News Column

LUCAS ENERGY, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

June 27, 2014

General

The following is a discussion by management of its view of the Company's business, financial condition, and corporate performance for the past year. The purpose of this information is to give management's recap of the past year, and to give an understanding of management's current outlook for the near future. This section is meant to be read in conjunction with "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Our fiscal year ends on the last day of March of the calendar year. We refer to the twelve-month periods ended March 31, 2014 and March 31, 2013 as our 2014 fiscal year and 2013 fiscal year, respectively.



Overview

The ultimate goal of the management of Lucas is to maximize shareholder value. We seek to accomplish this through various business activities and strategies identified in "Item 1. Business" and "Item 2. Properties" of this report. Specific targets include: increasing production by developing our acreage, increasing profitability margins by evaluating and optimizing our production, leveraging our balance sheet, and executing our business plan to increase property values, reserves, and expanding our asset base. We believe our strengths will help us successfully execute our ultimate goals. We benefit from having asset-rich properties in core areas such as the Eagle Ford, one of the most active plays in the U.S. The activity around our Eagle Ford assets has begun to define the tremendous opportunities we have in our leases. The increasing number of wells drilled and the corresponding data available to us has enhanced our knowledge of the Eagle Ford area. In addition, leading operators in the Eagle Ford area have developed drilling and completion technologies that have significantly reduced production risk and decreased per unit drilling and completion costs. We benefit from having an experienced management team with proven acquisition, operating and financing capabilities. Mr. Anthony Schnur, our Chief Executive Officer, has over twenty years of extensive oil and gas and financial management experience. He has developed strategic business plans, raised debt and equity capital, and provided asset management, cash flow forecasts, transaction modeling and development planning for both start-ups and special situations. On three separate occasions in his career, Mr. Schnur has been asked to lead work-out/turn-around initiatives in the E&P space. Further, the Company has attracted new talent in its operations, reservoir analysis, land and accounting functions and believes it has brought together a professional and dedicated team to deliver value to Lucas's shareholders. During our 2014 fiscal year, we performed several well cleanouts and workovers on our Austin Chalk properties in an effort to stabilize our rate of production; however, the incremental production from this program was insufficient to offset our steep production declines. We had an average net production flow of 146 BOE for the year, with oil production contributing to most of our production, and our exit rate at the quarter end of the year was 132 net BOE per day. Over the course of the year, we continued to significantly reduce our operating costs and general and administrative expenses, which declined 41% and 35%, respectively, and our overall operating expenses declined by approximately 37%. Our strategy is to maintain our operating costs at an acceptable rate that will benefit the operating margin of the Company as we look to develop our current acreage, and we anticipate our annual general and administrative expenses to average approximately $3.0 million moving forward, an over 50% decrease from previous years. In December 2013, we repositioned the Company's prospects for future growth with the objective of expanding the scope of our operations and increasing our market capitalization. Measures such as return on equity, liquidity and stock multiples have led us to conclude that the market rewards small-cap and mid-cap exploration and production companies with higher valuations than micro-caps. We believe that if we can grow in scale in our specific geology, we will be able to spread fixed operating costs over a larger base of production and access more favorable financing terms. 35

