EVOLUTION PETROLEUM CORP 10-Q

Item 1. Financial Statements (Unaudited) Evolution Petroleum Corporation and Subsidiaries Consolidated Condensed Balance Sheets (Unaudited) September 30, 2021 June 30, 2021 Assets Current assets Cash and cash equivalents $ 7,954,878 $ 5,276,510 Receivables from oil and natural gas sales 16,304,234 8,686,967 Receivables for federal and state income tax refunds 3,107,638 3,107,638 Prepaid expenses and other current assets 928,593 1,037,259 Total current assets 28,295,343 18,108,374 Property and equipment, net of depreciation, depletion, amortization, and amortization Oil and natural gas properties—full-cost method of accounting, of which none were excluded from amortization 57,369,403 58,515,860 Other property and equipment, net 9,555 10,639 Total property and equipment, net 57,378,958 58,526,499 Other assets, net 58,742 70,789 Total assets $ 85,733,043 $ 76,705,662 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 10,404,928 $ 5,609,367 Accrued liabilities and other 654,270 947,045 State and federal income taxes payable 1,676,460 37,748 Total current liabilities 12,735,658 6,594,160 Long term liabilities Senior secured credit facility 4,000,000 4,000,000 Deferred income taxes 5,838,077 5,957,202 Asset retirement obligations 5,661,868 5,538,752 Operating lease liability 10,417 20,745 Total liabilities 28,246,020 22,110,859 Commitments and contingencies (Note 14) Stockholders’ equity Common stock; par value $ 0.001 ; 100,000,000 shares authorized; 33,631,749 and 33,514,952 shares issued and outstanding as of September 30, 2021 and June 30, 2021, respectively 33,632 33,515 Additional paid-in capital 42,737,334 42,541,224 Retained earnings 14,716,057 12,020,064 Total stockholders’ equity 57,487,023 54,594,803 Total liabilities and stockholders’ equity $ 85,733,043 $ 76,705,662 See accompanying notes to consolidated condensed financial statements. 1 Table of Contents Evolution Petroleum Corporation and Subsidiaries Consolidated Condensed Statements of Operations (Unaudited) Three Months Ended September 30, 2021 2020 Revenues Oil $ 8,858,463 $ 5,379,161 Natural gas liquids 4,562,218 216,026 Natural gas 5,458,329 189 Total revenues 18,879,010 5,595,376 Operating costs Lease operating costs 8,625,167 2,397,924 Depreciation, depletion, amortization and accretion 1,527,812 1,410,888 Impairment of proved property — 9,602,620 Net loss on derivative contracts — 334,966 General and administrative expenses * 1,939,909 1,278,698 Total operating costs 12,092,888 15,025,096 Income (loss) from operations 6,786,122 ( 9,429,720 ) Other Interest and other income 2,477 14,426 Interest expense ( 50,612 ) ( 22,032 ) Income (loss) before income taxes 6,737,987 ( 9,437,326 ) Income tax expense (benefit) 1,519,586 ( 2,302,178 ) Net income (loss) attributable to common stockholders $ 5,218,401 $ ( 7,135,148 ) Earnings (loss) per common share Basic $ 0.16 $ ( 0.22 ) Diluted $ 0.16 $ ( 0.22 ) Weighted average number of common shares outstanding Basic 33,533,990 32,955,656 Diluted 33,533,990 32,955,656 * General and administrative expenses for the three months ended September 30, 2021 and 2020 included non-cash stock-based compensation expenses of $ 197,826 and $ 300,351 , respectively. See accompanying notes to consolidated condensed financial statements. 2 Table of Contents Evolution Petroleum Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited) Three Months Ended September 30, 2021 2020 Cash flows from operating activities Net income (loss) attributable to common stockholders $ 5,218,401 $ ( 7,135,148 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion, amortization and accretion 1,527,812 1,410,888 Impairment of proved property — 9,602,620 Stock-based compensation 197,826 300,351 Deferred income taxes ( 119,125 ) ( 2,160,340 ) Net loss on derivative contracts — 334,966 Payments paid for derivative settlements — ( 1,096,472 ) Other ( 2,169 ) 3,816 Changes in operating assets and liabilities: Receivables ( 7,617,267 ) ( 57,175 ) Prepaid expenses and other current assets 108,666 83,150 Net operating loss carryback — ( 512,042 ) Accounts payable and accrued expenses 4,639,889 250,421 Income taxes payable 1,638,712 122,206 Net cash provided by operating activities 5,592,745 1,147,241 Cash flows from investing activities Development of oil and natural gas properties ( 390,370 ) ( 153,205 ) Net cash used in investing activities ( 390,370 ) ( 153,205 ) Cash flows from financing activities Common stock dividends paid ( 2,522,408 ) ( 823,846 ) Common share repurchases, including shares surrendered for tax withholding ( 1,599 ) ( 7,348 ) Net cash used in financing activities ( 2,524,007 ) ( 831,194 ) Net increase (decrease) in cash and cash equivalents 2,678,368 162,842 Cash and cash equivalents, beginning of period 5,276,510 19,662,528 Cash and cash equivalents, end of period $ 7,954,878 $ 19,825,370 See accompanying notes to consolidated condensed financial statements. 3 Table of Contents Evolution Petroleum Corporation and Subsidiaries Consolidated Condensed Statements of Changes in Stockholders' Equity (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Stockholders' Equity Shares Par Value For the Three Months Ended September 30, 2021: Balance at June 30, 2021 33,514,952 $ 33,515 $ 42,541,224 $ 12,020,064 $ — $ 54,594,803 Issuance of restricted common stock 196,940 197 ( 197 ) — — — Forfeitures and expirations of restricted stock ( 79,790 ) ( 80 ) 80 — — — Common share repurchases, including shares surrendered for tax withholding — — — — ( 1,599 ) ( 1,599 ) Retirements of treasury stock ( 353 ) — ( 1,599 ) — 1,599 — Stock-based compensation — — 197,826 — — 197,826 Net income attributable to common stockholders — — — 5,218,401 — 5,218,401 Common stock dividends paid — — — ( 2,522,408 ) — ( 2,522,408 ) Balance at September 30, 2021 33,631,749 $ 33,632 $ 42,737,334 $ 14,716,057 $ — $ 57,487,023 For the Three Months Ended September 30, 2020: Balance at June 30, 2020 32,956,469 $ 32,956 $ 41,291,446 $ 32,800,080 $ — $ 74,124,482 Issuance of restricted common stock — — — — — — Forfeitures of restricted stock — — — — — — Common share repurchases, including shares surrendered for tax withholding — — — — ( 7,348 ) ( 7,348 ) Retirements of treasury stock ( 2,632 ) ( 3 ) ( 7,345 ) — 7,348 — Stock-based compensation — — 300,351 — — 300,351 Net loss attributable to common shareholders — — — ( 7,135,148 ) — ( 7,135,148 ) Common stock dividends paid — — — ( 823,846 ) — ( 823,846 ) Balance at September 30, 2020 32,953,837 $ 32,953 $ 41,584,452 $ 24,841,086 $ — $ 66,458,491 See accompanying notes to consolidated condensed financial statements. 