Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                         |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                           |
|       | **For the quarterly period ended September 30, 2009**                                                                                                                                                     |
|       |                                                                                                                                                                                                           |
| **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**

 

**EVOLUTIONPETROLEUM CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                                     | ** ** | **41-1781991**                    |
|----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (IRS Employer Identification No.) |

 

**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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes:  x No: o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes: o No: o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definition of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o |   | Accelerated filer  o         |
|--------------------------------------|--------|----------------------------------------|
|                                 |   |                                   |
| Non-accelerated filer  o   |   | Smaller reporting company  x |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.).  Yes: o No: x

 

Thenumber of shares outstanding of the registrant’s common stock, par value$0.001, as of November 13, 2009, was 27,118,766.

 

 

 

----

Table ofContents

 

**EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES**

**TABLE OF CONTENTS**

 
| ** **                              | ** **                                                                                                     | **Page** |
|-----------------------------------------|----------------------------------------------------------------------------------------------------------------|----------|
|                                    |                                                                                                           |     |
| **PART I. FINANCIAL  INFORMATION** | ** **                                                                                                     |
|                                    |                                                                                                           |     |
| ITEM 1.                                 | CONSOLIDATED  CONDENSED FINANCIAL STATEMENTS                                                                   |     |
|                                    |                                                                                                           |     |
|                                    | Consolidated  Balance Sheets (unaudited) as of September 30, 2009 and June 30,  2009                 |     |
|                                    | Consolidated  Statements of Operations (unaudited) for the three months ended September 30, 2009 and 2008 |     |
|                                    | Consolidated Statements  of Cash Flows (unaudited) for the three months ended September 30, 2009 and 2008 |     |
|                                    | Notes to  Consolidated Condensed Financial Statements (unaudited)                                              |     |
|                                    |                                                                                                           |     |
| ITEM 2.                                 | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                    |     |
|                                    |                                                                                                           |     |
| ITEM 3.                                 | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                    |     |
|                                    |                                                                                                           |     |
| ITEM 4.                                 | CONTROLS AND  PROCEDURES                                                                                       |     |
|                                    |                                                                                                           |     |
| **PART II. OTHER  INFORMATION**    | ** **                                                                                                     |
|                                    |                                                                                                           |     |
| ITEM 1.                                 | LEGAL PROCEEDINGS                                                                                              |     |
|                                    |                                                                                                           |     |
| ITEM 1A.                                | RISK FACTORS                                                                                                   |     |
|                                    |                                                                                                           |     |
| ITEM 2.                                 | UNREGISTERED  SALE OF EQUITY SECURITIES AND USE OF PROCEEDS                                                    |     |
|                                    |                                                                                                           |     |
| ITEM 3.                                 | DEFAULTS  UPON SENIOR SECURITIES                                                                               |     |
|                                    |                                                                                                           |     |
| ITEM 4.                                 | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                           |     |
|                                    |                                                                                                           |     |
| ITEM 5.                                 | OTHER INFORMATION                                                                                              |     |
|                                    |                                                                                                           |     |
| ITEM 6.                                 | EXHIBITS                                                                                                       |     |
|                                    |                                                                                                           |     |
| SIGNATURES                              |                                                                                                           |

 

2

----

Table ofContents

 

**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

**Evolution Petroleum Corporation and Subsidiaries**

**Consolidated Balance Sheets**

**(Unaudited)**

** **
| ** **                                                                                                                                                                                                                                                                                                   | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                   | ** ** | **2009**               | ** ** | **2009**          | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                   | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current assets                                                                                                                                                                                                                                                                                               |       |                   |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                    |       | $                      | 2,973,314  |              | $          | 3,891,764 |   |
| Certificates of deposit                                                                                                                                                                                                                                                                                      |       | 2,166,359              |       | 2,059,147         |       |
| Receivables                                                                                                                                                                                                                                                                                                  |       |                   |       |              |       |
| Oil and natural gas sales                                                                                                                                                                                                                                                                                    |       | 510,063                |       | 532,318           |       |
| Other                                                                                                                                                                                                                                                                                                        |       | 100,110                |       | 172,314           |       |
| Income taxes recoverable                                                                                                                                                                                                                                                                                     |       | 2,094,628              |       | 2,055,802         |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                    |       | 120,690                |       | 162,441           |       |
| Total current assets                                                                                                                                                                                                                                                                                         |       | 7,965,164              |       | 8,873,786         |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Property and equipment, net of depreciation,  depletion, and amortization                                                                                                                                                                                                                                    |       |                   |       |              |       |
| Oil and natural gas properties — full-cost method  of accounting, of which $10,163,615 and $9,819,465 at September 30, 2009  and June 30, 2009, respectively, were excluded from amortization.                                                                                                |       | 29,322,754             |       | 28,751,178        |       |
| Other property and equipment                                                                                                                                                                                                                                                                                 |       | 134,070                |       | 150,697           |       |
| Total property and equipment                                                                                                                                                                                                                                                                                 |       | 29,456,824             |       | 28,901,875        |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Other assets                                                                                                                                                                                                                                                                                                 |       | 54,566                 |       | 53,162            |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Total assets                                                                                                                                                                                                                                                                                                 |       | $                      | 37,476,554 |              | $          | 37,828,823 |   |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                                                                               |       |                   |       |              |       |
| Current liabilities                                                                                                                                                                                                                                                                                          |       |                   |       |              |       |
| Accounts payable                                                                                                                                                                                                                                                                                             |       | $                      | 799,853    |              | $          | 690,639 |   |
| Accrued compensation                                                                                                                                                                                                                                                                                         |       | 45,319                 |       | 71,427            |       |
| Royalties payable                                                                                                                                                                                                                                                                                            |       | 253,819                |       | 218,477           |       |
| State taxes payable                                                                                                                                                                                                                                                                                          |       | 157,736                |       | 157,736           |       |
| Other current liabilities                                                                                                                                                                                                                                                                                    |       | 102,558                |       | 99,625            |       |
| Total current liabilities                                                                                                                                                                                                                                                                                    |       | 1,359,285              |       | 1,237,904         |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Long-term liabilities                                                                                                                                                                                                                                                                                        |       |                   |       |              |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                        |       | 3,381,795              |       | 3,721,317         |       |
| Asset retirement obligations                                                                                                                                                                                                                                                                                 |       | 737,827                |       | 664,710           |       |
| Stock bonus (Note 5)                                                                                                                                                                                                                                                                                         |       | —                 |       | 370,440           |       |
| Accrued compensation                                                                                                                                                                                                                                                                                         |       | 105,000                |       | —            |       |
| Deferred rent                                                                                                                                                                                                                                                                                                |       | 78,802                 |       | 77,858            |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Total liabilities                                                                                                                                                                                                                                                                                            |       | 5,662,709              |       | 6,072,229         |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Commitments  and contingencies (Note 10)                                                                                                                                                                                                                                                                     |       |                   |       |              |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                                    |       |                   |       |              |       |
| Preferred stock, par value $0.001; 5,000,000 shares  authorized; no shares issued or outstanding                                                                                                                                                                                                             |       | —                 |       | —            |       |
| Common stock; par value $0.001; 100,000,000 shares  authorized; issued 27,781,338 shares and 27,318,517 shares as of  September 30, 2009 and June 30, 2009, respectively; outstanding  26,993,138 shares and 26,530,317 shares as of September 30, 2009 and  June 30, 2009, respectively |       | 27,781                 |       | 27,318            |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                   |       | 17,186,481             |       | 16,424,868        |       |
| Retained earnings                                                                                                                                                                                                                                                                                            |       | 15,481,605             |       | 16,186,430        |       |
|                                                                                                                                                                                                                                                                                                         |       | 32,695,867             |       | 32,638,616        |       |
| Treasury stock, at cost, 788,200 shares as of  September 30, 2009 and June 30, 2009                                                                                                                                                                                                                |       | (882,022               | )          | (882,022          | )          |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Total stockholders’ equity                                                                                                                                                                                                                                                                              |       | 31,813,845             |       | 31,756,594        |       |
|                                                                                                                                                                                                                                                                                                         |       |                   |       |              |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                              |       | $                      | 37,476,554 |              | $          | 37,828,823 |   |

 

See accompanying notes to consolidated financial statements.