-------------------------------------------------------------------------------- The Company, as previously announced, continues to review opportunities to accelerate development of its five million barrels of proved Eagle Ford and other oil reserves. These potential opportunities include, but are not limited to, strategic partnership(s), asset or corporate acquisitions, and/or merger opportunities. Additionally, various financing alternatives are under review. The future development of the Company's reserves, specifically of the Eagle Ford Shale, is dependent on our ability to acquire the necessary funding. The Company's intent is to obtain the funding in one of two ways: via a corporate transaction with another entity combined with the financing to recapitalize the new company, or by acquiring the necessary development funding on a stand-alone basis. Lucas is actively discussing potential transactions (financings, acquisitions and mergers) which we believe, if finalized and completed, will provide the financial mass to develop the significant reserves at our disposal. Due to our current reserve mix where just over 7% of the Company's total Proved Reserves are producing, the most likely financial vehicles available to the Company are the raising of additional equity, or a mezzanine type debt facility. Mezzanine debt is a loan facility which has embedded equity instruments, often warrants, to improve the expected return of the lender. This type of facility is common in the E&P sector due to the high capital requirements of a drilling program. For example, we estimate an Eagle Ford well will cost $7 to $8 million to drill and the Company currently has $8.2 million in Proved Producing Reserves. While we anticipate determining our future course in the near term, we have not entered into any binding agreements to date, and no definitive transactions are pending in connection with our planned strategic transaction. Overview of Properties At March 31, 2014, the Company had leasehold interests (working interests) in approximately 17,628 gross acres, or 13,314 net acres. The Company's total net developed and undeveloped acreage as measured from the surface to the base of the Austin Chalk formation was approximately 12,049 net acres. In deeper formations, the Company has approximately 3,929 net acres in the Eagle Ford oil window and 1,265 net acres in the Eaglebine, Buda and Glen Rose oil bearing formations. At March 31, 2014, Lucas Energy's total estimated net proved reserves were 5.6 million barrels of oil equivalent (BOE), of which 5.0 million barrels (BBLs) were crude oil reserves, and 3.3 billion cubic feet (BCF) were natural gas reserves (see "Item 8 Financial Statements and Supplementary Data" - "Supplemental Oil and Gas Disclosures (Unaudited)"). Approxiumately 97% of our proved reserves are undeveloped and will require significant capital expenditures to develop, as discussed above. We operate in known productive areas which minimizes our geological risk. Our holdings are found in a broad area of current industry activity in Gonzales, Wilson, Karnes, Atascosa, Leon and Madison Counties in Texas. We concentrate on three vertically adjoining formations in Gonzales, Wilson, Karnes and Atascosa Counties: the Austin Chalk, Eagle Ford and Buda formations, listed in the order of increasing depth measuring from the land surface. The development of the Eagle Ford as a high potential producing zone has heightened industry interest and success. Lucas Energy's acreage position is in the oil window of the Eagle Ford trend. In 2010, the Company sold 85% of its working interest in its Eagle Ford acreage in Gonzales County, Texas to Hilcorp Resources, LLC (now Marathon Resources EF, LLC); and in 2011 the Company sold 50% of its working interest in its Wilson County Eagle Ford acreage to Marathon Oil Company. In Karnes County, we own a 100% working interest in approximately 400 acres in the Eagle Ford. We concentrate in several formations in Madison and Leon Counties, Texas: the Eaglebine, Buda, and Glen Rose which have productive zones surrounding our acreage.



Operations

Lucas's objective for our current producing wells is to operate as efficiently as possible, look for technological advancements to increase the life of the wells, evaluate the economic viability of these wells, and consider adding or re-drilling our low producing assets. In the first half of fiscal 2014, we completed four workovers and one lateral extension in the Austin Chalk. We did not realize the full production potential from these wells however, and one of our larger existing wells was off-line for most of the fourth quarter and another large well was down earlier in the year. 36 -------------------------------------------------------------------------------- For the year ending March 31, 2014, Lucas produced an average of approximately 146 net barrels of oil equivalent per day (BOEPD) from 32 active well bores, of which 18 wells accounted for more than 80% of our production. The ratio between the gross and net production differs due to varied working interests and net revenue interests in each well. An affiliate of Marathon Oil Corporation operates two Eagle Ford horizontal wells in our Gonzales leases, of which we have a 15% working interest on each well. Our production sales totaled 53,228 barrels of oil equivalent, net to our interest, for the fiscal year ended March 31, 2014. Reserves Our estimated net proved crude oil and natural gas reserves at March 31, 2014 and 2013 were approximately 5.6 million BOE, respectively, for each year. Although there was not a significant change in total proved reserves, crude oil reserves decreased slightly by approximately 0.1 million BBLs offset by an increase of natural gas reserves by approximately 0.7 BCF (or 0.1 BOE - barrel of equivalent). Using the average monthly crude oil price of $96.17 per BBL and natural gas price of $3.47 per thousand cubic feet (MCF) for the twelve months ended March 31, 2014, our estimated discounted future net cash flow (PV-10) before tax expenses for our proved reserves was approximately $112.0 million, of which approximately $104.0 million are proved undeveloped reserves. Total reserve value at March 31, 2014 represents a decrease of approximately $20.6 million or 16% from a year ago using the same SEC pricing and reserves methodology. The decrease can be attributed the use of higher average monthly crude oil prices of $104.76 and natural gas prices of $3.51 from the prior year. Oil and natural gas prices have historically been volatile and such volatility can have a significant impact on our estimates of proved reserves and the related PV-10 value. These reserves were determined in accordance with standard industry practices and SEC regulations by the licensed independent petroleum engineering firm of Forest A. Garb and Associates, Inc. A large portion of the proved undeveloped crude oil reserves are associated with the Eagle Ford formation. Although these hydrocarbon quantities have been determined in accordance with industry standards, they are prepared using the subjective judgments of the independent engineers, and may actually be more or less.