4 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Note 1 — Organization and Basis of Preparation Nature of Operations. Evolution Petroleum Corporation is an oil and natural gas company focused on delivering a sustainable dividend yield to its stockholders through the ownership, management, and development of producing oil and natural gas properties. The Company's long-term goal is to build a diversified portfolio of oil and natural gas assets primarily through acquisitions while seeking opportunities to maintain and increase production through selective development, production enhancement, and other exploitation efforts on its properties. Our producing assets consist of our interests in the Delhi Holt-Bryant Unit in the Delhi field in Northeast Louisiana, a CO 2 enhanced oil recovery (“EOR”) project, our interests in the Hamilton Dome field located in Hot Springs County, Wyoming, a secondary recovery field utilizing water injection wells to pressurize the reservoir, our interests in the Barnett Shale located in North Texas, a natural gas producing shale reservoir, and overriding royalty interests in two onshore Texas wells. Interim Financial Statements. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s 2021 Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as filed with the SEC. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year. Principles of Consolidation and Reporting. Our unaudited consolidated condensed financial statements include the accounts of Evolution Petroleum Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany transactions have been eliminated in consolidation. Risk and Uncertainties . The Company is continuously monitoring the current and potential impacts of the COVID-19 pandemic on its business, including how it has and may continue to impact its financial results, liquidity, employees, and the operations of the Delhi field, Hamilton Dome field, and its Barnett Shale assets in which it holds non-operated interests. All of the Company’s property interests are not operated by the Company and involve other third-party working interest owners. As a result, the Company has limited ability to influence or control the operation or future development of such properties. However, the Company has been proactive with its third-party operators to review spending and alter plans as appropriate. In response to the COVID-19 pandemic, the Company has focused on putting long-term measures in place to prevent future disruptions, maintaining its operations and system of controls remotely, and has implemented its business continuity plans in order to allow its employees to securely work from home or in the corporate office. The Company has been able to transition the operation of its business with minimal disruption and has maintained its system of internal controls and procedures. Use of Estimates. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include (a) reserve quantities and estimated future cash flows associated with proved reserves, which may significantly impact depletion expense and potential impairments of oil and natural gas properties, (b) asset retirement obligations, (c) stock-based compensation, (d) fair values of derivative assets and liabilities, (e) income taxes and the valuation of deferred tax assets, (f) commitments and contingencies, and (g) oil, natural gas, and natural gas liquids (“NGL”) revenues. We analyze our estimates based on historical experience and various other assumptions that we believe to be reasonable. While we believe that our estimates and assumptions used in preparation of the unaudited consolidated condensed financial statements are appropriate, actual results could differ from those estimates. Note 2 — Summary of Significant Accounting Policies The significant accounting policies followed by the Company are set forth in Note 2 - Summary of Significant Accounting Policies in the 2021 Form 10-K and are supplemented by the notes to the unaudited consolidated condensed financial 5 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements statements included in this report. These unaudited consolidated condensed financial statements should be read in conjunction with the 2021 Form 10-K. Recently Issued Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires the use of a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. Early adoption is permitted and entities must adopt the amendment using a modified retrospective approach to the first reporting period in which the guidance is effective. For smaller reporting companies, as provided by Accounting Standards Update 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022. The adoption of ASU 2016-13 is currently not expected to have a material effect on our consolidated financial statements. Other accounting pronouncements that have recently been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations, or cash flows. Note 3 — Revenue Recognition Our revenue is primarily generated from our