UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

 

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

 

For the transition period from          to          

 

Commission File Number 001-32942

 

EVOLUTION PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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

(Address of principal executive offices and zip code)

 

(713) 935-0122

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Balance Sheets

(Unaudited) 

See accompanying notes to consolidated condensed financial statements.

Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Statements of Operations

(Unaudited)

 

 

* General and administrative expenses for the three months ended MarchDecember 31, 2015 and 2014 included non-cash stock-based compensation expense of $227,507$212,724 and $444,981,$245,020, respectively. For the corresponding ninesix month periods, non-cash stock-based compensation expense was $715,864$430,839 and $1,134,841,$488,357, respectively.

** Restructuring charges for the nine months ended March 31, 2014 includedinclude $569,228 of non-cash impairment charges and $59,339 of non-cash stock-based compensation expense of $376,365. Forfor the three months and six months ended MarchDecember 31, 2014, restructuring charges contained no stock-based compensation expense.

Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 

Evolution Petroleum Corporation and Subsidiaries

Consolidated Condensed Statement of Changes in Stockholders' Equity

For the NineSix Months Ended MarchDecember 31, 2015

(Unaudited)

Note 1 — Organization and Basis of Preparation

 

 

 

 

 

As of MarchDecember 31, 2015 and June 30, 20142015 our oil and natural gas properties and other property and equipment consisted of the following:

 

 

As of MarchDecember 31, 2015 and June 30, 20142015 our other current liabilities consisted of the following:

 

Note 8 — Asset Retirement Obligations

 

Our asset retirement obligations represent the estimated present value of the amount we will incur to plug, abandon and

reconciliation of the beginning and ending asset retirement obligations for the ninesix months ended MarchDecember 31, 2015, and for the year ended June 30, 2014:2015:

 

 Common Stock Dividends and Buyback Program

 

Commencing in December 2013, the Board of Directors initiated a quarterly cash dividend on our common stock at a quarterly rate of $0.10 per share and subsequently adjusted this rate to $0.05 per share during the quarter ended March 31, 2015. During the ninesix months ended MarchDecember 31, 2015, the Company declared threetwo quarterly dividends on its common stock and paid $8,192,989$3,268,319 to its common stockholders. 

 Series A Cumulative Perpetual Preferred Stock

 

At MarchDecember 31, 2015, there were 317,319 shares of the Company’s 8.5% Series A Cumulative (perpetual) Preferred Stock outstanding.  The Series A Cumulative Preferred Stock cannot be converted into our common stock and there are no sinking fund or redemption rights available to the holders thereof. Optional redemption can only be made by us on or afterEffective July 1, 2014, we can redeem this preferred stock at any time for the stated liquidation value of $25.00 per share plus accrued dividends.  With respect to dividend rights and rights upon our liquidation, winding-up or dissolution, the Series A Preferred Stock ranks senior to our common stockholders, but subordinate to any of our existing and future debt.  Dividends on the Series A Cumulative Preferred Stock accrue and accumulate at a fixed rate of 8.5% per annum on the $25.00 per share liquidation preference, payable monthly at $0.177083 per share, as, if and when declared by our Board of Directors through its Dividend Committee. We paid dividends of $505,726 and $505,726$337,151 to holders of our Series A Preferred Stock during each of the nine monthssix month periods ended MarchDecember 31, 2015 and 2014, respectively.2014.

For the fiscal year ended June 30, 2014,2015, 100% of cash dividends on preferred and common stock were treated for tax purposesas qualified dividend income. Approximately 86% of cash dividends on common shares were treated as a return of capital to our stockholders.stockholders and the remainder of 14% were treated as qualified dividend income. Based on our current projections for the fiscal year ending June 30, 2015,2016, we expect all preferred and common dividends will be treated as qualified dividend income and that a portion of our cash dividends on common stock will be treated as a return of capital and the remainder as qualified dividend income. We will make a preliminary determination regar

 

We may grantUnder the terms of the Evolution Petroleum Corporation Amended and Restated 2004 Stock Plan (the "Plan"), we have granted option awards to purchase common stock (the "Stock Options"), restricted common stock awards ("Restricted Stock"), andcontingent restricted common stock awards ("Contingent Restricted Stock") and/or unrestricted fully vested common stock, to employees, directors, and consultants of the Company under the Evolution Petroleum Corporation Amended and Restated 2004 Stock Plan (the "Plan").Company. The Plan authorizes the issuance of 6,500,000 shares of common stock prior to its expiration on October 24, 2017 and 542,529257,188 shares remain available for grant as of MarchDecember 31, 2015.