Crude Oil Sales

During the year ended March 31, 2014, our net crude oil sales volumes decreased to 53,228 BBLs or 146 BOPD from 84,227 BBLs, or 231 BOPD, a 37% decrease over the previous fiscal year. The production decline is primarily related to the Company having a reduced property base due to the sale of the Baker DeForest property in October 2012 and the assignment of certain Company properties to Nordic Oil USA I, LLLP ("Nordic") per a Settlement Agreement entered into with Nordic with an effective date of March 31, 2013, pursuant to which, among other things, we agreed to assign back to Nordic certain oil, gas and mineral leases located in Gonzales, Karnes and Wilson Counties, Texas which were purchased from Nordic in October 2011. When compared to the prior period the reduced production from the property and assignment sales represented an approximately 12,000 BBLs production decline. Additionally, in the prior reporting period, the Company had additional production decline of approximately 18,000 BBLs due to new drilling and lateral programs with higher front-end production when compared to the current period. We entered and exited the year producing 100% crude oil and a majority of our crude oil sale volumes came from Austin Chalk formation wells which we operate. We operate over 95% of our producing wells, except three wells producing from the Eagle Ford for which two are being operated by an affiliate of Marathon Oil Corporation and one which is being operated by Penn Virginia Corporation. 37

--------------------------------------------------------------------------------



Major Expenditures

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

2014



2013

Additions to Oil and Gas Properties (Capitalized)

Acquisitions Using Cash $ 69,622$ 116,700 Other Capitalized Costs (a) 4,923,864 4,782,327 Subtotal 4,993,486 4,899,027 Sales of Eaglebine Properties (b) (156,935 ) - Issuance/Relinquishment of Nordic Note Payable (c) -



(22,829,333 )

Issuance/Relinquishment of Origin Note Payable (d) -



180,837

Issuance/Relinquishment of Origin Note Receivable (e) -



470,812

Other Non-Cash Acquisitions (f) 7,719



(181,970 )

Total Additions (Deductions) to Oil and Gas Properties 4,844,270

(17,460,627 )

Lease Operating Expenditures (Expensed) 2,217,029



3,760,036

Severance and Property Taxes (Expensed) 394,372



432,187

$ 7,455,671



$ (13,268,404 )

General and Administrative Expense (Cash based) $ 3,544,603



$ 5,421,220

Share-Based Compensation (Non-Cash) 413,711



677,553

Total General and Administrative Expense $ 3,958,314



$ 6,098,773

(a) Other capitalized costs include title related expenses and tangible and

intangible drilling costs.

(b) On March 31, 2014, the Company sold 156 acres of oil and natural gas

properties with aggregate gross proceeds of $156,935 in Madison County,

Texas. (c) Relinquishment of Nordic Note Payable relates to the $22.0 million non-recourse senior secured promissory note issued during October 2011 in



connection with the Nordic acquisition. This Note has been settled and is no

longer part of our contingent liabilities. (d) Issuance/Relinquishment of Origin Note Payable relates to the original purchase by the Company of properties from Origin for $50,000 cash and a



note payable of $450,000 on October 30, 2012. On May 23, 2012, the remaining

$269,163 balance of the note (net $180,837) was subsequently relinquished

through the sale of other properties to Origin from the Company. (e) Issuance/Relinquishment of Origin Note Receivable relates to sale of



properties to Origin for a $500,000 note receivable on December 1, 2011. On

August 1, 2012, the Company repurchased certain properties plus one additional property from Origin for the $470,812 remaining balance of the note receivable.