interests in the Delhi field in Northeast Louisiana, the Barnett Shale assets of North Texas, and the Hamilton Dome field in Wyoming. Additionally, an overriding royalty interest retained in a past divestiture of Texas properties provided de minimis revenue. Three Months Ended September 30, 2021 2020 Revenues Oil $ 8,858,463 $ 5,379,161 Natural gas liquids 4,562,218 216,026 Natural gas 5,458,329 189 Total revenues $ 18,879,010 $ 5,595,376 We are a non-operator and presently do not take production in-kind and do not negotiate contracts with customers. We recognize oil, natural gas, and natural gas liquids production revenue at the point in time when custody and title (“control”) of the product transfers to the customer. Transfer of control drives the presentation of post-production expenses such as transportation, gathering, and processing deductions within the accompanying statements of operations. Fees and other deductions incurred prior to control transfer are recorded within the lease operating costs line item on the accompanying unaudited consolidated condensed statements of operations, while fees and other deductions incurred subsequent to control transfer are embedded in the price and effectively recorded as a reduction of oil, natural gas, and natural gas liquids production revenue. Transfer of control related to the Barnett Shale production does not occur until after the marketing, transportation, and processing services have been performed, and as such, fees related to these services are recorded within the lease operating costs line item and do not reduce the oil, natural gas, and natural gas liquids production revenue. Transfer of control related to the Hamilton Dome and Delhi production occurs prior to the fees and other deductions, and as such, these fees are recorded as a reduction to the oil and natural gas liquids production revenue. Judgments made in applying the guidance in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, relate primarily to determining the point in time when control of product transfers to the customer. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained. The Company’s contractual performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied at a point in time upon control transferring to a customer at a specified delivery point. Consideration is allocated to completed performance obligations at the end of an accounting period. Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received by field operators before distributing the Company's share one to two months after production has occurred, which is typical in the industry. As a result, the Company 6 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for the sale of the product. To estimate accounts receivable from operators' contracts with customers, the Company uses knowledge of its properties, information from the field operators, historical performance, contractual arrangements, index pricing, quality and transportation differentials, and other factors as the basis for these estimates. Estimated revenue due to the Company is recorded within the “Receivables from oil and natural gas sales” line item on the accompanying unaudited consolidated condensed balance sheets until payment is received from field operators. The accounts receivable balances from contracts with customers as presented on our respective unaudited consolidated condensed balance sheet as of September 30, 2021 and derived from our audited consolidated balance sheet as of June 30, 2021, were $ 16.3 million and $ 8.7 million, respectively. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser as remitted to us by field operators. Revenue recognized during the three months ended September 30, 2021, related to performance obligations satisfied in prior reporting periods, was immaterial. Note 4 — Prepaid Expenses and Other Current Assets September 30, 2021 June 30, 2021 Prepaid insurance $ 272,058 $ 365,922 Prepaid subscription and licenses 110,779 108,048 Prepaid federal and state income taxes 97,470 97,470 Carryback of EOR tax credit 416,441 416,441 Prepaid other 31,845 49,378 Total prepaid expenses and other current assets $ 928,593 $ 1,037,259 Note 5 — Property and Equipment September 30, 2021 June 30, 2021 Oil and natural gas properties: Property costs subject to amortization $ 129,402,638 $ 129,123,227 Less: Accumulated depreciation, depletion, amortization and impairment (a) ( 72,033,235 ) ( 70,607,367 ) Oil and natural gas properties, net $ 57,369,403 $ 58,515,860 Other property and equipment: Furniture, fixtures, and office equipment, at cost $ 154,731 $ 154,731 Less: Accumulated depreciation (b) ( 145,176 ) ( 144,092 ) Other property and equipment, net $ 9,555 $ 10,639 (a) Depletion on oil and natural gas properties was $ 1,425,868 for the quarter ended September 30, 2021, and $ 1,247,659 for the quarter ended June 30, 2021. There was no impairment on oil and natural gas properties for the quarter ended September 30, 2021 or the quarter ended June 30, 2021. (b) Depreciation was $ 1,084 for the quarter ended September 30, 2021, and $ 1,570 for the quarter ended June 30, 2021. As of September 30, 2021, all oil and natural gas property costs were subject to amortization. During the three months ended September 30, 2021 and 2020, the Company incurred capital expenditures of $ 0.3 million and $ 0.2 million, respectively. On May 7, 2021, the Company acquired an approximate 17 % working interest and a 14 % revenue interest in non-operated oil and natural gas assets in the Barnett Shale from Tokyo Gas Americas for $ 18.3 million, net of preliminary purchase price adjustments, and also recognized $ 2.8 million in non-cash asset retirement obligations (the “Barnett Shale Acquisition”). The Company accounted for this transaction as an asset acquisition with an effective date of January 1, 2021. In accordance with the FASB’s authoritative guidance on asset acquisitions, the Company allocated the costs of the Barnett Shale Acquisition to the assets acquired and liabilities assumed based on a relative fair value basis of the assets acquired and 7 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements liabilities assumed, with no recognition of goodwill or bargain purchase gain recorded. Incremental legal and professional fees related directly to the acquisition were capitalized as part of the acquisition cost. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Fair value measurements also utilize market assumptions of market participants. The Company uses the full cost method of accounting for its investment in oil and natural gas properties. All costs of acquisition, exploration, and development of oil and natural gas reserves are capitalized as the cost of oil and natural gas and properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs result in an impairment charge. At September 30, 2021, the ceiling test value of the Company’s reserves was calculated based on the first-day-of-the-month average for the 12-months ended September 30, 2021 of the West Texas Intermediate (WTI) crude oil spot price of $57.64 per barrel and Henry Hub natural gas spot price of $2.97 per MMBtu, adjusted by market differentials by field. The net price per barrel of NGLs was $ 23.04 , which was based on historical prices received as NGLs do not have any single comparable reference index price. Using these prices, the Company’s net book value of oil and natural gas properties at September 30, 2021 was below the current ceiling. At September 30, 2020, the ceiling test value of the Company’s reserves was calculated based on the first-day-of-the-month average for the 12-months ended September 30, 2020 of the WTI crude oil spot price of $43.63 per barrel, adjusted by market differentials by field, and the net price per barrel of NGLs was $ 7.85 . Using these prices, the Company’s net book value of oil and natural gas properties at September 30, 2020 exceeded the current ceiling, and the Company recorded a $ 9.6 million ceiling test impairment charge. The ceiling test impairment was driven by a decrease in the first-day-of-the-month average price for crude oil used in the ceiling test calculation and adverse changes in differentials received in the Delhi and Hamilton Dome fields. Note 6 — Other Assets September 30, 2021 June 30, 2021 Right of use asset under operating lease 161,125 161,125 Less: Accumulated amortization of right of use asset ( 102,383 ) ( 90,336 ) Other assets, net $ 58,742 $ 70,789 Operating leases are reflected as an operating lease right of use (“ROU”) asset included in “Other assets, net”, and as a ROU liability in “Accrued liabilities and other” (see Note 7 below) and “Operating lease liability” on our consolidated condensed balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term and amortized on a straight-line basis over the lease term. The ROU asset reflected in “Other Assets, net” above is related to our corporate office lease. Note 7 — Accrued Liabilities and Other September 30, 2021 June 30, 2021 Accrued incentive and other compensation $ 219,236 $ 630,744 Accrued retirement costs 131,162 52,786 Accrued franchise taxes 47,707 35,207 Accrued ad valorem taxes 162,000 108,000 Operating lease liability, current 60,346 64,234 Asset retirement obligations due within one year 22,264 44,520 Accrued - other 11,555 11,554 Total accrued liabilities and other $ 654,270 $ 947,045 8 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Note 8 — Asset Retirement Obligations Our asset retirement obligations represent the estimated present value of the amount we expect to incur to plug, abandon, and remediate our producing properties at the end of their productive lives in accordance with applicable laws and regulations. Presently, we expect the Hamilton Dome operator to plug two wells during the next twelve months. The following is a reconciliation of the beginning and ending asset retirement obligations for the three months ended September 30, 2021 and for the year ended June 30, 2021: September 30, 2021 June 30, 2021 Asset retirement obligations — beginning of period $ 5,583,272 $ 2,588,894 Liabilities incurred — — Liabilities settled — ( 99,231 ) (a) Liabilities acquired — 2,806,331 (b) Accretion of discount 100,860 210,182 Revision of previous estimates — 77,096 (c) Asset retirement obligations — end of period $ 5,684,132 $ 5,583,272 Less: current asset retirement obligations 22,264 44,520 Long-term portion of asset retirement obligations $ 5,661,868 $ 5,538,752 (a ) Abandonment of two non-scheduled Delhi field wells in fiscal 2021. (b) Liabilities incurred in fiscal 2021 were primarily due to our acquisition of our Barnett Shale interest. (c) Primarily related to upward revisions for two difficult-to-plug Delhi field wells in fiscal 2021. Note 9 — Stockholders’ Equity Common Stock As of September 30, 2021, we had 33,631,749 sh ares of common stock outstanding. The Company began paying quarterly cash dividends on common stock in December 2013. As of September 30, 2021, we have cumulatively paid over $ 77.0 million in cash dividends. We paid dividends of $ 2,522,408 and $ 823,846 to our common stockholders during the three months ended September 30, 2021 and 2020, respectively. The following table reflects the dividends paid within each respective three-month period: Common Stock Cash Dividends per Share 2021 2020 First quarter ended September 30, $ 0.075 $ 0.025 In May 2015, the Board of Directors approved a share repurchase program covering up to $ 5.0 million of the Company's common stock. Since inception of the program through September 30, 2021, the Company spent $ 4.0 million