 

3

----

Table ofContents

 

**Evolution Petroleum Corporation and Subsidiaries**

**ConsolidatedStatements of Operations**

**(Unaudited)**

** **
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Revenues                                                 |       |                   |       |   |   |
| Crude oil                                                |       | $                      | 503,122    |   | $ | 1,579,070 |   |
| Natural gas liquids                                      |       | 285,311                |       | 755,445 |   |
| Natural gas                                              |       | 381,594                |       | 580,471 |   |
| Total revenues                                           |       | 1,170,027              |       | 2,914,986 |   |
|                                                     |       |                   |       |   |   |
| Operating Costs                                          |       |                   |       |   |   |
| Lease operating expenses                                 |       | 364,846                |       | 335,904 |   |
| Production taxes                                         |       | 18,367                 |       | 85,996 |   |
| Depreciation, depletion and amortization                 |       | 617,757                |       | 644,882 |   |
| Accretion of asset retirement obligations                |       | 14,338                 |       | 5,737 |   |
| General and administrative expenses *                    |       | 1,253,116              |       | 1,464,840 |   |
| Total operating costs                                    |       | 2,268,424              |       | 2,537,359 |   |
|                                                     |       |                   |       |   |   |
| (Loss) income from  operations                           |       | (1,098,397             | )          | 377,627 |   |
|                                                     |       |                   |       |   |   |
| Other income                                             |       |                   |       |   |   |
| Interest income                                          |       | 15,224                 |       | 73,646 |   |
| ** **                                               |       |                   |       |   |   |
| Net (loss) income before  income tax benefit (provision) |       | (1,083,173             | )          | 451,273 |   |
|                                                     |       |                   |       |   |   |
| Income tax benefit  (provision)                          |       | 378,348                |       | (302,836 | ) |
| ** **                                               |       |                   |       |   |   |
| Net (loss) income                                        |       | $                      | (704,825   | ) | $ | 148,437 |   |
|                                                     |       |                   |       |   |   |
| (Loss) earnings per  common share                        |       |                   |       |   |   |
| Basic and Diluted                                        |       | $                      | (0.03      | ) | $ | 0.01 |   |
|                                                     |       |                   |       |   |   |
| Weighted average number  of common shares                |       |                   |       |   |   |
| Basic                                                    |       | 26,646,022             |       | 26,892,311 |   |
| Diluted                                                  |       | 26,646,022             |       | 29,254,273 |   |

 

----

*Generaland administrative expenses for the three months ended September 30, 2009and 2008 included non-cash stock-based compensation expense of $391,636 and$523,725, respectively.

 

See accompanying notes to consolidated financial statements.

 

4

----

Table ofContents

 

**Evolution Petroleum Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Three Months Ended********September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Cash flows from operating  activities                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net (loss) income                                                                         |       | (704,825                                         | )          | $ | 148,437 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation, depletion and amortization                                                  |       | 617,757                                          |       | 644,882 |   |
| Stock-based compensation                                                                  |       | 391,636                                          |       | 523,725 |   |
| Accretion of asset retirement obligations                                                 |       | 14,338                                           |       | 5,737 |   |
| Deferred income taxes                                                                     |       | (339,522                                         | )          | 302,836 |   |
| Deferred rent                                                                             |       | 944                                              |       | 944 |   |
| Other                                                                                     |       | 103,596                                          |       | 1,559 |   |
| Changes in operating assets and liabilities                                               |       |                                             |       |   |   |
| Receivables from oil and natural gas sales                                                |       | 22,255                                           |       | 1,167,557 |   |
| Receivables from income taxes and other                                                   |       | 33,378                                           |       | 265,798 |   |
| Prepaid expenses and other current assets                                                 |       | 41,751                                           |       | (238,650 | ) |
| Accounts payable and accrued expenses                                                     |       | 107,600                                          |       | (466,478 | ) |
| Royalties payable                                                                         |       | 35,342                                           |       | (135,857 | ) |
| Net cash provided by operating activities                                                 |       | 324,250                                          |       | 2,220,490 |   |
|                                                                                      |       |                                             |       |   |   |
| Cash flows from investing  activities                                                     |       |                                             |       |   |   |
| Development of oil and natural gas properties                                             |       | (1,090,298                                       | )          | (2,836,572 | ) |
| Acquisitions of oil and natural gas properties                                            |       | (45,190                                          | )          | (1,111,640 | ) |
| Capital expenditures for other equipment                                                  |       | —                                           |       | (25,509 | ) |
| Purchases of certificates of deposit                                                      |       | (107,212                                         | )          | — |   |
| Net cash used in investing activities                                                     |       | (1,242,700                                       | )          | (3,973,721 | ) |
|                                                                                      |       |                                             |       |   |   |
| Cash flows from financing  activities                                                     |       |                                             |       |   |   |
| Proceeds from the issuance of common stock                                                |       | —                                           |       | — |   |
| Net cash provided by financing activities                                                 |       | —                                           |       | — |   |
|                                                                                      |       |                                             |       |   |   |
| Net decrease in cash and cash equivalents                                                 |       | (918,450                                         | )          | (1,753,231 | ) |
|                                                                                      |       |                                             |       |   |   |
| Cash and cash equivalents, beginning of period                                            |       | 3,891,764                                        |       | 11,272,280 |   |
|                                                                                      |       |                                             |       |   |   |
| Cash and cash equivalents, end of period                                                  |       | $                                                | 2,973,314  |   | $ | 9,519,049 |   |
|                                                                                           |            |                                                  |            |  |  |  |  |

 

Oursupplemental disclosures of cash flow information for the three months ended September 30,2009 and 2008 are as follows:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Income taxes paid                                                                                                                             |       | $                      | —     |   | $ | 15,000 |   |
|                                                                                                                                          |       |                   |       |   |   |
| Income tax refunds received                                                                                                                   |       | $                      | —     |   | 322,869 |   |
|                                                                                                                                          |       |                   |       |   |   |
| Non-cash transactions                                                                                                                         |       |                   |       |   |   |
| Increase (decrease) in accounts payable used to  acquire oil and natural gas leasehold interests and develop oil and natural  gas properties: |       | $                      | (21,561    | ) | $ | (1,509,789 | ) |
| Oil and natural gas properties incurred through  recognition of asset retirement obligations:                                                 |       | $                      | 58,779     |   | $ | 107,751 |   |
| Common stock issued in lieu of a portion of 2008  cash bonus accrued at June 30, 2008:                                                   |       | $                      | —     |   | $ | 168,462 |   |

 

See accompanying notes to consolidated financial statements.

 

5

----

Table ofContents

** **

**EVOLUTION PETROLEUM CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1****—****Organization and Basis of Preparation**

 

***Nature of Operations.***  EvolutionPetroleum Corporation (“EPM”) and its subsidiaries (the “Company”, “we”, “our”or “us”), is an independent petroleum company headquartered in Houston, Texasand incorporated under the laws of the State of Nevada.  We are engaged primarily in the acquisition,exploitation and development of properties for the production of crude oil andnatural gas.  We acquire properties withknown oil and natural gas resources and exploit them through the application ofconventional and specialized technology to increase production, ultimaterecoveries, or both.

 

***Interim Financial Statements.***  The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information and with the appropriate rules andregulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations.  All adjustments (consisting of normalrecurring accruals) which are, in the opinion of management, necessary for afair presentation of the financial position and results of operations for theinterim periods presented have been included. The interim financial information and notes hereto should be read inconjunction with the Company’s 2009 Annual Report on Form 10-K for theyear ended June 30, 2009, as filed with the SEC. The results of operationsfor interim periods are not necessarily indicative of results to be expectedfor a full fiscal year.

 

***Principles of Consolidation and Reporting.***  Our consolidated financial statements includethe accounts of EPM and its wholly-owned subsidiaries. All significantintercompany transactions have been eliminated in consolidation. Theconsolidated financial statements for the previous year include certainreclassifications that were made to conform to the current presentation.  Such reclassifications have no impact onpreviously reported income or stockholders’ equity.

 

***Use of Estimates. ***The preparationof financial statements in conformity with GAAP requires us to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe dates of the financial statements and the reported amounts of revenues andexpenses during the reporting periods. Significant estimates include reserve quantities and estimated futurecash flows associated with proved reserves, which significantly impactdepletion expense and potential impairments of oil and natural gas properties,income taxes, the amounts recoverable from the carry-back of income tax lossesand the valuation of deferred tax assets, stock-based compensation andcommitments and contingencies.  Weanalyze our estimates based on historical experience and various otherassumptions that we believe to be reasonable. While we believe that ourestimates and assumptions used in preparation of the consolidated financialstatements are appropriate, actual results could differ from those estimates.

 

**Note 2 — Recent Accounting Pronouncements**

 

***New Accounting Standards.***  The followingdiscloses the existence and effect of accounting standards issued but not yetadopted by us with respect to accounting standards that may have an impact onthe Company when adopted in the future.