(f) Other non-cash acquisitions relate to the present value of the estimated

asset retirement costs capitalized as part of the carrying amount of the long-lived asset. Results of Operations The following discussion and analysis of the results of operations for each of the two fiscal years in the period ended March 31, 2014 should be read in conjunction with the consolidated financial statements of Lucas Energy, Inc. and notes thereto (see "Item 8. Financial Statements and Supplementary Data"). As used below, the abbreviations "BBLs" stands for barrels, "MCF" for thousand cubic feet and "BOE" for barrels of oil equivalent (determined under the relative energy content method by using a ratio of 6.0 Mmbtu (1 million British Thermal Units) to 1.0 Bbl of oil). We reported a net loss for the year ended March 31, 2014 of $4.7 million, or $0.16 per share. For the year ended March 31, 2013, we reported a net loss of $6.8 million, or $0.27 per share. Although our revenues decreased by $3.0 million, or 37%, our net loss only decreased by $2.1 million or 31% for the year ended March 31, 2014, compared to the prior year's period. 38 --------------------------------------------------------------------------------



Net Operating Revenues

The following table sets forth the revenue and production data for the years ended March 31, 2014 and 2013:

% Increase Increase 2014 2013 (Decrease) (Decrease) Sale Volumes: Crude Oil (Bbls) 53,228 84,227 (30,999 ) (37%) Natural Gas (Mcf) - 9,236 (9,236 ) (100%) Total (Boe) (1) 53,228 85,766 (32,538 ) (38%) Crude Oil (Bbls per day) 146 231 (85 ) (37%) Natural Gas (Mcf per day) - 25 (25 ) (100%) Total (Boe per day) (1) 146 235



(89 ) (38%)

Average Sale Price: Crude Oil ($/Bbl) $ 98.06$ 97.59$ 0.47 0% Natural Gas ($/Mcf) $ - $ 2.93



$ (2.93 ) (100%)

Operating Revenues: Crude Oil $ 5,219,752$ 8,219,984$ (3,000,232 ) (36%) Natural Gas - 27,100 (27,100 ) (100%) Total Revenues $ 5,219,752$ 8,247,084$ (3,027,332 ) (37%)



(1) Oil equivalents are determined under the relative energy content method by

using a ratio of 6.0 Mmbtu to 1.0 Bbl of oil.

Total crude oil and natural gas revenues for the year ended March 31, 2014 decreased $3.0 million, or 37%, to $5.2 million compared to $8.2 million for the same period a year ago due primarily to an unfavorable crude oil volume variance of $3.0 million. There was also a minimal favorable price variance, which had no significant impact, during the current period. The production decline is primarily related to the Company having a reduced property base due to the sale of the Baker DeForest property in October 2012 and the assignment of certain Company properties back to Nordic per a Settlement Agreement just prior to the previous fiscal year end. When compared to the prior period the reduced property base from the property and assignment sales represented an approximately $1.3 million decrease in production sales. Additionally, in the prior reporting period, the Company had additional production sales of approximately $1.7 million due to new drilling and lateral programs with higher front-end production when compared to the current period. 39 --------------------------------------------------------------------------------



Operating and Other Expenses

The following table sets forth operating and other expenses for the years ended March 31, 2014 and 2013: Increase % 2014 2013 (Decrease) Incr(Decr) Lease Operating Expenses $ 2,217,029$ 3,760,036$ (1,543,007 ) (41 %) Direct lease operating expense 953,777 2,106,372 (1,152,595 ) (55 %) Workovers expense 1,140,861 1,540,098 (399,237 ) (26 %) Other 122,391 113,566 8,825 8 % Severance and Property Taxes 394,372 432,187 (37,815 ) (9 %)



Depreciation, Depletion,

Amortization and Accretion 2,189,721 3,585,674 (1,395,953 ) (39 %)



General and Administrative (Cash based) $ 3,544,603$ 5,421,220$ (1,876,617 )

(35 %) Share-Based Compensation (Non-Cash) 413,711 677,553 (263,842 ) (39 %)