to repurchase 706,858 common shares at an average price of $ 5.72 per share. There were no shares purchased under this program during the three months ended September 30, 2021. Under the program's terms, shares are repurchased only on the open market and in accordance with the requirements of the SEC. Such shares are initially recorded as treasury stock, then subsequently canceled. The timing and amount of repurchases depends upon several factors, including financial resources and market and business conditions. There is no fixed termination date for this repurchase program, and it may be suspended or discontinued at any time. During the three months ended September 30, 2021 and 2020, the Company also acquired treasury stock from holders of newly vested stock-based awards to fund the recipients' payroll tax withholding obligations. The treasury shares were subsequently canceled. Such shares were valued at fair market value on the date of vesting. The following table shows all treasury stock purchases in the respective periods: 9 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Three Months Ended September 30, 2021 2020 Number of treasury shares acquired 353 2,632 Average cost per share $ 4.53 $ 2.79 Total cost of treasury shares acquired $ 1,599 $ 7,348 Expected Tax Treatment of Dividends For the fiscal year ended June 30, 2021, all common stock dividends were treated for tax purposes as qualified dividend income to recipients. Based on our current projections for the fiscal year ending June 30, 2022, we expect all common stock dividends for such period to be treated as qualified dividend income to the recipients. Such projections are based on our reasonable expectations as of September 30, 2021 and are subject to change based on our final tax calculations at the end of the fiscal year. Note 10 — Stock-Based Incentive Plan The Evolution Petroleum Corporation 2016 Equity Incentive Plan ("2016 Plan"), approved in the December 2016 annual meeting, authorized the issuance of 1,100,000 shares of common stock prior to its expiration on December 8, 2026. On December 9, 2020, an amendment to the 2016 Plan was approved by our stockholders which increased the number of shares available for issuance by 2,500,000 shares. Incentives under the 2016 Plan may be granted to employees, directors, and consultants of the Company in any one or a combination of the following forms: incentive stock options and non-statutory stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance share awards, performance cash awards, and other forms of incentives valued in whole or in part by reference to, or otherwise based on, our common stock, including its appreciation in value. There were 2,009,354 shares available for grant under the 2016 Plan as of September 30, 2021. Time-Vested Restricted Stock, Performance-Based Restricted Stock and Performance-Based Contingent Shares The Company has primarily granted equity awards with market-based vesting conditions that relate specifically to the price of our common stock, the intrinsic value indexed solely to our common stock and the intrinsic value indexed to our common stock compared to the performance of the common stock of our peers. The awards with market-based vesting conditions are classified as Time-Vested Restricted Stock, Performance-Based Restricted Stock and Performance-Based Contingent Shares. Time-Vested Restricted Stock contain service-based vesting conditions and expire after a maximum of four years from the date of grant if unvested. Performance-Based Restricted Stock contain market-based vesting conditions that are based on the Company’s common stock performance and expire after a maximum of four years from the date of grant if unvested. The common shares underlying the Time-Vested Restricted Stock and Performance-Based Restricted Stock are issued on the date of grant and participate in dividends paid by the Company. Performance-Based Contingent Shares contain market-based vesting conditions that are based on the Company’s common stock performance and expire after a maximum of four years from the date of grant if unvested. The Performance-Based Contingent Shares do not participate in dividends and are only issued upon the attainment of market-based vesting conditions that generally have a lower probability of achievement. Shares underlying Performance-Based Contingent Shares are reserved from the Plan they were granted under. Historically, the Company has granted equity awards with conditions for vesting that are based on Company-specific performance goals such as earnings, revenues, and other operational goals and require that the recipient remain an employee or director of the Company through the vesting date. The Company recognizes compensation expense for awards with Company-performance vesting conditions ratably over the expected vesting period based on the grant date fair value of the Company’s common stock and when it is deemed probable, for accounting purposes, that the performance criteria will be achieved. The expected vesting period may be deemed to be shorter than the term of the award. As of September 30, 2021, there were no awards outstanding with vesting conditions based on Company-specific performance goals such as earnings, revenues, and other operational goals. During three months ended September 30, 2021, a total of 196,940 equity awards were granted related to our fiscal year 2022 long-term incentive pay program that included 65,647 shares of Time-Vested Restricted Stock, which vests in three equal amounts on June 30, 2022, 2023 and 2024, and 131,293 shares of Performance-Based Restricted Stock. No equity awards were granted during the three months ended September 30, 2020. 