 

 

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

 

There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the ninesix months ended MarchDecember 31, 2015.  We believe we have appropriate support for the income tax positions taken and to be taken on our tax returns and that the accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company’s federal and state income tax returns are open to audit under the statute of limitations for the years ending June 30, 20102012 through June 30, 2014.2014 for federal tax purposes and for the years ended June 30, 2011 through June 30, 2014 for state tax purposes.

 

Our effective tax rate for any period maywill typically differ from the statutory federal rate due to (i) ouras a result of state income tax liabilitytaxes, primarily in Louisiana; (ii) stock-based compensation expensethe state of Louisiana, with smaller differences related to qualified incentive stock option awards (“ISO awards”), which createsbased compensation and other permanent differences. Statutory percentage depletion gives rise to a permanent difference in our tax differencerates when utilized for financial reporting, as these types of awards, if certain conditions are met, are not deductible forstate or federal income tax purposes; and (iii) statutory percentage depletion, which may create a permanent tax difference for financial reporting.purposes.

BasedIn late September 2015, we received a $1.5 million refund payment of cash taxes paid to the State of Louisiana over a three-year period ended June 30, 2014. We also received $57,467 from the State of Louisiana for interest on the refund and recorded it as a reduction of current income tax expense. This carryback of tax losses resultingresulted from the exercise of stock options and incentive warrants in fiscal 2014 and, accordingly, we filed a requestrecognized this benefit as an increase in additional paid-in capital for refund of cash taxes paid in Louisiana for the previous three fiscal years totaling approximately $1.5 million. This refund request is subject to final approval by the Louisiana tax authorities and we cannot be certain of the timing or amount of the ultimate recovery.financial reporting purposes. This carryback will utilizeutilized approximately $19.1 million of an estimated $24.2 million net loss for state tax purposes, with $5.1 millionpurposes. The remaining balance of this net loss carryforward in Louisiana was utilized in the tax loss carryforwards remainingreturn for Louisiana tax purposes. When received, this refund will not affect our tax provision for financial reporting purposes. We will recognize the benefit as an increase in additional paid-in capital.year ended June 30, 2015.

 

We recognized income tax expense of $2,118,218$2,123,858 and $1,148,155$1,624,038 for the ninesix months ended MarchDecember 31, 2015 and 2014, respectively, with corresponding effective rates of 40.6%35% and 36.6%41%. The lower effective tax rate in 2015 resulted from a lesser amount of taxable income in the state of Louisiana.

 

 

On February 29, 2012, EPMEvolution Petroleum Corporation entered into a credit agreementCredit Agreement (the “Credit Agreement”"Credit Agreement") with Texas Capital Bank, N.A. (the “Lender”"Lender"). The Credit Agreement provides usthe Company with a revolving credit facility (the “facility”) in an amount up to $50,000,000 with availability governed by an Initial Borrowing Base of $5,000,000.  A portion of the facility not in excess of $1,000,000 is available for the issuance of letters of credit.

 

The facility is unsecured and has a term of four years, expiring on February 29, 2016.  OurThe Company's subsidiaries guarantee EPM’sthe Company's obligations under the facility. We may use theThe proceeds of any loans under the facility may be used by the Company for the acquisition and development of oil and gas properties, as defined in the facility, the issuance of letters of credit, and for working capital and general corporate purposes.

 

Semi-annually, the borrowing base and a monthly reduction amount are re-determined from our reserve reports.  Requests by the Company to increase the $5,000,000 initial amount are subject to the Lender’s credit approval process, and are also limited to 25% of the value of our oil and gas properties, as defined in the Credit Agreement.

 

At ourthe Company's option, borrowings under the facility bear interest at a rate of either (i) an Adjusted LIBOR rate (LIBOR rate divided by the remainder of 1 less the Lender’s Regulation D reserve requirement), or (ii) an adjusted Base Rate equal to the greater of the Lender’s prime rate or the sum of 0.50% andplus the Federal Funds Rate. A maximum of three LIBOR based loans can be outstanding at any time.  Allowed loan interest periods are one, two, three and six months.  LIBOR interest is payable at

 

A commitment fee of 0.50% per annum accrues on unutilized availability and is payable quarterly.  We areThe Company is responsible for certain administrative expenses of the Lender over the life of the Credit Agreement as well as $50,000 in loan costs incurred upon closing.