Total General and Administrative Expense $ 3,958,314$ 6,098,773$ (2,140,459 )

(35 %) Interest Expense $ 1,169,440$ 1,367,844$ (198,404 ) (15 %) Other Expense (Income), Net $ (21,510 )$ (241,112 )$ (219,602 ) (91 %) Lease Operating Expenses. Lease operating expenses can be divided into the following categories: costs to operate and maintain Lucas's crude oil and natural gas wells, the cost of workovers and lease and well administrative expenses. Operating and maintenance expenses include, among other things, pumping services, salt water disposal, equipment repair and maintenance, compression expense, lease upkeep and fuel and power. Workovers are operations to restore or maintain production from existing wells. Each of these categories of costs individually fluctuates from time to time as Lucas attempts to maintain and increase production while maintaining efficient, safe and environmentally responsible operations. The costs of services charged to Lucas by vendors, fluctuate over time. Lease operating expenses of $2.2 million for the year ended March 31, 2014 decreased $1.5 million, or 41%, from $3.8 million for the same period a year ago, principally due to less production from prior period asset sales and assignments and a decline in direct lease operating and workover expenses from the Company's expanding effort to improve operating efficiencies and maintain cash flow. Depreciation, Depletion, Amortization and Accretion ("DD&A"). DD&A, related to proved oil and gas properties is calculated using the unit-of-production method. Under Full Cost Accounting, the amortization base is comprised of the total capitalized costs and total future investment costs associated with all proved reserves. DD&A expenses for the year ended March 31, 2014 decreased $1.4 million, or 39%, to $2.2 million from $3.6 million for the same period a year ago. The decrease was primarily due to decreased production of approximately 33,000 BOE and a lower unit DD&A rate. The unit DD&A rate decreased to $35.94 per BOE in fiscal 2014 from $40.51 per BOE in fiscal 2013. General and Administrative Expenses (excluding share-based compensation). General and administrative expenses (excluding share-based compensation) decreased approximately $1.9 million or 35% for the year ended March 31, 2014 as compared to the prior year primarily due to a decrease in professional and legal fees of approximately $0.6 million and a $1.3 million reduction in employee wage expenses, severances and bonuses as well as less consulting, contracting and outsourcing expenses. These decreases were primarily due to the Company performing functions related to these expenses internally as opposed to engaging outside support and the restructuring of employee responsibilities and duties within the Company to improve operational efficiencies. Share-Based Compensation. Share-based compensation, which is included in General and Administrative expenses in the Consolidated Statements of Operations decreased approximately $0.3 million or 39% for the year ended March 31, 2014 as compared to the prior year primarily due to a decrease in employee based stock option and compensation costs. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations. 40

-------------------------------------------------------------------------------- Interest Expense. Interest expense for the year ended March 31, 2014 consisted of cash interest payments, amortization of discounts and deferred financing costs of approximately $1.2 million made in relation to the Notes issued in April 2013 and May 2013 and the Letter Loan entered into in August 2013 (described below under "Liquidity and Capital Resources" - "Financing"). When compared to the same period a year ago, which primarily related to incurred interest expense of approximately $1.4 million on a note due to Nordic, there is a $0.2 million decrease. Other Expense (Income), Net. Other Expense (Income) for the year ended March 31, 2014, primarily consisted of approximately $100,000 in financing fees offset by approximately $118,000 in discounts from accounts payable settlements, approximately $2,000 in office space rental income from our Gonzales County office (which was sold during the period) and a $1,000 gain from the sale of old vehicles as compared to the same period a year ago which consisted of approximately $344,000 in discounts from accounts payable settlements, approximately $13,000 in rental income and $7,000 in interest income offset by approximately $124,000 impairment of our Gonzales County, Texas office building.