10 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Time-Vested Restricted Stock shares are service-based awards that vest with continuous employment by the Company, generally in annual installments over terms of three to four years . Awards to the Company's directors have one-year cliff vesting. Time-Vested Restricted Stock grants are valued at the fair market value of the Company's common stock on the date of grant and amortized over the service period. Performance-Based Restricted Stock and Performance-Based Contingent Share grants vest if the trailing total returns on the Company’s common stock for a specified three-year period exceed the corresponding total returns of various quartiles of indices consisting of peer companies. Additionally, some Performance-Based Contingent Shares vest when the average of the Company's closing common stock price over a defined quarterly measurement period meets or exceeds a required common stock price. The Company utilizes third-party independent assessments of fair values and expected vesting periods of these awards that are determined using a Monte Carlo simulation based on the historical volatility of the Company's total return compared to the historical volatilities of the other peer companies in the index. Compensation expense for awards with market-based vesting conditions is based on the fair value of the awards at the date of grant and recognized over the expected vesting period using the straight-line method, so long as the holder remains an employee or director of the Company. Previously recognized compensation expense is only reversed for the awards with market-based vesting conditions if the requisite service period is not rendered and the award is forfeited by the holder. No equity awards were granted during the three months ended September 30, 2020. For market-based awards granted during the three months ended September 30, 2021, the assumptions used in the Monte Carlo simulation valuations, expected lives and fair values were as follows: September 30, September 30, 2021 2020 Weighted average fair value of market-based awards granted $ 3.31 $ — Risk-free interest rate 0.53 % — % Expected vesting term in years 3 0 Expected volatility 64.7 % — % Dividend yield 6.3 % — % Unvested Restricted Stock awards at September 30, 2021 consisted of the following: Number of Restricted Shares Weighted Average Grant-Date Fair Value Time-Vested Restricted Stock awards 342,341 $ 3.56 Performance-Based Restricted Stock awards 389,594 3.34 Unvested Restricted Stock at September 30, 2021 731,935 $ 3.44 The following table sets forth the Restricted Stock transactions for the three months ended September 30, 2021: Number of Restricted Shares Weighted Average Grant-Date Fair Value Unamortized Compensation Expense at September 30, 2021 Weighted Average Remaining Amortization Period (Years) Unvested at July 1, 2021 669,295 $ 3.37 Time-Vested Restricted Stock shares granted 65,647 4.77 Performance-Based Restricted Stock shares granted 131,293 3.31 Vested ( 54,510 ) 3.71 Forfeited and expired ( 79,790 ) 3.47 Unvested Restricted Stock at September 30, 2021 731,935 $ 3.44 $ 1,932,587 2.16 11 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Unvested Performance-Based Contingent Share awards in table below consists solely of market-based awards: Number of Contingent Restricted Shares Weighted Average Grant-Date Fair Value Unamortized Compensation Expense at September 30, 2021 Weighted Average Remaining Amortization Period (Years) Unvested at July 1, 2021 323,080 $ 2.84 Forfeited ( 22,640 ) $ 1.76 Unvested contingent shares at September 30, 2021 300,440 $ 2.92 $ 120,692 1.74 Stock-based compensation expense related to Time-Vested Restricted Stock, Performance-Based Restricted Stock, and Performance-Based Contingent Shares for the three months ended September 30, 2021 and 2020 was $ 197,826 and $ 300,351 , respectively. Note 11 — Income Taxes We file a consolidated federal income tax return in the United States of America in addition to various combined and separate filings in several state and local jurisdictions. There were no unrecognized tax benefits, nor any accrued interest or penalties associated with unrecognized tax benefits during any periods presented in these unaudited consolidated condensed financial statements. We believe that we have appropriate support for the income tax positions taken and to be taken on the Company's tax returns and that the accruals for tax liabilities are adequate for all open years based on our assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. The Company’s federal and state income tax returns are open to audit under the statute of limitations for the fiscal years ended June 30, 2018 through June 30, 2021 for federal tax purposes and for the fiscal years ended June 30, 2017 through June 30, 2021 for state tax purposes. To the extent we utilize net operating losses generated in earlier years, such earlier years may also be subject to audit. For the three months ended September 30, 2021, we recognized income tax expense of $ 1.5 million and had an effective tax rate of 22.6 % compared to an income tax benefit of $ 2.3 million and an effective tax rate of 24.4 % for the three months ended September 30, 2020. Our effective tax rate will typically differ from the statutory federal rate as a result of state income taxes, primarily in the states of Louisiana and Texas, and differences related to percentage depletion in excess of basis, stock-based compensation, and other permanent differences. For both periods, our respective statutory federal tax rate was 21 %. During the fiscal 2020 year we undertook a project to seek potential cash tax savings opportunities identifying available Enhanced Oil Recovery credits (“EOR credits”) related to our interests in the Delhi field. To take advantage of the EOR credits, we amended federal and state tax returns for the