 

***Modernization of Oil and Gas Reporting.***  On December 31, 2008,the SEC released new requirements for reporting oil and gas reserves (the “ModernizationRequirements”).  The Modernization Requirements, when effective, providefor consideration of current technology in evaluating reserves, allow companiesto disclose their probable and possible reserves to investors, requirereporting of oil and gas reserves using an average price based on the prior12-month period rather than period-end prices, revise the disclosurerequirements for oil and gas operations, and revise accounting for the limitationon capitalized costs for full cost companies.  The ModernizationRequirements are expected to be effective for fiscal years ending on or after December 31,2009.  A company may not apply theModernization Requirements to disclosures in quarterly reports prior to thefirst annual report in which the revised disclosures are required.  We have not yet evaluated the effects theModernization Requirements will have on our financial statements.

 

In September 2009, theFinancial Accounting Standards Board (“FASB”) issued an exposure draft to alignthe reserve calculation and disclosure requirements of generally acceptedaccounting principles with the Modernization Requirements. As proposed, theexposure draft would be effective for reporting periods ending on or after December 31,2009.

 

The SEC staff issued StaffAccounting Bulletin 113, which revises portions of the guidance included in SABTopic 12, *Oil and Gas Producing Activities.*  Specifically, SAB 113 revises the relevantinterpretive guidance in SAB Topic 12 to conform it to the ModernizationRequirements.

 

6

----

Table of Contents

 

**Note 3 —****Property and Equipment**

 

Asof September 30, 2009 and June 30, 2009 our oil and natural gasproperties and other property and equipment consisted of the following:

 
| ** **                                                   | ** ** | **September 30,  2009** | ** ** | **June 30,  2009** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| **Oil and natural gas properties**                           |       |                         |       |                    |       |
| Property costs subject to amortization                       |       | $                            | 22,814,506 |                    | $          | 21,985,950 |   |
| Less: Accumulated depreciation, depletion, and  amortization |       | (3,655,367                   | )          | (3,054,237              | )          |
| Unproved properties not subject to amortization              |       | 10,163,615                   |       | 9,819,465               |       |
| Oil and natural gas properties, net                          |       | $                            | 29,322,754 |                    | $          | 28,751,178 |   |
|                                                         |       |                         |       |                    |       |
| **Other property and equipment**                             |       |                         |       |                    |       |
| Furniture, fixtures and office equipment, at cost            |       | 260,476                      |       | 260,476                 |       |
| Less: Accumulated depreciation                               |       | (126,406                     | )          | (109,779                | )          |
| Other property and equipment, net                            |       | $                            | 134,070    |                    | $          | 150,697 |   |

 

Unprovedproperties not subject to amortization include unevaluated acreage of $7.5million as of September 30, 2009 and June 30, 2009, consisting ofproperties in the Giddings Field in Central Texas, the Woodford Shale trend inOklahoma, and the Lopez Field in South Texas (our “Neptune oil project”).  Unproved properties include $2.0 million asof September 30, 2009 and June 30, 2009, of participating intereststhrough royalty and overriding royalty interests aggregating 7.4% of the DelhiHolt Bryant Unit in the Delhi Field in Louisiana.  We incurred $0.7 million and $0.3 million asof September 30, 2009 and June 30, 2009, respectively, related to thedrilling of three test wells and re-entry of four test wells, all verticaltests with light acid hydraulic fracturing, on our acreage in Wagoner County inOklahoma.  Subject to industryconditions, evaluation of these properties is expected to be completed withinone to five years.  Our evaluation ofimpairment of unproved properties occurs, at a minimum, on a quarterly basis.

 

**Note 4****—****Asset Retirement Obligations**

 

Ourasset retirement obligations represent the estimated present value of theamount we will incur to plug, abandon and remediate our producing properties atthe end of their productive lives in accordance with applicable laws. Thefollowing is a reconciliation of the beginning and ending asset retirementobligation for the three months ended September 30, 2009:

 
| **Asset retirement obligations —  beginning of period** |   | $      | 664,710 |   |   |   |
|--------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Liabilities incurred                                         |   | 58,779 |    |   |   |
| Accretion                                                    |   | 14,338 |    |   |   |
| **Asset retirement obligations —  end of period**       |   | $      | 737,827 |   |   |   |

 

**Note 5 — Stockholders’ Equity**

 

On September 8, 2009,the Board of Directors authorized and the Company issued 138,224 unrestrictedand fully vested shares of common stock from the 2004 Stock Plan to certainemployees for the payment of fiscal 2009 bonuses.  The value of the shares issued was $370,440,based on the fair market value on the date of issuance, or $2.68 pershare.  The amount of bonus was accruedas of June 30, 2009 and recognized as a long-term liability. On September 8,2009, when the shares were issued, the liability was reclassified tostockholders’ equity.

 

OnSeptember 8, 2009, the Board of Directors authorized and the Companyissued 324,597 shares of restricted common stock from the 2004 Stock Plan to employeesas a long-term incentive award.  Totalunrecognized stock-based compensation expense of $869,917 related to thelong-term incentive award will be recognized ratably over a four year vestingperiod.

 

7

----

Table of Contents

 

**Note 6****—****Stock-Based Incentive Plan**

 

Wehave granted option awards to purchase common stock (the “Stock Options”) andrestricted common stock awards (“Restricted Stock”) to employees, directors,and consultants of the Company and its subsidiaries under the Natural GasSystems Inc. 2003 Stock Plan (the “2003 Stock Plan”) and the EvolutionPetroleum Corporation Amended and Restated 2004 Stock Plan (the “2004 StockPlan” or together, the “EPM Stock Plans”). Option awards for the purchase of 600,000 shares of common stock wereissued under the 2003 Stock Plan.  The2004 Stock Plan authorized the issuance of 5,500,000 shares of commonstock.  There are no shares available forgrant under the 2003 Stock Plan and, as of September 30, 2009, 543,600shares remain available for grant under the 2004 Stock Plan.

 

Wehave also granted common stock warrants, as authorized by the Board ofDirectors, to employees in lieu of cash bonuses or as incentive awards toreward previous service or provide incentives to individuals to acquire aproprietary interest in the Company’s success and to remain in the service ofthe Company (the “Incentive Warrants”). These Incentive Warrants have similar characteristics of the StockOptions.  A total of 1,037,500 IncentiveWarrants have been issued, with Board of Directors approval, outside of the EPMStock Plans.  We have not issuedIncentive Warrants since the listing of our shares on the NYSE Amex (formerlyAmerican Stock Exchange) in July 2006.

 

OnSeptember 8, 2009, the Board of Directors authorized the issuance of138,224 unrestricted and fully vested shares of common stock from the 2004Stock Plan to certain employees for the payment of fiscal 2009 bonuses in lieuof cash.  The value of the shares issuedwas $370,440, based on the fair market value on the date of issuance, or $2.68per share.  The amount of bonus wasaccrued as of June 30, 2009, and recognized as a long-term liability. On September 8,2009, when the shares were issued, the liability was reclassified tostockholders’ equity.

 

OnAugust 19, 2008, the Board of Directors authorized the issuance of 46,795unrestricted and fully vested shares of common stock from the 2004 Stock Planto certain employees who elected to receive these shares in lieu of a portionof their fiscal 2008 cash bonus.  Thevalue of the shares issued was $168,462, based on the fair market value on thedate of issuance, or $3.60 per share.

 

***Stock Options and Incentive Warrants***

 

Non-cashstock-based compensation expense related to Stock Options and IncentiveWarrants for the three months ended September 30, 2009 and 2008 was$265,252 and $445,993, respectively.

 

Therewere no Stock Options granted during the three months ended September 30,2009.  During the three months ended September 30,2008, we granted Stock Options to purchase 591,090 shares of common stock underthe 2004 Stock Plan with a weighted average exercise price of $4.27.  The exercise price was determined based onthe market price of the Company’s common stock on the date of grant.  The Stock Options granted during the threemonths ended September 30, 2008 vest quarterly, on a straight line basis,over a period of four years.  The StockOptions granted during the three months ended September 30, 2008 have acontractual life of seven years.  Theweighted average assumptions used to calculate the fair value of these StockOptions and the weighted average fair value of each option granted are asfollows:

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **September 30,** | ** ** |
| ** **               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Expected volatility      |       | —                 |       | 87.1 | % |
| Expected dividends       |       | —                 |       | — |   |
| Expected term (in years) |       | —                 |       | 4.6 |   |
| Risk-free rate           |       | —                 |       | 3.10 | % |
| Fair value               |       | —                 |       | $ | 2.62 |   |
|                          |            |                        |            |  |  |  |

 

Weestimated the fair value of Stock Options and Incentive Warrants issued toemployees and directors at the date of grant using the Black-Scholes-Mertonvaluation model.  The risk-free rate isbased on the U.S. Treasury yield curve in effect at the time of grant.  The expected term (estimated period of timeoutstanding) of Stock Options and Incentive Warrants is based on the “simplified”method of the estimated expected term for “plain vanilla” options allowed bythe SEC Staff Accounting Bulletin (“SAB”) No. 107 and SAB No. 110,and varied based on the vesting period and contractual term of the StockOptions or Incentive Warrants.   Expected volatility is based on thehistorical volatility of the Company’s closing common stock price and that ofan evaluation of a peer group of similar companies trading activity.  Wehave not declared any cash dividends on the Company’s common stock.