Liquidity and Capital Resources

Working Capital

At March 31, 2014, the Company's Total Current Liabilities of $4.6 million exceeded its Total Current Assets of $1.6 million, resulting in a working capital deficit of approximately $3.0 million, while at March 31, 2013, the Company's total current liabilities of $6.5 million exceeded its total current assets of $1.7 million, resulting in a working capital deficit of $4.8 million. The $1.8 million reduction in the working capital deficit is primarily related to the Company effectively accessing the capital markets in connection with the sale of both equity and debt during the year ended March 31, 2014 (as described in greater detail below under "Financing"). Subsequent to the year end, the Company also raised capital and amended its current loan agreement in an effort to maintain adequate cash flow entering the coming year. On August 13, 2013, the Company secured a long-term loan for $7.5 million (described in greater detail below under "Financing"). A portion of the funds raised in connection with the Loan were used to repay the $3.25 million in outstanding current Notes issued in April and May 2013 (described in greater detail below under "Financing"). On September 6, 2013, the Company closed a registered direct offering of $3,451,500 (approximately $3.2 million net, after deducting commissions and other expenses) in shares of common stock to certain institutional investors. The Company used the funds raised in the offerings to pay down expenses related to lease operating, workover activities and for general corporate purposes, including general and administrative expenses and legal settlements. On April 21, 2014, the Company closed a registered direct offering of $2,000,000 (approximately $1.88 million net, after deducting commissions and other expenses) of 3,333,332 units, each consisting of one share of common stock and 0.50 of one warrant to purchase one share of common stock at an exercise price of $1.00 per share to certain institutional investors. The Company used the funds raised in the offering to pay down expenses related to lease operating, workover activities and for general corporate purposes, including general and administrative expenses. On April 29, 2014 and effective March 14, 2014, the Company entered into an amended loan agreement, amending the terms of the Letter Loan Agreement, which had a balance of approximately $7.3 million as of March 14, 2014. Pursuant to the amended long-term note, we restructured the repayment terms to defer monthly amortizing principal payments which began on March 13, 2014, during the period from April 13, 2014 through September 13, 2014 (described in greater detail below under "Financing"). The Company believes its undeveloped acreage and continued ability to access the capital markets in both equity and debt provides a sufficient means to conduct its current operations, meet its contractual obligations and undertake a forward outlook on future development of its current fields. 41 --------------------------------------------------------------------------------

Cash Flows Year Ended March 31, 2014 2013 Cash flows used in operating activities $ (3,684,464 )$ (1,814,640 ) Cash flows used in investing activities (5,409,608 ) (5,374,669 ) Cash flows provided by financing activities 9,165,536



6,956,021

Net increase (decrease) in cash and cash equivalents $ 71,464$ (233,288 )

The primary sources of cash for Lucas during the two-year period ended March 31, 2014 were funds generated from sales of crude oil, proceeds from sale of shares of the Company's common stock and borrowings. The primary uses of cash were funds used in operations, acquisitions of oil and gas properties and equipment and repayments of debt. Net cash used in operating activities was approximately $3.7 million for the year ended March 31, 2014 as compared to $1.8 million for the same period a year ago. The increase in net cash used in operating activities of $1.9 million was due primarily to paying down all outstanding advances to working interest owners via a settlement with Seidler Oil & Gas L.P. for approximately $1.3 million, a decrease of $1.4 million in depreciation, depletion, amortization and accretion and paying down vendor payables of approximately $0.7 million which was offset by an approximately $0.1 million increase in changes to other components of working capital and a decrease of $2.1 million in net loss. Net cash used in investing activities was approximately $5.4 million for both the years ended March 31, 2014 and 2013. Although, there was not a significant change from the prior year, the Company had approximately $3.5 million less in additions to oil and gas properties during fiscal year 2014, which was offset by proceeds of approximately $4.0 million from the sale of oil and gas properties during fiscal year 2013 coupled with approximately $0.5 million in additional proceeds from oil and gas and other property and equipment sales during fiscal year 2014. Net cash provided by financing activities was approximately $9.2 million for the year ended March 31, 2014 as compared to net cash provided by financing activities of $7.0 million for the same period a year ago. The increase in net cash provided by financing activities was primarily related to approximately $7.3 million of loan and equity proceeds, net of repayments offset by repayment of borrowings and deferred financing costs, which were approximately $4.6 million from the current period when compared to equity sales and loan repayment amounts from the same period a year ago, as well as net proceeds from the exercise of warrants of $0.4 million.