years ended June 30, 2017 and 2018 and incorporated the associated impacts into our 2019 tax returns. Principally as a result of the EOR credits, the Company recorded a net tax benefit of $ 2.8 million during fiscal 2020. Relative to the foregoing, the Company has a $ 3.1 million receivable for income tax refunds at September 30, 2021. As of the date of this filing, the Company has received $ 0.7 million of this income tax refund, and the Company currently anticipates to receive the remaining refund within the next twelve months based on inquiries and communication with the Internal Revenue Service, although no assurances can be made as to the actual date of receipt. During the three months ended September 30, 2021, we recognized an income tax benefit of $ 0.03 million attributable to the EOR credit. We must assess the likelihood that we will be able to realize our deferred tax assets. Realization is dependent on generating sufficient taxable income over the period the deferred tax assets are deductible. Currently, the Company is in a cumulative loss position, but with the increase in commodity prices and absent material unexpected losses, the Company may be in a cumulative income position during the current fiscal year. Management considered the reversal of deferred tax liabilities and tax planning strategies in making the assessment of the realization of deferred tax assets. Based upon the weight of available evidence, the Company believes that some of the deferred tax assets are not likely to be realized at the time of this report. For the three months ended September 30, 2021, there was no material change in the valuation allowance related to the federal and state deferred tax assets. 12 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Note 12 — Earnings (Loss) per Common Share The following table sets forth the computation of basic and diluted net income (loss) per share: Three Months Ended September 30, 2021 2020 Numerator Net income (loss) attributable to common stockholders $ 5,218,401 $ ( 7,135,148 ) Denominator Weighted average number of common shares — basic and diluted 33,533,990 32,955,656 Net earnings (loss) per common share — Basic $ 0.16 $ ( 0.22 ) Net earnings (loss) per common share — Diluted $ 0.16 $ ( 0.22 ) Outstanding Potentially Dilutive Securities Weighted Average Exercise Price Outstanding at September 30, 2021 Contingent Restricted Stock grants $ — 300,440 Outstanding Potentially Dilutive Securities Weighted Average Exercise Price Outstanding at September 30, 2020 Contingent Restricted Stock grants $ — 200,000 Note 13 — Senior Secured Credit Agreement On April 11, 2016, the Company entered into a three-year , senior secured reserve-based credit facility (the “Senior Secured Credit Facility”) in an amount up to $ 50 million. On November 2, 2020, the Company entered into the fifth amendment to the Senior Secured Credit Facility extending the maturity to April 9, 2024. On August 5, 2021, and effective as of June 30, 2021, the Company entered into the seventh amendment of the Senior Secured Credit Facility which added definitions for the terms “Acquired Entity or Mineral Interests” and “Acquired Entity or Mineral Interests EBITDA Adjustment.” Additionally, the Company elected to reduce the Consolidated Tangible Net Worth to $ 40 million from $ 50 million. Subsequent to the current quarter end, on November 9, 2021, the Company entered into the Eighth Amendment to the Senior Secured Credit Facility which increased the Company’s borrowing base to $ 50 million, among other items (see Note 18 - Subsequent Events for further discussion). The Company was in compliance with all financial covenants and there was $ 4 million outstanding under the Senior Secured Credit Facility at September 30, 2021, which is secured by substantially all of the Company's assets. Borrowings from the Senior Secured Credit Facility may be used for the acquisition and development of oil and natural gas properties, investments in cash flow generating assets complimentary to the production of oil and natural gas, and for letters of credit or other general corporate purposes. The Senior Secured Credit Facility included a placement fee of 0.50 % on the initial borrowing base amounting to $ 50 million and carries a commitment fee of 0.25 % per annum on the undrawn portion of the borrowing base. Any borrowings under the Senior Secured Credit Facility will bear interest, at the Company’s option, at either London Interbank Offered Rate (“LIBOR”) plus 2.75 %, subject to a minimum LIBOR of 0.25 %, or the Prime Rate, as defined under the Senior Secured Credit Facility, plus 1.00 %. The Senior Secured Credit Facility contains financial covenants including a requirement that the Company maintain, as of the last day of each fiscal quarter, (a) a maximum total leverage ratio of not more than 3.00 to 1.00, (b) a current ratio of not less than 1.00 to 1.00, and (c) a consolidated tangible net worth of not less than $ 40 million, all as defined under the Senior Secured Credit Facility. 13 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Note 14 — Commitments and Contingencies We are subject to various claims and contingencies in the normal course of business. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate. At a minimum, we disclose such matters if we believe it is reasonably possible that a future event or events will confirm a material loss through the impairment of an asset or the incurrence of a material liability. We accrue a material loss if we believe it is probable that a future event or events will confirm a loss, we can reasonably estimate such loss, and we do not accrue future legal costs related to that loss. Furthermore, we will disclose any matter that is unasserted if we consider it probable that a claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable and material in amount. We expense legal defense costs as they are incurred. Note 15 – Derivatives It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial or commodity hedging institutions deemed by management as competent and competitive market makers. As of September 30, 2021, the Company did not have any remaining open derivative contracts. The Company has in the past and may utilize in the future fixed-price swaps or costless put/call collars to hedge a portion of its anticipated future production. Fixed-price swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for the volumes under contract. A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract, and a purchased put that establishes a minimum price. The Company has elected not to designate its open derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of the derivative contracts and all payments and receipts on settled derivative contracts in “Net loss on derivative contracts” on the unaudited consolidated condensed statements of operations. Three Months Ended September 30, 2021 2020 Realized loss $ — $ 1,151,576 Unrealized gain — ( 816,610 ) Net loss on derivative contracts $ — $ 334,966 The Company’s derivative contract is recorded at fair market value and is included in the unaudited consolidated condensed balance sheets as an asset or a liability. The Company did not have any open positions as of September 30, 2021. The following sets forth a summary of the Company’s open oil derivative positions as of September 30, 2020. Period Type of Contract Volumes in Barrels Price / Price Range Weighted Average Floor Price per Bbl. Weighted Average Ceiling Price per Bbl. October 2020 to December 2020 Fixed-Price Swap 128,800 $ 32 $ 32 $ — The Company enters into an International Swap Dealers Association Master Agreement (“ISDA”) with each counterparty prior to a derivative contract with such counterparty. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency. The Company nets its derivative instrument fair value amounts executed with the same counterparty. Note 16 – Fair Value Measurement Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows: Level 1—Observable inputs such as quoted prices in active markets at the measurement date for identical unrestricted assets or liabilities. 14 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Level 2—Other inputs that are observable directly or indirectly, such as quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. Level 3—Unobservable inputs for which there are little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities. Fair Value of Derivative Instruments. The Company’s determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company’s consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 – Fair Value Measurement (“ASC 820”) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs are generally market corroborated (Level 2), and the Company classifies fair value balances as such. The Company did not have any open derivative trades as of September 30, 2021, and had a $ 1.1 million derivative liability balance as of September 30, 2020, which was settled during fiscal year 2021. As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment. This may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented in this report. The Company did not have any open derivative positions as of September 30, 2021. The table below sets forth the Company’s derivative assets and liabilities whose fair value measurements all reflect Level 2 inputs at September 30, 2020. September 30, 2020 (Asset) Liability Gross Amounts Recognized Gross Amounts Offset in the Consolidated Balance Sheet Net Amounts Presented in the Consolidated Balance Sheets Current derivative contract assets $ — $ — $ — Current derivative contract liabilities 1,094,734 — 1,094,734 Total derivative contract liabilities $ 1,094,734 $ — $ 1,094,734 Other Fair Value Measurements. The initial measurement and any subsequent revision of asset retirement obligations at fair value are calculated using discounted future cash flows of internally estimated costs. Significant Level 3 inputs used in the calculation of asset retirement obligations include the costs of plugging and abandoning wells, surface restoration, and reserve lives. Subsequent to initial recognition, revisions to estimated asset retirement obligations are made when changes occur for input values . Note 17 – Supplemental Disclosure of Cash Flow Information Supplemental disclosures of cash flow information: Three Months Ended September 30, 2021 2020 Income taxes paid $ 94 $ 248,000 Income tax refunds received — 130,499 Non-cash transactions: (Decrease) increase in accrued purchases of property and equipment ( 110,959 ) ( 55,311 ) Oil and natural gas property costs attributable to the recognition of asset retirement obligations — 91,608 15 Table of Contents Evolution Petroleum Corporation and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements Note 18 – Subsequent Events On November 9, 2021, the Company entered into the Eighth Amendment to the Senior Secured Credit Facility. The Eighth Amendment to the Senior Secured Credit Facility increases the borrowing base to $ 50 million and adds a hedging covenant whereby the Company must hedge from 25 to 75 percent of future production on a rolling twelve-month basis when 25 % or more of the borrowing base is utilized. The Company has elected a $ 40 million commitment amount for the Senior Secured Credit Facility, which provides $ 36 million in availability as of November 10, 2021 under the new borrowing base amount. On November 9, 2021, the Company declared a quarterly cash dividend of $ 0.075 per share of common stock to shareholders of record on December 15, 2021 and payable on December 31, 2021. 16 Table of Contents