 

Thefollowing summary presents information regarding outstanding Stock Options andIncentive Warrants as of September 30, 2009, and the changes during theperiod:

 

8

----

Table of Contents

 

**Note 6****—****Stock-Based Incentive Plan**(Continued)

 
| ** **                                                                   | ** ** | **Number of Stock  Options  and Incentive Warrants** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value  (1)** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in  years)** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | ** **                                                               | ** ** | ** **                                     | ** ** | ** **                               | ** ** | ** **                                                           | ** ** |
| Stock Options and Incentive Warrants outstanding at  July 1, 2009       |       | 5,485,820                                                                |       | $                                              | 1.83       |                                     |       |                                                                 |       |   |
|                                                                         |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Granted                                                                      |       | —                                                                   |       | —                                         |       |                                     |       |                                                                 |       |
| Exercised                                                                    |       | —                                                                   |       | —                                         |       |                                     |       |                                                                 |       |
| Cancelled or forfeited                                                       |       | —                                                                   |       | —                                         |       |                                     |       |                                                                 |       |
| Expired                                                                      |       | —                                                                   |       | —                                         |       |                                     |       |                                                                 |       |
|                                                                         |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Stock Options and Incentive Warrants outstanding at  September 30, 2009 |       | 5,485,820                                                                |       | $                                              | 1.83       |                                     | $          | 6,601,645                                                            |       | 6.2 |   |
|                                                                         |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Vested or expected to vest                                                   |       | 5,485,820                                                                |       | $                                              | 1.83       |                                     | $          | 6,601,645                                                            |       | 6.2 |   |
|                                                                         |       |                                                                     |       |                                           |       |                                     |       |                                                                 |       |
| Exercisable at September 30, 2009                                       |       | 4,538,741                                                                |       | $                                              | 1.65       |                                     | $          | 6,088,858                                                            |       | 5.9 |   |

 

----

(1) Basedupon the difference between the market price of our common stock on the lasttrading date of the period ($2.97 as of September 30, 2009) and the StockOption or Incentive Warrant exercise price of in-the-money Stock Options andIncentive Warrants.

 

There were no Stock Optionsor Incentive Warrants that were exercised during the three months ended September 30,2009 and 2008.

 

Asummary of the status of our unvested Stock Options and Incentive Warrants asof September 30, 2009 and the changes during the three months ended September 30,2009, is presented below:

 
| ** **                          | ** ** | **Number of  Stock Options  and Incentive  Warrants** | ** ** | **Weighted  Average Grant-  Date Fair Value** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                            | ** ** | ** **                                                   | ** ** |
| Unvested at July 1, 2009       |       | 1,091,912                                             |       | $                                                            | 1.97       |   |
|                                |       |                                                  |       |                                                         |       |
| Granted                             |       | —                                                |       | $                                                            | —     |   |
|                                |       |                                                  |       |                                                         |       |
| Vested                              |       | (144,833                                              | )          | $                                                            | 1.80       |   |
|                                |       |                                                  |       |                                                         |       |
| Unvested at September 30, 2009 |       | 947,079                                               |       | $                                                            | 1.99       |   |

 

Duringthe three months ended September 30, 2009 and 2008, there were 144,833 and229,062 Stock Options and Incentive Warrants that vested with a total grantdate fair value of $260,699 and $389,405, respectively.

 

Thetotal unrecognized compensation cost at September 30, 2009, relating tonon-vested Stock Options and Incentive Warrants was $1,794,601.  Such unrecognized expense is expected to berecognized over a weighted average period of 2.1 years.

 

***Restricted Stock***

 

During the three months endedSeptember 30, 2009, we issued 324,597 shares of Restricted Stock tocertain employees as long-term incentive compensation.  There were no grants of Restricted Stock forthe three months ended September 30, 2008.

 

Stock-basedcompensation expense related to Restricted Stock grants for the three monthsended September 30, 2009 and 2008 was $126,384 and $77,732, respectively.

 

9

----

Table of Contents

 

**Note 6****—****Stock-Based Incentive Plan**(Continued)

 

Thefollowing table sets forth the Restricted Stock transactions for the threemonths ended September 30, 2009:

 
| ** **                          | ** ** | **Number of  Restricted  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | ** **                             | ** ** | ** **                                         | ** ** |
| Unvested at July 1, 2009       |       | 390,283                                |       | $                                                  | 3.37       |   |
|                                |       |                                   |       |                                               |       |
| Granted                             |       | 324,597                                |       | $                                                  | 2.68       |   |
|                                |       |                                   |       |                                               |       |
| Vested                              |       | —                                 |       | $                                                  | —     |   |
|                                |       |                                   |       |                                               |       |
| Forfeited                           |       | —                                 |       | —                                             |       |
|                                |       |                                   |       |                                               |       |
| Unvested at September 30, 2009 |       | 714,880                                |       | $                                                  | 3.06       |   |

 

AtSeptember 30, 2009, unrecognized stock compensation expense related toRestricted Stock grants totaled $1,964,783. Such unrecognized expense will be recognized over a weighted average periodof 3.8 years.

 

**Note 7****—****Income Taxes**

 

Wefile a consolidated federal income tax return in the United States and variouscombined and separate filings in several state and local jurisdictions.

 

Therewere no unrecognized tax benefits or accrued interest or penalties associatedwith unrecognized tax benefits since the FASB required recognition ofunrecognized tax benefits and through September 30, 2009.  We believe that we have appropriate supportfor the income tax positions taken and to be taken on the Company’s tax returnsand that the accruals for tax liabilities are adequate for all open years basedon our assessment of many factors, including past experience andinterpretations of tax law applied to the facts of each matter. The Company’sfederal and state income tax returns are open to audit under the statute oflimitations for the years ending June 30, 2007 through June 30, 2009.

 

Oureffective tax rate for the three months ended September 30, 2008 of 67%,significantly higher than the statutory federal rate, was due to stock-basedcompensation related to qualified incentive stock option awards (“ISO awards”),a permanent tax difference for financial reporting.  We recorded an expense of $396,394 for thethree months ended September 30, 2008, related to ISO awards.  For the three months ended September 30,2009, stock based compensation expense was primarily related to awards that arenon-qualified for federal income tax purposes.

 

Weexpect to recover approximately $2.1 million in federal income taxes paidduring the tax year ended June 30, 2007, as a result of the carry-back ofour 2009 income tax loss.  Significantintangible drilling costs were incurred during the 2009 fiscal year, of which,we elected to expense approximately $4.8 million for federal income taxpurposes.  Under GAAP, and specificallythe full-cost accounting method, intangible drilling costs are capitalized aspart of oil and natural gas properties, and depleted using theunit-of-production method.  The deductionof intangible drilling costs created a significant difference in the income taxand book basis of our oil and natural gas properties, the most significantcomponent of our deferred income tax liability as of September 30, 2009and June 30, 2009.

 

**Note 8****—****Related Party Transactions**

 

Laird Q. Cagan, a member ofour Board of Directors, is a Managing Director and co-owner of Cagan McAfeeCapital Partners, LLC (“CMCP”).  CMCP hasperformed financial advisory services to us pursuant to a written agreementamended in November 2005 (the “Agreement”), providing for a retainer of$5,000 per month.  Also pursuant to theAgreement, Mr. Cagan, as a registered representative of Colorado FinancialServices Corporation and as a partner of CMCP, could serve as our placementagent in private equity financings, wherein CMCP could earn cash fees equal to8% of gross equity proceeds, declining to 4% subject to the amount of equityraised through CMCP, and a fixed 4% warrant fee.  We have not paid placement fees to CMCP underthis agreement since May 2006. During the term of the Agreement, Mr. Cagan received nocompensation for serving as a director or as the Chairman of our Board ofDirectors.   Effective December 31,2008, the Agreement was modified to remove the monthly retainer and Mr. Caganwas re-elected as a director of our Board with remuneration consistent withother outside directors of our Board. During the three months ended September 30, 2008, we expensed andpaid CMCP $15,000 through monthly retainers of $5,000.  There were no other transactions with CMCP.