Financing

Effective April 4, 2013, the Company entered into a Loan Agreement with various lenders (the "April 2013 Loan Agreement") pursuant to which such lenders loaned the Company an aggregate of $2,750,000 to be used for general working capital. The lenders included entities beneficially owned by our chairman, Ken Daraie (which entity loaned us $2,000,000) and director, W. Andrew Krusen, Jr. (which entities loaned us $250,000), as well as an unrelated third party which loaned the Company $500,000. Effective May 31, 2013, the Company entered into a Loan Agreement with various lenders (the "May 2013 Loan Agreement" and together with the April 2013 Loan Agreement, the "Loan Agreements"), pursuant to which such lenders loaned the Company an aggregate of $500,000 to be used for general working capital and to pay amounts the Company owed to Nordic under a settlement agreement. The lenders were third parties, unaffiliated with the Company, provided that one lender who previously loaned the Company funds in connection with the April 2013 Loan Agreement provided the Company an additional $300,000 loan in connection with the May 2013 Loan Agreement. The May 2013 Loan Agreement included substantially similar terms as the April 2013 Loan Agreement and was approved by the prior lenders, who also waived their right to be repaid from the proceeds from the loans. The loans provided pursuant to the Loan Agreements were documented by Promissory Notes (the "Notes") which accrued interest at the rate of 14% per annum, with such interest payable monthly in arrears (beginning June 1, 2013 in connection with the April 2013 Loan Agreement and July 1, 2013 in connection with the May 2013 Loan Agreement) and were due and payable on October 4, 2013 in connection with the April 2013 Loan Agreement and April 4, 2014 in connection with the May 2013 Loan Agreement. The Notes could be prepaid at any time without penalty. In the event any amounts were not paid when due under the Notes and/or in the event any event of default occurred and was continuing under the Notes, the Notes accrued interest at the rate of 17% per annum. The Note holders were each paid their pro rata portion of a commitment fee ($55,000 in connection with the April 2013 Loan Agreement and $15,000 in connection with the May 2013 Loan Agreement) and were each granted their pro rata portion of warrants to purchase 325,000 shares of the Company's common stock which were evidenced by Common Stock Purchase Warrants (the "Warrants"). 42 -------------------------------------------------------------------------------- On July 17, 2013, Meson Capital Partners LP (which is indirectly beneficially owned by one of our directors, Ryan J. Morris), purchased 185,185 restricted shares of our common stock in a private transaction for consideration of $250,000 or $1.35 per share ($0.01 above the closing sales price of our common stock on July 17, 2013). Effective on August 13, 2013, Lucas entered into a Letter Loan Agreement with Louise H. Rogers (the "Letter Loan"). In connection with the Letter Loan and a Promissory Note entered into in connection therewith, Ms. Rogers loaned the Company $7.5 million (the "Loan"). The Loan accrues interest at the rate of 12% per annum (18% upon the occurrence of an event of default), can be prepaid by Lucas at any time without penalty after November 13, 2013 and is due and payable on August 13, 2015, provided that $75,000 in interest only payments are due on the Loan during the first six months of the term (which have been escrowed by Lucas) and beginning on March 13, 2014, Lucas is required to make monthly amortization principal payments equivalent to the sum of fifty-percent of the Loan during months seven through twenty-four of the term. The $450,000 escrow deposit for the first six months interest was recorded as restricted cash within the balance sheet, with no balance being recognized on the balance sheet as of March 31, 2014, as all escrowed interest had been paid. Lucas is also required to make mandatory prepayments of the loan in the event the collateral securing the Loan does not meet certain thresholds and coverage ratios. The repayment of the Loan is secured by a security interest in substantially all of Lucas's assets which was evidenced by a Security Agreement and a Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and Fixture Filing. Lucas agreed to pay a $15,000 quarterly administrative fee in connection with the Loan and grant the administrator a warrant to purchase up to 279,851 shares of Lucas's common stock at an exercise price of $1.35 per share and a term continuing until the earlier of (a) August 13, 2018; and (b) three years after the payment in full of the Loan. A portion of the funds raised in connection with the Loan were used to repay the $3.25 million in outstanding Notes issued in April and May 2013 as described above. On September 6, 2013, the Company closed a registered direct offering of $3,451,500 (approximately $3.2 million net, after deducting commissions and other expenses) of shares of common stock to certain institutional investors. In total, the Company sold 2.95 million shares of common stock at a price of $1.17 per share. On April 21, 2014, pursuant to the terms of the Registration Statement, the Company closed a registered direct offering of $2,000,000 (approximately $1.88 million net, after deducting commissions and other expenses) of shares of common stock to certain institutional investors. In total, the Company sold 3,333,332 units, each consisting of one share of common stock and 0.50 of one warrant to purchase one share of common stock. The Company used the funds raised in the offering to pay down expenses related to drilling, lease operating, workover activities and for general corporate purposes, including general and administrative expenses. On April 29, 2014 and effective March 14, 2014, the Company entered into an Amended Loan Agreement and Restated Promissory Note on the Letter Loan note noted above, which had a balance of approximately $7.3 million as of March 14, 2014. Pursuant to the Amended Loan Agreement, we restructured the repayment terms to defer monthly amortizing principal payments which began on March 13, 2014, during the period from April 13, 2014 through September 13, 2014, during which six month period interest on the Restated Promissory Note will accrue at 15% per annum (compared to 12% per annum under the terms of the original Letter Loan). Additionally, beginning on October 13, 2014, the interest rate of the Amended Note will return to 12% per annum and we will be required to pay the monthly amortization payments in accordance with the original repayment schedule (which total approximately $205,000 to $226,000, depending on the due date), as well as additional principal amortization payments of approximately $266,000 every three months (beginning October 13, 2014, and ending on July 13, 2015) until maturity, with approximately $3.87 million due on maturity, which maturity date remains August 13, 2015. We agreed to pay all legal expenses of the lender related to the amendments and agreed to (i) pay $25,000 and (ii) issue 75,000 shares of restricted common stock, to Robertson Global Credit, LLC ("Robertson"), the administrator of the Loan, as additional consideration for the modifications. Should we opt to prepay the Amended Note prior to the maturity date, we are required to pay an exit fee equal to the advisory fees of approximately $15,000 per quarter that would have been due, had the note remained outstanding through maturity. Lucas plans to continue to focus a substantial portion of its capital expenditures in various known prolific and productive geological formations, including the Austin Chalk, Eagle Ford and Buda formations, primarily in Gonzales, Wilson, and Karnes Counties south of the city of San Antonio, Texas and in the Eaglebine, Buda, and Glen Rose formations in Madison and Leon Counties north of the city of Houston, Texas. Lucas expects capital expenditures to be greater than cash flow from operating activities for the remainder of the 2015 fiscal year and into fiscal 2016. To cover the anticipated shortfall, our business plan includes establishing a reserve-based line of credit, initiating bank or private borrowings, and/or issuing equity or debt offerings similar to the above; provided that the Company is also actively reviewing a number of opportunities for strategic partnership, acquisitions, and mergers with a focus on development of reserves, increasing revenue, and improving shareholder value as discussed above. 43