 

The Credit Agreement also contains financial covenants including a requirement that wethe Company maintain a current ratio of not less than 1.5 to 1; a ratio of total funded Indebtedness to EBITDA of not more than 2.5 to 1, and a ratio of EBITDA to interest expense of not less than 3 to 1.  The agreement specifies certain customary covenants, including restrictions on the Company and its subsidiaries from pledging their assets, incurring defined Indebtedness outside of the facility other thatthan permitted indebtedness, and it restricts certain asset sales.  Payments of dividends for the Series A Preferred are only restricted by the EBITDA to interest coverage ratio, wherein Series Asuch dividends are a 1X deduction from EBITDA (as opposed to a 3:1 requirement if dividends were treated as interest expense).  The Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Lender may declare allany amounts outstanding under the Credit Agreement if any, to be immediately due and payable.

 

As of MarchDecember 31, 2015 and 2014, the Company had no borrowings and no outstanding letters of credit issued under the facility, resulting in an available borrowing base capacity of $5,000,000, and we are in compliance with all the covenants of the Credit Agreement. During Mayearly 2014 the Lender waived the provisions of the Credit Agreement pertaining to the past payments of cash dividends on our common stock, and the Credit Agreement was amended to permit the payment of cash dividends on common stock in the future if no borrowings are outstanding at the time of such payment.

 

In connection with this agreement, wethe Company incurred $179,468 of debt issuance costs whichthat have been capitalized in Other Assets and are being amortized on a straight-line basis over the term of the agreement. The unamortized balance in debt

issuance costs related to the Credit Agreement was $44,570$8,093 as of MarchDecember 31, 2015. The Company is in discussions with the Lender to replaceextend the maturity, renew the current unsecured Credit Agreement with an expanded secured facility. Asor seek a similar source of March 31, 2015, the Company had incurred approximately $127,272 in legal and title costs related to this proposed agreement, which are also capitalized in Other Assets.

 

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

 

 

Rent expense for the three months ended MarchDecember 31, 2015 and 2014 was $45,857 and $43,776, and $44,473, respectively. Rent expense forFor the ninesix months ended MarchDecember 31, 2015 and 2014, rent expense was $131,327$90,900 and $131,151, respectively.$87,551.

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto contained herein and in our Annual Report on Form 10-K for the year ended June 30, 20142015 (the “Form 10-K”), along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Form 10-K.  Any terms used but not defined herein have the same meaning given to them in the Form 10-K.

 

This Form 10-Q and the information referenced herein contain forward-looking statements within the meaning of the Private Securities Litigations Reform Act of 1995, Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. The words “plan,” “expect,” “project,” “estimate,” “assume,” “believe,” “anticipate,” “intend,” “budget,” “forecast,” “predict” and other similar expressions are intended to identify forward-looking statements. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our officers and directors. When considering any forward-looking statement, you should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and natural gas, operating risks and other risk factors as described in our 20142015 Annual Report on Form 10-K for the year ended June 30, 20142015 as filed with the Securities and Exchange Commission. Furthermore, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to Evolution Petroleum Corporation are expressly qualified in their entirety by this cautionary statement.

 

 

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

We are currently funding our fiscal 20152016 capital program from working capital and net cash flows from our properties.

 

Gross production at Delhi in the thirdsecond quarter of fiscal 20152016 averaged 6,2036,810 BOPD, aan increase of 1%16% from the year-ago quarter, and a 5%6% increase from the prior quarter. Net production averaged 1,6401,801 BOPD, a 259%52% increase from the year-ago quarter, and a 38%6% increase from the prior quarter. GrossThe large year-over-year increase in net production continues to be positively impacted byvolumes was the result of an increase in both gross production volumes and the reversion of our 23.9% working interest in the Delhi field on November 1, 2014, which means we did not realize a replacement well that was redrilled and placed intofull quarter of production associated with our reversionary working interest in Januarythe second quarter of fiscal 2015.