 

Eric A. McAfee, a majorshareholder of the Company, is also a Managing Director of CMCP.

 

10

----

Table of Contents

 

**Note 9 —****Net loss Per Share**

 

The following table sets forth the computation of basic and diluted lossper share:

 
| ** **                                                                                         | ** ** | **Three Months Ended********September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2009**                                              | ** ** | **2008** | ** ** |
| *Numerator*                                                                                        |       |                                                  |       |   |   |
| Net (loss) income                                                                                  |       | $                                                     | (704,825   | ) | $ | 148,437 |   |
|                                                                                               |       |                                                  |       |   |   |
| *Denominator*                                                                                      |       |                                                  |       |   |   |
| Weighted average number of common shares - basic                                                   |       | 26,646,022                                            |       | 26,892,311 |   |
|                                                                                               |       |                                                  |       |   |   |
| Effect of dilutive securities*                                                                     |       |                                                  |       |   |   |
| Common stock warrants issued in connection with equity  and financing transactions                 |       | —                                                |       | 269,699 |   |
| Stock Options and Incentive Warrants                                                               |       | —                                                |       | 2,092,263 |   |
| *Total weighted average number  of potential dilutive securities*                                  |       | —                                                |       | 2,361,962 |   |
| Weighted average number of common shares and  potential dilutive common shares used in diluted EPS |       | 26,646,022                                            |       | 29,254,273 |   |
|                                                                                               |       |                                                  |       |   |   |
| Net (loss) earnings per common share - basic                                                       |       | $                                                     | (0.03      | ) | $ | 0.01 |   |
| Net (loss) earnings per common share - diluted                                                     |       | $                                                     | (0.03      | ) | $ | 0.01 |   |

 

----

* Potential dilutive commonshares are excluded from the computation of net (loss) earnings per commonshares if their effect is anti-dilutive. Potential dilutive common sharesalways will result in an anti-dilutive per-share amount when an entity has aloss from continuing operations and as such no potential dilutive common shareswere included in the computation of diluted EPS for the three months ended September 30,2009.

 

Totaloutstanding potentially dilutive securities as of September 30, 2009 areas follows:
|                                                                               |       |                                  |       |                                        |       |   |   |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|--------|--------|
| **Outstanding Potential Dilutive  Securities**                                     | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Outstanding at  September 30, 2009** | ** ** |
|                                                                               |       |                                  |       |                                        |       |
| Common stock warrants issued in connection with  equity and financing transactions |       | $                                     | 1.46       |                                        | 348,058    |   |
| Stock Options and Incentive Warrants                                               |       | $                                     | 1.83       |                                        | 5,485,820  |   |
| Total                                                                              |       | $                                     | 1.81       |                                        | 5,833,878  |   |

 

Totaloutstanding potentially dilutive securities as of September 30, 2008 areas follows:
|                                                                               |       |                                  |       |                                        |       |   |   |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|--------|--------|
| **Outstanding Potential Dilutive  Securities**                                     | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Outstanding at  September 30, 2008** | ** ** |
|                                                                               |       |                                  |       |                                        |       |
| Common stock warrants issued in connection with  equity and financing transactions |       | $                                     | 1.40       |                                        | 401,058    |   |
| Stock Options and Incentive Warrants                                               |       | $                                     | 2.05       |                                        | 6,074,590  |   |
| Total                                                                              |       | $                                     | 2.01       |                                        | 6,475,648  |   |

 

**Note 10 — Commitments and Contingencies**

 

Weare subject to various claims and contingencies in the normal course ofbusiness.  In addition, from time totime, we receive communications from government or regulatory agenciesconcerning investigations or allegations of noncompliance with laws orregulations in jurisdiction in which we operate.  We disclose such matters if we believe it isreasonably possible that a future event or events will confirm a loss throughimpairment of an asset or the incurrence of a liability. We establish reservesif we believe it is probable that a future event or events will confirm a lossand we can reasonably estimate such loss. Furthermore, we will disclose any matter that is unasserted if weconsider it probable that a claim will be asserted and there is a reasonablepossibility that the outcome will be unfavorable.  As of September 30, 2009, andsubsequently through the date these financial statements were issued, no claimor unasserted claim existed that required an accrual or disclosure.

 

11

----

Table ofContents

 

**Note 10 — Commitments and Contingencies**(Continued)

 

***Lease Commitments.***  We have a non-cancelable operating lease foroffice space that expires on August 1, 2016. Future minimum leasecommitments as of September 30, 2009 under this operating lease are asfollows:

 
| **For the year ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2010                                       |       | $          | 138,089    |   |
| 2011                                       |       | 141,576    |       |
| 2012                                       |       | 159,011    |       |
| 2013                                       |       | 159,011    |       |
| 2014                                       |       | 159,011    |       |
| Thereafter                                 |       | 291,520    |       |
| Total                                      |       | $          | 1,048,218  |   |

 

Rentexpense for the three months ended September 30, 2009 and 2008 was $39,730and $35,466, respectively.

 

***Employment Contracts.***  We have entered into employment agreementswith the Company’s three senior executives. The employment contracts provide for a severance package for terminationby the Company for any reason other than cause or permanent disability, or inthe event of a constructive termination, that includes payment of base pay andcertain medical and disability benefits from six months to a year aftertermination.   The total contingentobligation under the employment contracts as of September 30, 2009 isapproximately $499,000.

 

**Note 11****—****Subsequent Events**

 

OnOctober 27, 2009, 119,795 shares of common stock were issued through a netcashless exercise of a placement warrant. The placement warrant, which was issued to CMCP on May 26, 2004 inconnection with a financing transaction, gave CMCP the right to purchase165,000 shares, with an exercise price of $1.00 per share.

 

OnNovember 10, 2009, 5,833 shares of common stock were issued through a netcashless exercise of a placement warrant. The placement warrant, issued on November 30, 2004 in connection with afinancing transaction, gave the holder the right to purchase 10,000 shares,with an exercise price of $1.50 per share.

 

Subsequentevents have been evaluated through November 13, 2009, the date thesefinancial statements were issued.

 

12

----

Table ofContents

 

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*This Form 10-Q and theinformation referenced herein contain forward-looking statements within themeaning of the Private Securities Litigations Reform Act of 1995, Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. The words “plan,” “expect,” “project,” “estimate,” “assume,” “believe,”“anticipate,” “intend,” “budget,” “forecast,” “predict” and other similarexpressions are intended to identify forward-looking statements. Thesestatements appear in a number of places and include statements regarding ourplans, beliefs or current expectations, including the plans, beliefs andexpectations of our officers and directors.* *Whenconsidering any forward-looking statement, you should keep in mind the riskfactors that could cause our actual results to differ materially from thosecontained in any forward-looking statement. Important factors that could causeactual results to differ materially from those in the forward-lookingstatements herein include the timing and extent of changes in commodity pricesfor oil and natural gas, operating risks and other risk factors as described inour 2009 Annual Report on Form 10-K for the year ended June 30, 2009as filed with the Securities and Exchange Commission. Furthermore, theassumptions that support our forward-looking statements are based uponinformation that is currently available and is subject to change. We specificallydisclaim all responsibility to publicly update any information contained in aforward-looking statement or any forward-looking statement in its entirety andtherefore disclaim any resulting liability for potentially related damages. Allforward-looking statements attributable to Evolution Petroleum Corporation areexpressly qualified in their entirety by this cautionary statement.*

 

*We usethe terms, “EPM,” “Company,” “we,” “us” and “our” to refer to EvolutionPetroleum Corporation.*

 

**Executive Overview**

 

*General*

 

We are a petroleum companyengaged primarily in the acquisition, exploitation and development ofproperties for the production of crude oil and natural gas. We acquire known,underdeveloped oil and natural gas resources and exploit them through theapplication of capital and technology to increase production, ultimaterecoveries, or both.

 

Our strategy is intended togenerate scalable development opportunities at normally pressured depths,exhibiting relatively low completion risk, generally longer and morepredictable production lives, less expenditures on infrastructure and loweroperational risks.

 

Within this overall strategy,we pursue three specific initiatives:

 
| I      | Enhanced  oil recovery (“EOR”), using miscible and immiscible gas flooding;                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                   |
| II     | Conventional  redevelopment of bypassed primary resources within mature oil and natural gas  fields utilizing modern technology and our expertise; and |
|   |                                                                                                                                                   |
| III    | Unconventional  gas resource development, using modern stimulation and completion  technologies.                                                       |

 

Our most significant asset iswithin our EOR Initiative in the 13,636 acre Delhi Field, located in northeastLouisiana.  Our non-operated interestsconsist of 7.4% in overriding and mineral royalty interests and a 25% afterpay-out reversionary working interest in the Delhi Field Holt Bryant Unit,along with a 25% working interest in certain other depths in the Delhi Fieldresulting from the Farmout we completed on June 12, 2006 with DenburyOnshore LLC, a subsidiary of Denbury Resources Inc. (the “Operator”) (the “DelhiFarmout”).  The Holt Bryant Unit iscurrently being redeveloped by the Operator, using CO2 enhanced oil recovery technology and adedicated portion of the Operator’s proved CO2 reserves inthe Jackson Dome, located approximately 100 miles east of Delhi.  During an Analyst Day presentation onNovember 12, 2009, the Operator announced that CO2 injectionbegan at the Delhi Field earlier that day, with initial oil production responseexpected by mid-year calendar 2010.

 

Since our closing of theDelhi Farmout, we have focused on developing projects in our other initiativesthrough conventional redevelopment of oil and rich gas in the Giddings Fieldusing horizontal drilling, development of gas resources in the shallow portionof the Woodford and Caney Shale Trend in Eastern Oklahoma and development ofpotential oil reserves in the mature Lopez Field within our Neptune project inSouth Texas.

 

We are funding our ongoingdevelopment from our working capital resources and from net cash flows from ourproperties in the Giddings Field.  Ourexpected future cash flows from the Delhi Project also will be used to fundfull development of our projects and other new projects.  We also may utilize project financing andselected asset monetization in the future.

 

Ourlong-term strategy and primary focus continue to be on increasing share valuethrough the identification and acquisition of resources and conversion of thoseresources into proved reserves through our expertise and technology.

 

13

----

Table of Contents

 

*Highlights for our FirstQuarter 2010*

 

***Projects***

 

·                 **CO****2**** ****injection began at Delhi on November 12, 2009.** On November 12, 2009, the operator of the Delhi Field announced at theirAnalyst Day presentation that CO2 injectionhad begun earlier that day, and that they expected first oil production tobegin around mid-calendar 2010.****

 

·**                ****Wesuccessfully field tested our proprietary lift technology at Giddings. **As previously reported, thefirst well we re-entered and drilled horizontally in Giddings, the Donella #1,was also our poorest producer in the program due to previous depletion of thezone by an offset well.  After one yearof production, the well became incapable of further commercial production onconventional rod pump.  During June 2009,we re-entered the well to install and test our proprietary artificial lifttechnology.  Commercial production wassuccessfully re-established and steadily improved over its first two months ofproduction.   The well is still onproduction.

 

·                 **We drilled and completed our first test well atNeptune. **Testing of the productiverate is pending the completion of water disposal facilities. We also increasedour net acreage holdings by 14% to 1,710 net acres on favorable terms,potentially adding 10-13 additional drilling locations.

 

·                 **Updateon proof of concept drilling in our shallow Oklahoma Gas Shale Project.**   As previously reported, we initiated thedrilling of three test wells and re-entry of three wells, all vertical testswith light acid hydraulic fracturing on our acreage in Wagoner County inOklahoma.  The tests demonstrated asatisfactory initial rate of gas production from the Woodford Shale.  We also demonstrated that the Caney Shale isproductive, thereby providing an additional zone that could be potentiallyco-produced with the Woodford.

 

***Operations***

 

·                 **Sales volumes increased 3%, but product pricesdeclined 61% during our first quarter of fiscal 2010 compared to our firstquarter of fiscal 2009.* ***Essentially 100% of ourproduction for the three months ended September 30, 2009 and 2008 wasattributable to our properties in the Giddings Field.  Declines in crude oil and NGL production wasmore than offset by an increase in natural gas production, while revenues weredriven down in the current period by substantial declines in both crude oil andnatural gas prices.  During the threemonths ended September 30, 2009, the average price we received was $33.43per BOE, as compared to $85.51 during the three months ended September 30,2008.

 

·                 **Our production declines have flattened, exitingour 1****st**** quarter of fiscal 2010 at a combined rate ofapproximately 382 net BOE per day**.** **This compares to a sequential rateof 348 net BOE per day and comparable prior fiscal year quarterly rate of 371net BOE per day for the three months ended June 30, 2009 and September 30,2008, respectively.  All of our wellsappear to have completed their initial period of steep production declines andexhibit shallower declines. In particular, our best well, the Pearson, hasstabilized at a productive gross rate of 1.3 MMCFE per day after eight monthsof production.

 

·                 **We lowered our field income break-even point by 9%over our 1****st**** quarter of fiscal 2009 and 5% over our 4****th**** quarter of fiscal 2009.**  During the three months ended September 30,2009, lifting costs (lease operating expense and production taxes, on a combinedper unit of sales basis) were $10.95 and our depletion rate was $17.17 per BOE,equaling a field income break-even point of $28.12 per BOE.  This compares to lifting costs of $12.38 anda depletion rate of $18.63 per BOE, equaling a field income break-even point of$31.01 per BOE we experienced during the three months ended September 30,2008 and to lifting costs of $12.59 and a depletion rate of $17.15 per BOE,equaling a field income break-even point of $29.74 per BOE we experiencedduring the three months ended June 30, 2009.

 

***Finances***

 

·                 **We endedour 1****st**** quarter of fiscal 2010 with $6.6 million ofworking capital, compared to $7.6 million at June 30, 2009. **At September 30, 2009,working capital included $5.1 million of cash and cash equivalents and short-termcertificates of deposit, and $2.1 million of recoverable income taxes arisingfrom current year tax losses being carried back to a prior tax year.*** ***Weincurred $1.1 million (not including $0.1 million related to amountscapitalized due to asset retirement obligations) in capital expenditures foroil and natural gas leasehold and development costs.

 

·**                ****Cashflows from operations provided for our general and administrative expenses andfunded a portion of our capital expenditures. **Therefore, use of our working capital was entirely dedicated to our oiland gas projects.  Cash flows fromoperations were $324,250 during the three months ended September 30, 2009.

 

14

----

Tableof Contents

 

·                 **We protected our short-term investments during difficultcredit market conditions.**  Weavoided higher risk credit instruments over the last year, relying instead uponlower yielding short-term U.S. Treasury money market funds and short-termcertificates of deposit fully insured by the FDIC.

 

·                 **Non-cashstock-based compensation expense of $0.4 million comprised over 30% of totalgeneral and administrative expenses during the three months ended September 30,2009. **Non-cashstock-based compensation expense remains an important part of our total compensationprogram to help motivate and retain high performing employees and consultants,in addition to conserving our cash resources.

 

·                 **Weremained debt free.** All of our expenditures were funded solely byworking capital and we ended the quarter with no funded debt.

 

*Looking forward into 2010*

 

Wecontinue to focus on:

 

***Selective low cost testing and development of our portfolio properties.***

 

·                 **Upgradeour shallow multi-pay shale gas reserves.**  We arecontinuing our test program in the Oklahoma shallow Woodford and Caney gasshales.  We have immediate plans to applylarger hydraulic fracturing using proppant in two wells, to separately test theWoodford and Caney reservoirs, to determine peak initial production rates anddecline profiles.  We expect the resultswill allow us to design the appropriate development program and necessaryfacilities and gathering system. Later in the fiscal year, market conditionspermitting, we plan to re-enter a well in our mid-depth project in HaskellCounty, OK to begin testing the Woodford and Caney Shale reservoirs between4,000’ and 5,000’ depth.

 

·                 **Pursuecommercial joint ventures utilizing our proprietary artificial lift technology.**  Based on tests results in our Donella #1, webelieve this technology could re-establish production in many wells throughoutthe Giddings Field, and potentially other fields developed with horizontalwells.  We are installing this technologyon a second well we own in the Giddings Field. We have also initiated discussions with other producers, with theexpectation of contributing our technology and expertise in exchange for aninterest in the new production we might re-establish via our technology.

 

·**                ****Establishproduction in our Neptune oil project**.  We expect to begin first production in our100% owned Neptune oil project in South Texas with the drilling and completionof a second well that will allow low cost water disposal, and we plan to drilla second oil producer during the year. This work will potentially upgrade additional proved reserves whileadding oil production.

 

·                 **Conductworkovers in Giddings to generate net production to cover our overhead.**  We are performing workovers on certain wellsto partially offset normal production declines and continue to generatesufficient cash flows to offset corporate cash overhead.

 

·                 **Solicitjoint venture(s) to drill Giddings PUD locations.**  We are considering various options toaccelerate the drilling of our proved and unproved undeveloped drillinglocations, subject to stable natural gas, oil and NGL prices.

 

***Continued progress in ourDelhi EOR project****.*

 

·                 **CO****2**** injection at Delhi began on November 12, 2009.**

 

·                 **First oil production at Delhi is expected by the Operator duringmid-calendar 2010.**

 

·                 **Establishproved reserves at Delhi.** Under current SEC rules, proved reservescannot be assigned to our Delhi EOR property until first EOR productionresponse, projected by the Operator to occur by mid-year calendar 2010.Alternatively, the SEC’s “Modernization” rules that are scheduled tobecome effective on January 1, 2010, state that reservoir engineers canconsider other relevant factors in assigning proved reserves to EOR projects,including current technology, the results of field pilot tests and EOR projectsin geologically comparable fields, all of which we believe are characteristicsof the EOR project at Delhi.

 

15

----

Tableof Contents

 

***Continued conservativefinancial management.***

 

·                 **Emphasizelong-term share value over near-term earnings, particularly during periods oflow natural gas prices.**

 

·                 **Retainfinancial strength, flexibility and liquidity to assure we obtain proper valueof our core assets.**

 

·                 **Primarilyuse internally generated funds and our working capital for fiscal 2010 goals,**whileconsidering joint ventures, project financing or non-core asset monetization tofund growth through development of our core projects and new projects.

 

**Liquidityand Capital Resources**

 

AtSeptember 30, 2009, our working capital was $6.6 million and we continuedto be debt free.  This compares toworking capital of $7.6 million at June 30, 2009.  The decrease in working capital of $1.0million since June 30, 2009 was due primarily to investments of $1.1million in oil and natural gas properties (not including $0.1 million incurredrelated to recognition of asset retirement obligations).

 

Cashflows provided by operating activities for the three months ended September 30,2009 were $0.3 million.  Cash flowsprovided by operations include cash receipts of $1.2 million from oil andnatural gas sales primarily from our properties in the Giddings Field.  Sources of cash were offset by $0.9 millionof cash payments for operating activities, including lease operating expenses,production taxes, salaries and other general administrative expenses.  In comparison, cash flows provided byoperating activities for the three months ended September 30, 2008 wasapproximately $2.2 million, which included cash receipts of approximately $3.9million from oil and natural gas production primarily from our properties inthe Giddings Field, net cash receipts of approximately $0.4 million frominterest income and income tax refunds, offset by approximately $2.1 million ofcash payments for operating activities, including lease operating expenses,production taxes, salaries and other general and administrative expenses.

 

Cashflows used in investing activities totaled $1.2 million during the three monthsended September 30, 2009, which include the purchase of short-termcertificates of deposit of $0.1 million. Our remaining investing activities of $1.1 million were primarily for developmentof our properties in the Giddings Field, in our Neptune oil project in SouthTexas, and test drilling in our Woodford Shale projects in Oklahoma.  In comparison, cash flows used in investingactivities totaled approximately $4.0 million during the three months ended September 30,2008, consisting of approximately $3.9 million used for investments to acquireand develop oil and natural gas property interests, including net payments on June 30,2008 accounts payable of approximately $1.5 million relating to prior periodexpenditures for oil and natural gas properties

 

There were no cash flows fromfinancing activities during the three months ended September 30, 2009 and2008.

 

Weincurred $1.1 million of capital expenditures for oil and natural gas leaseholdand development costs during three months ended September 30, 2009, plusan additional $0.1 million related to recognition of asset retirementobligations.  Of the $1.1 million ofincurred capital expenditures during the three months ended September 30,2009, $0.1 million was for leasehold acquisitions and $1.0 million was fordevelopment activities.  Developmentactivities were in the Giddings Field, in our Neptune oil project in SouthTexas, and test drilling in our Woodford Shale acreage.

 

Due to our positive workingcapital, cash flows from producing properties and no debt, we believe we havethe ability to fund or further adjust our capital expenditure budget to captureselect opportunities that may arise for the benefit of our shareholders,without the need of additional financing. Therefore, we believe that our current sources of liquidity aresufficient to fund our ongoing cash requirements.

 

16

----

Table ofContents

 

**Resultsof Operations**

 

*Three months ended September 30,2009 and 2008*

 

The following table setsforth certain financial information with respect to our oil and natural gasoperations:

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------|------------|--------------|------------|
| ** **                                               | ** ** | **September 30**  | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                                               | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Variance** | ** ** | **change** | ** ** |
| ** **                                               |       |                   | ** ** | ** ** | ** ** | ** **   |       | ** ** |   |
| **Sales Volumes, net to the  Company:**                  |       |                   | ** ** | ** ** | ** ** | ** **   |       | ** ** |   |
| ** **                                               |       |                   | ** ** | ** ** | ** ** | ** **   |       | ** ** |   |
| Crude oil (Bbl)                                          |       | 7,570                  |       | 12,835     |       | (5,265       | )          | (41 | )% |
|                                                     |       |                   |       |       |       |         |       |   |   |
| NGLs (Bbl)                                               |       | 8,871                  |       | 11,063     |       | (2,192       | )          | (20 | )% |
|                                                     |       |                   |       |       |       |         |       |   |   |
| Natural gas (Mcf)                                        |       | 111,380                |       | 61,146     |       | 50,234       |       | 82 | % |
| Crude oil, NGLs and natural gas (BOE)                    |       | 35,004                 |       | 34,089     |       | 915          |       | 3 | % |
|                                                     |       |                   |       |       |       |         |       |   |   |
| **Revenue data:**                                        |       |                   |       |       |       |         |       |   |   |
| ** **                                               |       |                   |       |       |       |         |       |   |   |
| Crude oil                                                |       | $                      | 503,122    |       | $          | 1,579,070    |       | $ | (1,075,948 | ) | (68 | )% |
|                                                     |       |                   |       |       |       |         |       |   |   |
| NGLs                                                     |       | 285,311                |       | 755,445    |       | (470,134     | )          | (62 | )% |
|                                                     |       |                   |       |       |       |         |       |   |   |
| Natural gas                                              |       | 381,594                |       | 580,471    |       | (198,877     | )          | (34 | )% |
| Total revenues                                           |       | $                      | 1,170,027  |       | $          | 2,914,986    |       | $ | (1,744,959 | ) | (60 | )% |
|                                                     |       |                   |       |       |       |         |       |   |   |
| **Average price:**                                       |       |                   | ** ** | ** ** | ** ** | ** **   |       | ** ** |   |
| Crude oil (per Bbl)                                      |       | $                      | 66.46      |       | $          | 123.03       |       | $ | (56.57 | ) | (46 | )% |
| NGLs (per Bbl)                                           |       | 32.16                  |       | 68.29      |       | (36.13       | )          | (53 | )% |
| Natural gas (per Mcf)                                    |       | 3.43                   |       | 9.49       |       | (6.06        | )          | (64 | )% |
| Crude oil, NGLs and natural gas (per BOE)                |       | $                      | 33.43      |       | $          | 85.51        |       | $ | (52.08 | ) | (61 | )% |
|                                                     |       |                   |       |       |       |         |       |   |   |
| **Expenses (per BOE)**                                   |       |                   | ** ** | ** ** | ** ** | ** **   |       | ** ** |   |
| Lease operating expenses and production taxes            |       | $                      | 10.95      |       | $          | 12.38        |       | $ | (1.43 | ) | (12 | )% |
| Depletion expense on oil and natural gas properties  (a) |       | $                      | 17.17      |       | $          | 18.63        |       | $ | (1.46 | ) | (8 | )% |

 

----

(a)          Excludesdepreciation of office equipment, furniture and fixtures, and other of $16,627and $9,824, for the three months ended September 30, 2009 and 2008,respectively.

 

Netloss.  For the three months ended September 30,2009, we reported a net loss of $704,825, or $0.03 loss per share (whichincludes $391,636 of non-cash stock-based compensation expense) on total oiland natural gas revenues of $1,170,027. This compares to a net income of $148,437, or $0.01 per share (whichincludes $523,725 of non-cash stock-based compensation expense) on total oiland natural gas revenues of $2,914,986 for the three months ended September 30,2008.  A decrease in our revenues of$1,744,959 and a decrease in interest income of $58,422 was offset by decreasesin operating costs of $268,935 (primarily related to a decrease in stock-basedcompensation and depreciation, depletion, and amortization), and a recognitionof an income tax benefit of $378,348 (compared to a provision for income taxesof $302,836 for the three months ended September 30, 2008).  Additional details of the components of netloss are explained in greater detail below.

 

Sales Volumes.  Crude oil, NGLs, and natural gas salesvolumes, net to our interest, for the three months ended September 30,2009 increased 3% to 35,004 BOE, compared to 34,089 BOE for the three months September 30,2008.  Our sales volumes for the threemonths ended September 30, 2009 and 2008 was primarily from our propertiesin the Giddings Field in Texas. Production of natural gas increased 82%, while production of crude oiland NGLs decreased 31% compared to the three months ended September 30,2008.

 

Oil,NGLs and Natural Gas Revenues.  Crude oil, NGLs and natural gas revenues forthe three months ended September 30, 2009 decreased 60% from the threemonths ended September 30, 2008. This was due to a 61% decline in the average price received per BOE,from $86 per BOE for the three months ended September 30, 2008 to $33 perBOE for the three months ended September 30, 2009.

 

17

----

Table ofContents

 

LeaseOperating Expenses (including production severance taxes).  Lease operating expenses and production taxesfor the three months ended September 30, 2009 decreased 9% compared to thethree months ended September 30, 2008, despite the addition of threeproducing wells.  The decrease isprimarily attributable to a decrease in production taxes.

 

General and AdministrativeExpenses (“G&A”). G&A expenses decreased 14% to $1.3 million for the three monthsended September 30, 2009, compared to $1.5 million for the three monthsended September 30, 2008.  Thereduction was primarily due to a decrease in non-cash stock-based compensationexpense, which was $391,636 (31% of total G&A) and $523,725 (36% of totalG&A) for the three months ended September 30, 2009 and 2008,respectively, and a fifteen percent reduction in staff.  Non-cash stock-based compensation is anintegral part of total staff compensation utilized to recruit quality stafffrom other, more established companies and, as a result, will likely continueto be a significant component of our G&A costs.

 

Depreciation, Depletion &Amortization Expense (“DD&A”).  DD&A decreased by 4% to $617,757 for thethree months ended September 30, 2009, compared to $644,882 for the threemonths ended September 30, 2008. The decrease is primarily due to a lower depletion rate ($17.17 vs.$18.63) per BOE, as a result of the reduction in projected capital expendituresassociated with our proved undeveloped locations in our properties in theGiddings Field, partially offset by the 3% increase in net sales volumes.

 

Interest Income.  Interest income for the three months ended September 30,2009 decreased $58,422 to $15,224, compared to $73,646 for the three monthsended September 30, 2008.  Thedecrease in interest income is due to much lower interest rates available onlower short-term investment balances averaging $5.5 million during the threemonths ended September 30, 2009, as compared to short-term investmentbalances averaging $10.4 million during the three months ended September 30,2008.  The lower balances were primarilydue to investments in our oil and natural gas properties during the priortwelve months.

 

Inflation.  Although the general inflationrate in the United States, as measured by the Consumer Price Index and theProducer Price Index, has been relatively low in recent years, the oil and gasindustry has experienced unusually volatile price movements.  With the general rise in the price of oil andnatural gas products over two of the last three fiscal years, increased pricesfor drilling and oilfield services, oilfield equipment, tubulars, labor,expertise and other services, have also increased, thereby escalating our leaseoperating expenses and our capital expenditures.  Most recently, we have seen a substantialdecline in both petroleum product prices and drilling and oilfield servicescosts.  However, product prices,operating costs and development costs may not always move in tandem.

 

KnownTrends and Uncertainties. General worldwide economic conditions have deteriorated due to creditconditions impacted by the sub-prime mortgage turmoil and otherfactors.  Concerns over uncertain future economic growth are affectingnumerous industries, companies, as well as consumers, which has resulted inreduced demand for crude oil and natural gas.  If demand decreases inthe future, it may put downward pressure on crude oil and natural gas prices,thereby lowering our revenues and working capital going forward.

 

Seasonality.  Our business is generally not seasonal,except for certain rare instances when weather conditions may adversely affectaccess to our properties or delivery of our petroleum products.  Although we do not generally modify ourproduction for changes in market demand, we do experience seasonality in theproduct prices we receive, generally based on higher demand for natural gas inthe summer and winter and higher demand for downstream oil products during thesummer driving season.

 

**OffBalance Sheet Arrangements**

 

TheCompany has no off-balance sheet arrangements to report during the firstquarter ending September 30, 2009.

 

18

----

Table of Contents

 

**ITEM 3.**** ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

 

Informationabout market risks for the three months ended September 30, 2009, did notchange materially from the disclosures in Item 7A. of our Annual Report on Form 10-Kfor the year ended June 30, 2009 except as noted below.  As such, the information contained hereinshould be read in conjunction with the related disclosures in our Annual Reporton Form 10-K for the year ended June 30, 2009.

 

*Interest Rate Risk*

 

Weare exposed to changes in interest rates. Changes in interest rates affect theinterest earned on our cash and cash equivalents.  Under our current policies, we do not useinterest rate derivative instruments to manage exposure to interest ratechanges.

 

*Commodity Price Risk*

 

Ourrevenues, profitability and future growth depend substantially on prevailingprices for oil and natural gas. Prices also affect the amount of cash flowavailable for capital expenditures and our ability to borrow and raiseadditional capital, as, if and when needed. Lower prices may also reduce theamount of oil and natural gas that we can economically produce.  Although our current production base may notbe sufficient enough to effectively allow hedging, we may periodically usederivative instruments to hedge our commodity price risk. We may hedge aportion of our projected oil and natural gas production through a variety offinancial and physical arrangements intended to support oil and natural gasprices at targeted levels and to manage our exposure to price fluctuations. Wemay use futures contracts, swaps and fixed price physical contracts to hedgeour commodity prices. Realized gains and losses from our price risk managementactivities are recognized in oil and natural gas sales when the associatedproduction occurs. We presently do not hold or issue derivative instruments forhedging or speculative purposes.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information required tobe disclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and that such information is accumulated andcommunicated to this Company’s management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow for timelydecisions regarding required disclosure.

 

As required by Securities andExchange Commission Rule 13a-15(b), we carried out an evaluation, underthe supervision and with the participation of the Company’s management,including our Chief Executive Officer and the Company’s Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(c) and15d-15(e)) as of the end of the quarter covered by this report.  In designing and evaluating our disclosurecontrols and procedures, our management recognizes that controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving desired control objectives.  Based on the foregoing, our Chief ExecutiveOfficer and Chief Financial Officer concluded that as of September 30,2009 our disclosure controls and procedures are effective in ensuring that theinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission rules andforms.

 

During the quarter ended September 30,2009 there has been no change in our internal control over financial reportingthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A. RISK FACTORS**

 

Seerisk factors set forth in the Company’s Annual Report on Form 10-K for theyear ended June 30, 2009.

 

**ITEM 2.UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM****3. DEFAULTS UPON SENIOR SECURITIES**

 

Notapplicable.

 

19

----

Table ofContents

 

**ITEM****4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITE****M 6.EXHIBITS**

 

A.           Exhibits

 
|   | 31.1   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) under the Securities Exchange Act of 1934, as  amended.                              |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                             |
|   | 31.2   |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) under the Securities Exchange Act of 1934, as  amended.                              |
|   |   |   |                                                                                                                                                                                             |
|   | 32.1   |   | Certification of Chief  Executive Officer pursuant Rule 13a-14(b) or  Rule 15d-14(b) under the Securities Exchange Act of 1934, as  amended and 18 U.S.C. Section 1350. |
|   |   |   |                                                                                                                                                                                             |
|   | 32.2   |   | Certification of Chief  Financial Officer pursuant Rule 13a-14(b) or  Rule 15d-14(b) under the Securities Exchange Act of 1934, as  amended and 18 U.S.C. Section 1350. |

 

20

----

Table ofContents

 

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

**EVOLUTION PETROLEUM CORPORATION**

(Registrant)

 

 
| Date:  November 13, 2009 | By:    | /s/ STERLING H. MCDONALD                    |
|-------------------------------|--------|---------------------------------------------|
|                          |   | Sterling H. McDonald                        |
|                          |   | Vice-President and Chief  Financial Officer |
|                          |   | Principal Financial and  Accounting         |
|                          |   | Officer                                     |
|                               |        |                                             |  |

 

21

----