--------------------------------------------------------------------------------



Off-Balance Sheet Arrangements

Lucas does not participate in financial transactions that generate relationships with unconsolidated entities or financial partnerships. As of March 31, 2014, we did not have any off-balance sheet arrangements.



Critical Accounting Policies and Estimates

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



Proved Oil and Natural Gas Reserves

Lucas's independent petroleum consultants estimate proved oil and gas reserves, which directly impact financial accounting estimates, including depreciation, depletion and amortization. Proved reserves represent estimated quantities of crude oil and condensate, natural gas liquids and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. For related discussion, see "Item 1A. Risk Factors". Full Cost Accounting Method Lucas uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells including directly related overhead costs and related asset retirement costs are capitalized. Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities are capitalized as oil and gas property costs on a country-by-country basis. Properties not subject to amortization consist of exploration and development costs, which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Lucas assesses overall values of unproved properties, if any, on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management's intention with regard to future development of individually significant properties and the ability of Lucas to obtain funds to finance their programs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Costs of oil and gas properties are amortized using the units of production method. Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves.



Full Cost Ceiling Test Limitation

In applying the full cost method, Lucas performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the "estimated present value," of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. 44 --------------------------------------------------------------------------------



Share-Based Compensation

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



Revenue Recognition

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


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters