8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report: September 10, 2014

(Date of earliest event reported)

Yuma Energy, Inc.

(Exact name of registrant as specified in its charter)

CALIFORNIA	001-32989	94-0787340
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

1177 West Loop South, Suite 1825

Houston, Texas 77027

(Address of principal executive offices) (Zip Code)

(713) 968-7000

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Introductory Note

On August 1, 2014, Pyramid Oil Company, a California corporation (“Pyramid” and, following consummation of the Merger, the “Company”), Pyramid Delaware Merger Subsidiary, Inc., a Delaware corporation and wholly-owned subsidiary of Pyramid (“PDMS”), Pyramid Merger Subsidiary, Inc., a Delaware corporation and wholly-owned subsidiary of Pyramid (“Merger Subsidiary”) and Yuma Energy, Inc., a Delaware corporation (“Yuma”), entered into an Amended and Restated Agreement and Plan of Merger and Reorganization (as amended, the “Merger Agreement”) providing for the merger of Merger Subsidiary with and into Yuma (the “Merger”) and the subsequent change of the Company’s name to “Yuma Energy, Inc.” The Merger was consummated on September 10, 2014. Please see Item 2.01 below for a discussion of the Merger. The Company also issued a press release regarding the Merger, which is attached as Exhibit 99.1 hereto.

The Company is filing this amendment to its Current Report on Form 8-K filed on September 16, 2014 (the “Prior 8-K”) to include (i) unaudited consolidated financial statements of Yuma as of and for the six month period ended June 30, 2014, (ii) management’s discussion and analysis of financial condition and results of operation of Yuma for the three and six month periods ended June 30, 2014, and (iii) pro forma financial statements giving effect to the Merger. Further, the Company has attached to this Current Report the audited financial statements of Yuma for the years ended December 31, 2013, 2012 and 2011.

Item 2.01. Completion of Acquisition or Disposition of Assets.

The Merger was consummated on September 10, 2014, as a result of which Merger Subsidiary merged with and into Yuma and holders of Yuma securities were issued shares of common stock, no par value, of the Company (“Company Common Stock”). Upon the consummation of the Merger, the Company changed its name from “Pyramid Oil Company” to “Yuma Energy, Inc.” and Yuma changed its name to “The Yuma Companies, Inc.”

In accordance with the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), the Company issued an aggregate of approximately 66,336,701 shares of Company Common Stock to the former stockholders of Yuma and in the case of fractional shares, cash (without interest) in an amount equal to the product of (i) such fractional part of a share of Company Common Stock multiplied by (ii) the average closing price of one share of Company Common Stock for the five consecutive trading days ending on the trading day immediately prior to the effective time of the Merger, as reported on the NYSE MKT (collectively, the “Merger Consideration”).

Immediately following the consummation of the Merger, the Company had approximately 71,224,786 shares of Company Common Stock, issued and outstanding. Company Common Stock began trading on the NYSE MKT under the symbol “YUMA” on September 11, 2014.

The foregoing description of the Merger Agreement and the Merger is only a summary, does not purport to be complete, and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August 4, 2014 and incorporated herein by reference.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF YUMA

The following discussion should be read in conjunction with the financial statements of Yuma and the notes thereto included elsewhere in this Current Report on Form 8-K. The following discussion includes certain forward-looking statements. For a discussion of important factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Risk Factors – Risks Relating to Yuma’s Business” and “Cautionary Note Regarding Forward-Looking Statements” in Pyramid’s and Yuma’s definitive proxy statement/prospectus (the “Proxy Statement/Prospectus”), included in the Company’s registration statement on Form S-4, as amended (the “Form S-4”), which Form S-4 was declared effective by the SEC on August 8, 2014.

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Overview

Yuma Energy, Inc. is a U.S.-based oil and gas company focused on the exploration for, and development of, conventional and unconventional oil and gas prospects. Yuma’s predecessor was established in 1983. Yuma has employed a 3-D seismic-based strategy to build a multi-year inventory of development and exploration prospects. Yuma’s current operations are focused on onshore central Louisiana, where Yuma is targeting the Austin Chalk, Tuscaloosa, Wilcox, Frio, Marg Tex and Hackberry formations. In addition, Yuma has a non-operated position in the Bakken Shale in North Dakota. Yuma’s core competencies in generating oil and gas prospects include: unconventional oil plays; onshore liquids-rich projects; and high impact deep onshore prospects located beneath known producing trends, identified through the use of 3-D seismic surveys.

For the three months ended June 30, 2014, production averaged 2,567 Boe/d compared to 1,074 Boe/d for the three months ended June 30, 2013. Production for the six months ended June 30, 2014 averaged 2,599 Boe/d compared to 975 Boe/d for the six months ended June 30, 2013.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and that could potentially result in materially different results under different assumptions and conditions.

Sales and Other Operating Revenues

The net quantities of oil, gas and natural gas liquids produced and sold by Yuma for each of the three and six months ended June 30, 2014 and 2013, and the average sales price per unit sold are presented below.

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Production volumes:
Crude oil and condensate (Bbl)		60,603		47,451		123,490		85,461
Natural gas (Mcf)		860,515		258,985		1,716,404		469,993
Natural gas liquids (Bbl)		29,607		7,121		60,932		12,654
Barrel of oil equivalent (Boe)		233,629		97,736		470,490		176,447
Average prices realized:
Excluding commodity derivatives (both realized and unrealized)
Crude oil and condensate (per Bbl)	$	103.20	$	104.71	$	102.28	$	106.31
Natural gas (per Mcf)	$	4.86	$	4.01	$	4.97	$	3.90
Natural gas liquids (per Bbl)	$	37.86	$	42.12	$	41.39	$	43.43
Including commodity derivatives (realized only)
Crude oil and condensate (per Bbl)	$	91.90	$	105.31	$	93.69	$	106.74
Natural gas (per Mcf)	$	4.47	$	3.64	$	4.97	$	3.90
Natural gas liquids (per Bbl)	$	37.86	$	42.12	$	41.39	$	43.43

Yuma’s revenues for the three and six months ended June 30, 2014 and 2013 are summarized in the below table:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Sales of natural gas and crude oil:
Crude oil and condensate	$	6,254,072		$	4,968,391		$	12,631,160		$	9,085,091
Natural gas		4,186,260			1,038,525			8,531,860			1,833,212
Natural gas liquids		1,120,936			299,925			2,522,182			549,513
Realized gain/(loss) on commodity derivatives		(1,020,979	)		(66,199	)		(1,994,173	)		36,058
Unrealized gain/(loss) on commodity derivatives		(708,547	)		1,938,452			(1,686,933	)		1,262,839
Gas marketing sales		147,783			503,916			330,868			786,239
Other revenue		302,143			304,844			543,636			431,492
Total revenues	$	10,281,668		$	8,987,854		$	20,878,600		$	13,984,444

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Sale of Crude Oil and Condensate

Crude oil and condensate are sold through month-to-month evergreen contracts. The price is tied to an index or a weighted monthly average of posted prices with certain adjustments for gravity, BS&W (Basic Sediment and Water) and transportation. Generally, the index or posting is based on WTI (West Texas Intermediate) and adjusted to LLS (Light Louisiana Sweet) or HLS (Heavy Louisiana Sweet). For the three months ended June 30, 2014 and 2013, LLS postings averaged $2.56 and $9.00 over WTI, respectively.  For the six months ended June 30, 2014 and 2013, LLS postings averaged $4.12 and $15.07 over WTI, respectively.

● Yuma’s crude oil revenues increased by 26% in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 as a result of new production on the Bertha #8-3 and continued production on the Broussard #1 and #2, Starns #38-1, Crosby #12-1 and the Thibodeaux #1 wells.  For the six months ended June 30, 2014, crude oil revenues increased 39% compared to the same period in 2013 as a result of the successful drilling of the Crosby #12-1 and the Bertha #8-3 wells, the DS&B 117 #1 and Starnes #38-1 workovers, and the continued production on the Broussard #1 and #2 wells, and the Thibodeaux #1 well.

Sale of Natural Gas and Natural Gas Liquids

Yuma’s natural gas is sold under multi-year contracts with pricing tied to either first of the month index or a monthly weighted average of purchaser prices received. Natural gas liquids are also sold under multi-year contracts usually tied to the related natural gas contract. Pricing is based on published prices for each product or a monthly weighted average of purchaser prices received.

● Yuma’s natural gas revenues increased due to higher gas volumes of 601,530 Mcf, or 232%, for the three months ended June 30, 2014 compared to the same period of 2013. The increase in production volumes for the second quarter of 2014 compared to the second quarter 2013 was primarily due to increased production in the Broussard #1 and #2, and the Thibodeaux #1 well.  These volumetric benefits were enhanced by a 23% increase in natural gas prices realized for the three months ended June 30, 2014 compared to the same period in 2013.  For the six months ended June 30, 2014, natural gas revenues increased due to higher gas volumes of 1,246,411 Mcf, representing a 265.2% increase for the six months ended June 30, 2014 as compared to the same period in 2013.  The increase in production volumes for the period was primarily due to increased production from new wells.  Average realized gas prices increased 27.44% to $4.97 per Mcf for the six months ended June 30, 2014, from $3.90 per Mcf for the same period in 2013.

● Increasing natural gas sales volumes contributed to increased natural gas liquids revenues, resulting in a 274% increase in NGL revenues for the three months ended June 30, 2014 over the same period in 2013, and a 359% increase in NGL revenues for the six month period ended June 30, 2014 over the same period in 2013.

Gas Marketing

Gas marketing sales are natural gas volumes purchased from certain Yuma operated wells and the aggregated volumes sold with a mark-up of $.03 per MMBtu. Texas Southeastern Gas Marketing Company (“Marketing”), a wholly-owned subsidiary of Yuma, purchases and sells natural gas on behalf of Yuma and its working interest partners.

Lease Operating Expenses

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014			2013
Lease operating expenses	$	3,264,643	$	2,628,628		$	6,923,148		$	3,976,359
LOE per Boe	$	13.97	$	26.90		$	14.71		$	22.54

Lease operating expenses (“LOE”) include all costs incurred to operate wells and related facilities, both operated and non-operated. In addition to direct operating costs such as labor, repairs and maintenance, equipment rentals, materials and supplies, fuel and chemicals, LOE also includes severance taxes, product marketing and transportation fees, insurance, ad valorem taxes and operating agreement allocable overhead. LOE excludes costs classified as re-engineering and workovers. If severance and ad valorem taxes were not included in the above table, LOE would have been reduced by $1,126,319 and $646,405 during the three months ended June 30, 2014 and 2013, respectively, and operating costs per barrel of oil equivalent would have been reduced to $9.15 and $20.28 for the three months ended June 30, 2014 and 2013, respectively.  For the six months ended June 30, 2014 and 2013, if severance and ad valorem taxes were not included, LOE would have been reduced by $2,319,046 and $1,139,642 respectively, and operating cost per barrel of oil equivalent would have been reduced to $9.78 and $16.08, respectively.

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● LOE was $3,264,643 for the three months ended June 30, 2014 compared to $2,628,628 for the same period in 2013.  The $636,015 increase is primarily due to increased production from the Broussard #1 and #2, the Crosby 12 #1, and the Thibodeaux #1 wells.  LOE per barrel of oil equivalent decreased for the same period, from $26.90 in 2013 to $13.97 in 2014, a 48.1% reduction due to significantly increased production volumes. For the six months ended June 30, 2014, LOE increased by $2,946,789 from the same period in 2013.  LOE per barrel of oil equivalent decreased for the same period from $22.54 to $14.71, a 34.7% reduction primarily due to significantly increased production volumes.

Re-engineering and Workovers

Re-engineering and workover expenses include the costs to restore or enhance production in current producing zones as well as costs of significant non-recurring operations.

● Workover expenses for the three months ended June 30, 2014 totaled $550,401.  For the same period in 2013, workover expenses were $1,217,282, of which $810,081 was for the workover of the USA 34 #1 well.  Workover costs for the six months ended June 30, 2014 totaled $551,911, while costs for the same period in 2013 totaled $1,268,239.

General and Administrative Expenses

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
General and administrative
Stock based compensation	$	35,816		$	40,028		$	91,938		$	40,028
Other		2,399,824			2,395,781			6,301,525			4,454,529
Capitalized		(617,664	)		(688,651	)		(1,377,502	)		(1,495,608	)
Net	$	1,817,976		$	1,747,158		$	5,015,961		$	2,998,949

General and administrative (“G&A”) expenses primarily consist of overhead expenses, employee remuneration and professional and consulting fees. The Company capitalizes certain G&A expenditures where they satisfy the criteria for capitalization under GAAP as relating to oil and gas exploration activities following the full cost method of accounting.

The net change in G&A cost for the three months ended June 30, 2014 compared to the same period in 2013 was $70,818, or 4% higher.  The increase for the three month period reflected $260,076 in professional costs associated with the merger with Pyramid, along with approximately $121,000 in increased costs over 2013 resulting from four (net) additional employees.  The second quarter of 2013 contained RSU, RSA and annual incentive awards of approximately $496,000.  For the six month period ended June 30, 2014, G&A cost was $2,017,012, or 67%, over the amount for the same period in 2013.  The increase for the six month period ended June 30, 2014 over the same period in 2013 is due to the write-off of approximately $1.3 million in expenses incurred to explore several alternatives to obtaining a public listing for Yuma’s stock, and approximately $585,000 in costs associated with the merger with Pyramid.

Depreciation, Depletion and Amortization (“DD&A”)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
DD&A		$	6,012,525		$	2,450,581		$	11,738,608		$	4,112,086

Production is up from the same 2013 periods by 139% quarter-to-date and 167% year-to-date.  Refer to “Sales and Other Operating Revenues” above for oil and gas production discussion.

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Adjusted EBITDA

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net Income	$	(7,550,697	)	$	(24,989,851	)	$	(7,845,675	)	$	(22,882,022	)
Add: Depreciation, depletion & amortization of property and equipment		6,012,525			2,450,581			11,738,608			4,112,086
Add: Interest expense, net of interest income and amounts capitalized		66,402			257,378			204,772			420,555
Add (deduct): Income tax expense (benefit)		(285,000	)		(73,600	)		(1,134,000	)		41,200
EBITDA		(1,756,770	)		(22,355,492	)		2,963,705			(18,308,181	)
Add:  Costs to obtain a public listing		295,835			-			1,884,965			-
Add: Increase in value of preferred stock derivative liability		5,975,944			24,967,853			4,503,914			22,964,198
Add: Accretion of asset retirement obligation		145,945			213,037			288,089			277,281
Add:  Bank mandated commodity derivative novation cost		-			175,000			-			175,000
Deduct: Amortization of benefit from commodity derivatives sold		(23,437	)		(18,150	)		(46,875	)		(36,300	)
Add (deduct): Net commodity derivatives mark-to-market loss (gain)		708,547			(1,938,452	)		1,686,933			(1,262,839	)
Adjusted EBITDA	$	5,346,064		$	1,043,796		$	11,280,731		$	3,809,159

“EBITDA” represents earnings before interest, taxes, depreciation, depletion and amortization, and is a non-GAAP financial measure. Because Yuma makes other adjustments to its EBITDA formula by considering the change in the preferred stock derivative liability, accretion of asset retirement obligations, and changes in commodity derivative values, management refers to this metric as Adjusted EBITDA and it is provided as an additional metric that is used by Yuma’s Board of Directors and management to measure operating performance and trends. Adjusted EBITDA for the three and six months ended June 30, 2014 increased from the same periods in 2013 by $4,302,267 (412%) and $7,471,572 (196%), respectively. The increase for 2014 was from increased oil and gas revenue, somewhat offset by increased LOE and G&A.

Interest Expense

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014				2013
Interest expense	$	332,363		$	559,237			$	708,683			$	963,523
Interest capitalized		(264,507	)		(299,748	)			(501,408	)			(538,811	)
Net	$	67,856		$	259,489			$	207,275			$	424,712
Bank debt	$	24,775,000		$	24,925,000			$	24,775,000			$	24,925,000

At the beginning of the second quarter of 2013, debt was used to finance the acquisition of the Addison acreage, attributing to an increase in debt through the first quarter of 2014.  Also, interest for the three months ended June 30, 2013 was greater than the same period in 2014 because 2013 interest included $189,727 of debt cost write-off due to the exit of a lender from the Yuma loan syndicate. Year to date 2013 also included $123,925 debt cost write-off from the exit of another lender in the first quarter of 2013, for a six month total of $313,652.  Debt declined during the second quarter of 2014 due to increasing production.

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Income Tax Expense

The following summarizes Yuma’s income tax expense (benefit) and effective tax rates:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014				2013
Consolidated net income (loss) before income taxes	$	(7,835,697	)	$	(25,063,451	)		$	(8,979,675	)		$	(22,840,822	)
Income tax expense (benefit)		(285,000	)		(73,600	)			(1,134,000	)			41,200
Effective tax rate		3.64	%		0.29	%			12.63	%			(0.18	)%

The differences between the U.S. federal statutory rate of 35% and Yuma’s effective tax rates are due primarily to the tax effects of the excess of book carrying value over the tax basis in the full cost pool and the net operating loss carryforwards for each period.

Liquidity and Capital Resources

Cash Flows

	Six Months Ended June 30,
	2014			2013
Cash flows provided by operating activities	$	17,632,086		$	8,005,015
Cash flows used for investing activities		(9,340,088	)		(15,417,255	)
Cash flows provided by (used for) financing activities		(6,254,582	)		6,978,725
Net increase in cash	$	2,037,416		$	(433,515	)

Cash Flows From Operating Activities

Cash flows from operations for the six month period ended June 30, 2014 increased 120.3% over the same period of 2013 primarily due to increased production in the La Posada field and new production at Crosby #12-1.  These increases were somewhat mitigated by higher lease operating expenses associated with increasing production at La Posada, new production at Crosby #12-1 and the acquisition of the Addison properties in the Austin Chalk.

Cash Flows From Investing Activities

	Six Months Ended June 30,
	2014			2013
Acquisition of acreage and new properties	$	2,625,909		$	10,358,667
Drilling and completion		7,827,840			4,335,683
Recompletions, capital workovers and plugging and abandoning (“P&A”)		(770,841	)		1,018,364
Total oil and natural gas investing activities		9,682,908			15,712,714
Corporate office property and equipment purchases		60,414			42,277
Total cash used for capitalized expenditures on property and equipment		9,743,322			15,754,991
Proceeds from sale of property		(307,600	)		(338,029	)
(Decrease) increase in noncurrent receivable from affiliate		(95,634	)		293
Cash flows used for investing activities	$	9,340,088		$	15,417,255

During the six months ended June 30, 2014, the Greater Masters Creek Field accounted for $8,370,260 of Yuma’s total oil and natural gas investing activities.  Of that, $987,956 was spent primarily on lease extensions and geological and geophysical activities.  The remaining $7,382,304 represents drilling costs.  A net credit of $671,553 for insurance recovery on the Grief Bros. #1 created a credit balance for recompletions, capital workovers and P&A for the period.

For the six months ended June 30, 2013, lease related costs of $8,535,010 were incurred on the Austin Chalk Project, a part of the Greater Masters Creek Field.  Other significant lease related costs for the first six months of 2013 were $574,133 for Livingston and $459,729 for Amazon, and $325,086 in other leases.  Costs incurred in the Bakken to drill and complete the Bunning 35-26 #1H and build the Jerry and Monson salt water disposal (“SWD”) facilities amounted to $648,476.  At La Posada, $1,019,009 was incurred to drill and complete the Broussard #1 side track and upgrade the production facilities.  Other drilling costs incurred were $1,202,150 for the SLLO #1 at Amazon and $1,422,130 for the Starns 38-1 and the Weyerhaeuser 57-1 SWD at Livingston.

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Cash Flows From Financing Activities

Yuma’s cash flows, both in the short-term and the long-term, are impacted by highly volatile oil and natural gas prices.  Although Yuma mitigates this risk by hedging a significant portion of its future crude oil and natural gas production out two years (three to five years historically), a significant deterioration in commodity prices negatively impacts revenues, earnings, and cash flows, capital spending, and potentially our liquidity.  Sales volumes and costs also impact cash flows; however, these historically have not been as volatile or as impactful as commodity prices in the short-term.

Yuma expects to finance future acquisition, development and exploration activities through available working capital, cash flows from operating activities, advances from its credit facility, sale of non-strategic assets, and the possible issuance of additional equity/debt securities.  In addition, Yuma may slow or accelerate its development of existing reserves to more closely match its projected cash flows.

At June 30, 2014, Yuma had a $40.0 million conforming borrowing base, with a $4.5 million additional non-conforming borrowing base, providing a total borrowing base of $44.5 million, with available borrowing capacity of $19,725,000 in accordance with its credit facility. The borrowing base is reviewed and redetermined in March and October of each year and was increased to the current level on April 22, 2014.

	Six Months Ended			Twelve Months Ended
	June 30, 2014			December 31, 2013
Credit Facility:
Balances outstanding, beginning of year	$	31,215,000		$	17,875,000
Activity		(6,440,000	)		13,340,000
Balances outstanding, end of period	$	24,775,000		$	31,215,000

Other than the credit facility, Yuma had debt of $507,654 and $178,027 at June 30, 2014 and December 31, 2013, respectively, from an installment loan financing oil and gas property insurance premiums.

Debt in 2014 has been favorably impacted by increased revenues and trended lower during the six month period ended June 30, 2014. 

Hedging Activities

Current Commodity Derivative Contracts

Yuma seeks to reduce its sensitivity to oil and gas price volatility and secure favorable debt financing terms by entering into commodity derivative transactions which may include fixed price swaps, price collars, puts, calls and other derivatives. Yuma believes its hedging strategy should result in greater predictability of internally generated funds, which in turn can be dedicated to capital development projects and corporate obligations. 

Fair Market Value of Commodity Derivatives

	June 30, 2014						December 31, 2013
	Oil			Gas			Oil			Gas
Assets
Noncurrent	$	233,626		$	-		$	818,637		$	-
Liabilities
Current		(1,098,799	)		(664,673	)		(423,217	)		(253,915	)
Noncurrent		-			(183,106	)		-			(218,649	)

Assets and liabilities are netted within each commodity on the balance sheet as all contracts are with the same counterparty. For the balances without netting, refer to Note C – “Commodity Derivative Instruments” in the Unaudited Condensed Notes to the Consolidated Financial Statements of Yuma for the period ended June 30, 2014.

The fair market value of Yuma’s commodity derivative contracts in place at June 30, 2014 and December 31, 2013 were net liabilities of $1,712,952 and $77,144, respectively.

Yuma expects to reclassify losses on commodity derivatives of $16,826 net after taxes into earnings from accumulated other comprehensive income during the twelve months ending June 30, 2015; however, actual cash settlement gains and losses recognized may differ materially.

Please see Note C – “Commodity Derivative Instruments” in the Unaudited Condensed Notes to the Consolidated Financial Statements of Yuma for the period ended June 30, 2014, for additional information on Yuma’s commodity derivatives.

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Hedging commodity prices for a portion of Yuma’s production is a fundamental part of Yuma’s corporate financial management. Yuma does not engage in speculative commodity trading activities and does not hedge all available or anticipated quantities of its production. In implementing its hedging strategy Yuma seeks to:

● effectively manage cash flow to minimize price volatility and generate internal funds available for operations, capital development projects and additional acquisitions; and

● ensure its ability to support its exploration activities as well as administrative and debt service obligations.

Estimating the fair value of derivative instruments requires complex calculations, including the use of a discounted cash flow technique, estimates of risk and volatility, and subjective judgment in selecting an appropriate discount rate. In addition, the calculations use future market commodity prices which, although posted for trading purposes, are merely the market consensus of forecasted price trends. The results of the fair value calculation cannot be expected to represent exactly the fair value of Yuma’s commodity derivatives. Yuma currently obtains fair value positions from its counterparties and compares that value to the calculated value provided by its outside commodity derivative consultant. Yuma believes that the practice of comparing the consultant’s value to that of Yuma’s counterparties, who are more specialized and knowledgeable in preparing these complex calculations, reduces its risk of error and approximates the fair value of the contracts, as the fair value obtained from Yuma’s counterparties would be the cost to Yuma to terminate a contract at that point in time.

Commitments and Contingencies

Yuma had the following contractual obligations and commitments as of June 30, 2014:

			Liability for
			Commodity			Operating		Asset Retirement
	Debt (1)		Derivatives (2)			Leases		Obligations
2014	$	-	$	1,405,719		$	268,066	$	-
2015		-		437,148			542,655		1,169,566
2016		-		(129,915	)		550,989		977,054
2017		24,775,000		-			536,227		307,657
2018		-		-			2,197		717,923
Thereafter		-		-			-		7,818,230
Totals	$	24,775,000	$	1,712,952		$	1,900,134	$	10,990,430

(1) This table does not include future commitment fees, interest expense or other fees because the credit agreement is a floating rate instrument, and Yuma cannot determine with accuracy the timing of future loans, advances, repayments or future interest rates to be charged.

(2) Represents the estimated future payments under Yuma’s oil and natural gas derivative contracts based on the future market prices as of June 30, 2014. These amounts will change as oil and natural gas commodity prices change.

Off Balance Sheet Arrangements

Yuma has no off balance sheet arrangements, special purpose entities, financing partnerships or guarantees (other than Yuma’s guarantee of its wholly-owned subsidiary’s credit facility).

Quantitative and Qualitative Disclosures About Market Risk of Yuma

Commodities. Yuma is exposed to market risk from changes in commodity prices. In the normal course of business, Yuma enters into derivative transactions, including commodity price collars, swaps and floors to mitigate its exposure to commodity price movements. Yuma does not participate in these transactions for trading or speculative purposes. While the use of these arrangements may limit the benefit to Yuma of increases in the prices of oil and natural gas, it also limits the downside risk of adverse price movements.

Interest rates. Yuma is exposed to financial risk from changes in future interest rates to the extent that it incurs future indebtedness. As of June 30, 2014, Yuma had outstanding indebtedness under its credit facility of $24,775,000, which matures in May 2017. The credit facility provides for a variable interest rate. In the event interest rates rise significantly, and Yuma incurs future indebtedness without mitigating or fixing future interest rates, Yuma’s interest expense will increase in accordance with any future borrowings and at rates in effect at the time of those borrowings.

Cautionary Statement Regarding Forward-Looking Statements

This current report on Form 8-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These include statements regarding the effects of the Merger, estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties and are typically identified by words or phrases such as “may,” “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast,” and other words and terms of similar meaning. For example, statements regarding future financial performance, future competitive positioning and business synergies, future acquisition cost savings, future accretion to earnings per share, future market demand, future benefits to stockholders, future economic and industry conditions, the Merger (including its benefits, results, and effects), are forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond the Company’s control, which could cause actual benefits, results, effects and timing to differ materially from the results predicted or implied by the statements.

These risks and uncertainties include, but are not limited to: potential adverse reactions or changes to business relationships resulting from the consummation of the Merger; competitive responses to the Merger; costs and difficulties related to the integration of Yuma’s business and operations with Pyramid’s business and operations; the inability to or delay in obtaining cost savings and synergies from the Merger; unexpected costs, charges or expenses resulting from the Merger; the inability to retain key personnel; uncertainty of the expected financial performance of Yuma or Pyramid following consummation of the Merger; and any changes in general economic and/or industry specific conditions.

9

The Company cautions that the foregoing list of factors is not exclusive. Additional information concerning these and other risk factors is contained in the Company’s most recently filed Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, and other SEC filings, which are available at the SEC’s website, http://www.sec.gov. Each forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update any of these forward-looking statements to reflect events or circumstances that may arise after the date hereof. All subsequent written and oral forward-looking statements concerning the Company, the Merger or other matters and attributable to the Company or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements above.

Item 9.01. Financial Statements and Exhibits.

(a)           Financial Statements of Business Acquired.

The unaudited consolidated financial statements of Yuma as of and for the period ended June 30, 2014 are incorporated herein by reference to Exhibit 99.2 to this Amendment No. 1 to the Current Report on Form 8-K. The audited consolidated financial statements of Yuma for the years ended December 31, 2013, 2012 and 2011 are incorporated herein by reference to Exhibit 99.4 to this Amendment No. 1 to the Current Report on Form 8-K.

(b)           Pro Forma Financial Information.

The unaudited Pro forma condensed combined balance sheet of Yuma as of June 30, 2014, and unaudited pro forma condensed combined statements of operations of Yuma for the year ended December 31, 2013 and the six months ended June 30, 2014, giving effect to the merger of a wholly owned subsidiary of Pyramid with and into Yuma are incorporated herein by reference to Exhibit 99.3 to this Amendment No. 1 to the Current Report on Form 8-K.

(d)           Exhibits.

The following exhibits are filed with this Current Report on Form 8-K:

Exhibit No.	Description
99.2	Unaudited consolidated financial statements of Yuma Energy, Inc. as of and for the period ended June 30, 2014.
99.3	Unaudited Pro forma condensed combined balance sheet of Yuma Energy, Inc. as of June 30, 2014, and unaudited pro forma condensed combined statements of operations of Yuma Energy, Inc. for the year ended December 31, 2013 and the six months ended June 30, 2014, giving effect to the merger of a wholly owned subsidiary of Pyramid Oil Company with and into Yuma Energy, Inc.
99.4	Audited consolidated financial statements of Yuma Energy, Inc. as of and for the years ended December 31, 2013, 2012 and 2011.

10

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	YUMA ENERGY, INC.
	By:	/s/ Sam L. Banks
	Name:	Sam L. Banks
Date: September 22, 2014	Title:	Chief Executive Officer

11

EXHIBIT INDEX

Exhibit No.	Description
99.2	Unaudited consolidated financial statements of Yuma Energy, Inc. as of and for the period ended June 30, 2014.
99.3	Unaudited Pro forma condensed combined balance sheet of Yuma Energy, Inc. as of June 30, 2014, and unaudited pro forma condensed combined statements of operations of Yuma Energy, Inc. for the year ended December 31, 2013 and the six months ended June 30, 2014, giving effect to the merger of a wholly owned subsidiary of Pyramid Oil Company with and into Yuma Energy, Inc.
99.4	Audited consolidated financial statements of Yuma Energy, Inc. as of and for the years ended December 31, 2013, 2012 and 2011.

12
 

EX-99.2

Exhibit 99.2

Yuma Energy, Inc.

CONSOLIDATED

FINANCIAL STATEMENTS

JUNE 30, 2014

CONTENTS	Page
Consolidated Balance Sheets	3
Consolidated Statements of Operations	5
Consolidated Statements of Comprehensive Income	6
Consolidated Statements of Changes in Equity	7
Consolidated Statements of Cash Flows	8
Condensed Notes to Consolidated Financial Statements	10

Yuma Energy, Inc.

CONSOLIDATED BALANCE SHEETS

	June 30,
	2014			December 31,
	(Unaudited)			2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6,231,927		$	4,194,511
Accounts receivable, net of allowance for doubtful accounts:
Trade		11,717,457			10,833,211
Stockholder and employees		203,439			155,080
Other		120,787			417,850
Note receivable		4,000			4,000
Prepayments		550,252			433,991
Deferred taxes		146,964			146,964
Other deferred charges		181,483			162,416
Total current assets		19,156,309			16,348,023
OIL AND GAS PROPERTIES, at cost (full cost method):
Not subject to amortization		31,827,542			24,051,278
Subject to amortization		154,482,793			152,863,988
		186,310,335			176,915,266
Less:  accumulated depreciation, depletion and amortization		(96,117,943	)		(84,438,840	)
Net oil and gas properties		90,192,392			92,476,426
OTHER PROPERTY AND EQUIPMENT, at cost		2,127,174			2,066,760
Less:  accumulated depreciation and amortization		(1,882,430	)		(1,822,925	)
Net other property and equipment		244,744			243,835
OTHER ASSETS:
Receivables from affiliate		-			95,634
Commodity derivative instruments		233,626			818,637
Other noncurrent assets		327,879			1,649,413
Total other assets		561,505			2,563,684
Total assets	$	110,154,950		$	111,631,968

The accompanying notes are an integral part of these financial statements.

3

Yuma Energy, Inc.

CONSOLIDATED BALANCE SHEETS - CONTINUED

	June 30,
	2014			December 31,
	(Unaudited)			2013
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of debt	$	507,654		$	178,027
Accounts payable, principally trade		22,136,930			15,116,560
Commodity derivative instruments		1,763,472			677,132
Asset retirement obligations		915,346			1,755,650
Other accrued liabilities		1,900,108			1,127,283
Total current liabilities		27,223,510			18,854,652
LONG-TERM DEBT:
Bank debt		24,775,000			31,215,000
OTHER NONCURRENT LIABILITIES:
Preferred stock derivative liability, Series A and B		55,794,328			51,290,414
Asset retirement obligations		10,075,084			8,942,029
Commodity derivative instruments		183,106			218,649
Deferred taxes		12,027,841			13,160,205
Restricted stock units		194,471			102,532
Other deferred credits		45,142			69,998
Total other noncurrent liabilities		78,319,972			73,783,827
PREFERRED STOCK, Series A and B, subject to mandatory redemption		40,366,251			35,666,342
EQUITY:
Common stock		542			542
Capital in excess of par value of common stock		2,668,923			2,668,923
Accumulated other comprehensive income		41,384			38,770
Accumulated earnings (deficit)		(63,240,632	)		(50,596,088	)
Total equity		(60,529,783	)		(47,887,853	)
Total liabilities and equity	$	110,154,950		$	111,631,968

The accompanying notes are an integral part of these financial statements.

4

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Quarter Ended June 30,						Year to Date Ended June 30,
	2014			2013			2014			2013
REVENUES:
Sales of natural gas and crude oil	$	9,979,525		$	8,683,010		$	20,334,964		$	13,552,952
Other revenue		302,143			304,844			543,636			431,492
Total revenues		10,281,668			8,987,854			20,878,600			13,984,444
EXPENSES:
Marketing cost of sales		282,701			402,571			604,018			638,140
Lease operating		3,264,643			2,628,628			6,923,148			3,976,359
Re-engineering and workovers		550,401			1,217,282			551,911			1,268,239
General and administrative - stock based compensation		28,926			409,413			76,840			409,413
General and administrative - other		1,789,050			1,337,745			4,939,121			2,589,536
Depreciation, depletion and amortization		6,012,525			2,450,581			11,738,608			4,112,086
Asset retirement obligation accretion expense		145,945			213,037			288,089			277,281
Gain on asset disposal		-			(19,500	)		-			(19,500	)
Bad debt expense		2,871			12,571			29,999			13,075
Recovery of bad debts		(1,984	)		(2,195	)		(1,984	)		(2,195	)
Total expenses		12,075,078			8,650,133			25,149,750			13,262,434
INCOME (LOSS) FROM OPERATIONS		(1,793,410	)		337,721			(4,271,150	)		722,010
OTHER INCOME (EXPENSE):
Change in fair value of preferred stock derivative liability - Series A and Series B		(5,975,944	)		(24,967,853	)		(4,503,914	)		(22,964,198	)
Interest expense		(67,856	)		(259,489	)		(207,275	)		(424,712	)
Interest income		1,454			2,111			2,503			4,157
Bank mandated commodity derivative novation cost		-			(175,000	)		-			(175,000	)
Other, net		59			(941	)		161			(3,079	)
Total other income (expense)		(6,042,287	)		(25,401,172	)		(4,708,525	)		(23,562,832	)
NET LOSS BEFORE INCOME TAXES		(7,835,697	)		(25,063,451	)		(8,979,675	)		(22,840,822	)
Income tax expense (benefit)		(285,000	)		(73,600	)		(1,134,000	)		41,200
NET LOSS		(7,550,697	)		(24,989,851	)		(7,845,675	)		(22,882,022	)
Preferred Stock, Series A and Series B
Accretion		284,580			274,199			566,529			545,873
Dividends paid in cash		98,960			59,850			98,960			59,850
Dividends paid in kind		4,133,380			2,228,545			4,133,380			2,228,545
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(12,067,617	)	$	(27,552,445	)	$	(12,644,544	)	$	(25,716,290	)
LOSS PER COMMON SHARE
Basic	$	(223	)	$	(508	)	$	(233	)	$	(475	)
Diluted	$	(223	)	$	(508	)	$	(233	)	$	(475	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic		54,236			54,236			54,236			54,119
Diluted		54,236			54,236			54,236			54,119

The accompanying notes are an integral part of these financial statements.

5

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Quarter Ended June 30,						Year to Date Ended June 30,
	2014			2013			2014			2013
NET LOSS	$	(7,550,697	)	$	(24,989,851	)	$	(7,845,675	)	$	(22,882,022	)
OTHER COMPREHENSIVE INCOME (LOSS):
Reclassification of (gain) loss on settled commodity derivatives		86,853			(131,835	)		51,125			(199,756	)
Less income taxes		33,438			(50,756	)		19,683			(76,906	)
Reclassification of (gain) loss on settled commodity derivatives, net of income taxes		53,415			(81,079	)		31,442			(122,850	)
Reclassification of gain from amortization of commodity derivatives sold		(23,437	)		(18,150	)		(46,875	)		(36,300	)
Less income taxes		(9,023	)		(6,988	)		(18,047	)		(13,976	)
Reclassification of gain from amortization of commodity derivatives sold,
net of income taxes		(14,414	)		(11,162	)		(28,828	)		(22,324	)
OTHER COMPREHENSIVE INCOME (LOSS)		39,001			(92,241	)		2,614			(145,174	)
COMPREHENSIVE LOSS	$	(7,511,696	)	$	(25,082,092	)	$	(7,843,061	)	$	(23,027,196	)

The accompanying notes are an integral part of these financial statements.

6

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	June 30,
	2014			December 31,
	(Unaudited)			2013
COMMON STOCK:
Balance at beginning of period - 54,000 shares, $.01 par	$	542		$	540
Employee restricted stock awards (236 shares)		-			2
Balance at end of period - 54,236 shares, $.01 par		542			542
CAPITAL IN EXCESS OF PAR VALUE OF COMMON STOCK:
Balance at beginning of period		2,668,923			2,182,293
Employee restricted stock awards (236 shares)		-			486,630
Balance at end of period		2,668,923			2,668,923
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period		38,770			268,841
Comprehensive income (loss) from commodity derivative instruments, net of income taxes		2,614			(230,071	)
Balance at end of period		41,384			38,770
ACCUMULATED EARNINGS (DEFICIT):
Balance at beginning of period		(50,596,088	)		(10,885,832	)
Net income (loss)		(7,845,675	)		(33,050,103	)
Preferred stock accretion (Series A and B)		(566,529	)		(1,101,972	)
Preferred stock cash dividends (Series A and B)		(98,960	)		(145,900	)
Preferred stock dividends paid in kind (Series A and B)		(4,133,380	)		(5,412,281	)
Balance at end of period		(63,240,632	)		(50,596,088	)
TOTAL EQUITY	$	(60,529,783	)	$	(47,887,853	)

The accompanying notes are an integral part of these financial statements.

7

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Year to Date Ended June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net loss to net cash
provided by operating activities:
Net loss	$	(7,845,675	)	$	(22,882,022	)
Increase in fair value of preferred stock liability		4,503,914			22,964,198
Depreciation, depletion and amortization of property and equipment		11,738,608			4,112,086
Accretion of asset retirement obligation		288,089			277,281
Stock-based compensation net of capitalized cost		76,840			409,414
Amortization of other assets and liabilities		93,240			81,515
Deferred tax expense (benefit)		(1,134,000	)		41,200
Bad debt expense		29,999			13,075
Gain on disposal of property and equipment		-			(19,500	)
Write off deferred offering costs		1,257,160			-
Write off credit financing costs		-			313,652
Amortization of benefit from commodity derivatives (sold) and purchased, net		(46,875	)		(36,300	)
Net commodity derivatives mark-to-market (gain) loss		1,686,933			(1,262,839	)
Other		(4,668	)		(1,402	)
Changes in current operating assets and liabilities:
Accounts receivable		(663,557	)		(1,497,954	)
Note receivable		-			216
Other current assets		(116,261	)		299,315
Accounts payable		7,020,370			5,052,642
Other current liabilities		772,825			140,438
Noncurrent payable to commodity derivative advisor		(24,856	)		-
NET CASH PROVIDED BY OPERATING ACTIVITIES		17,632,086			8,005,015

8

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(Unaudited)

	Year to Date Ended June 30,
	2014			2013
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures on property and equipment	$	(9,743,322	)	$	(15,754,991	)
Proceeds from sale of property		307,600			338,029
Decrease (increase) in noncurrent receivable from affiliate		95,634			(293	)
NET CASH USED BY INVESTING ACTIVITIES		(9,340,088	)		(15,417,255	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing		624,457			872,754
Payments on borrowings		(294,830	)		(351,903	)
Change in borrowing on line of credit		(6,440,000	)		7,050,000
Line of credit financing costs		(45,249	)		(532,276	)
Cash dividends to preferred stockholders		(98,960	)		(59,850	)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(6,254,582	)		6,978,725
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,037,416			(433,515	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,194,511			5,285,022
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	6,231,927		$	4,851,507
Supplemental disclosure of cash flow information:
Interest payments (net of interest capitalized)	$	125,023		$	(125,379	)
Interest capitalized	$	501,408		$	538,811
Supplemental disclosure of significant non-cash activity:
Preferred dividends paid in kind	$	4,133,380		$	2,228,545

The accompanying notes are an integral part of these financial statements.

9

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BASIS OF PRESENTATION

These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments necessary for a fair statement of the results for the periods reported.  All such adjustments are of a normal recurring nature unless disclosed otherwise.  These consolidated financial statements, including notes, have been condensed and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2013 and the notes thereto.

NOTE B – FAIR VALUE MEASUREMENTS

Certain financial instruments are reported at fair value on the Consolidated Balance Sheets.  Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price.  To estimate an exit price, a three-level hierarchy is used.  The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels.  Yuma uses a market valuation approach based on available inputs and the following methods and assumptions to measure the fair values of its assets and liabilities, which may or may not be observable in the market.

Fair Value of Other Financial Instruments – The carrying values of financial instruments comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments.

Derivatives – The fair values of the Company’s commodity derivatives are considered Level 2 as their fair values are based on third-party pricing models which utilize inputs that are either readily available in the public market, such as natural gas and oil forward curves and discount rates, or can be corroborated from active markets or broker quotes.  These values are then compared to the values given by Yuma’s counterparties for reasonableness.  The Company is able to value the assets and liabilities based on observable market data for similar instruments, which results in the Company using market prices and implied volatility factors related to changes in the forward curves.  Derivatives are also subject to the risk that counterparties will be unable to meet their obligations.  Because the Company’s commodity derivative counterparty was Société Générale at June 30, 2014, Yuma has not considered non-performance risk in the valuation of the Company’s derivatives.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable.  Level 3 financial liabilities consist of embedded derivatives related to the conversion features in the Series A Preferred Stock issued and outstanding July 1, 2011, and the Series B Preferred Stock issued and outstanding in July and August of 2012, for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  Yuma has valued the automatic conditional conversion, re-pricing/down-round, change of control, default and follow-on offering provisions using a Monte Carlo simulation model, with the assistance of an independent valuation consultant.  These models incorporate transaction details such as the stock price of comparable companies in the same industry, contractual terms, maturity, and risk free interest rates, as well as assumptions about future financings, volatility, and holder behavior as of issuance, and each quarter thereafter for each of the Series A and the Series B Preferred Stock.

10

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – FAIR VALUE MEASUREMENTS – Continued

	Fair value measurements at June 30, 2014
			Significant
	Quoted prices		other		Significant
	in active		observable		unobservable
	markets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Commodity derivatives - oil	$	-	$	233,626	$	-	$	233,626
Total assets	$	-	$	233,626	$	-	$	233,626
Liabilities:
Commodity derivatives - gas	$	-	$	847,779	$	-	$	847,779
Commodity derivatives - oil		-		1,098,799		-		1,098,799
Preferred stock derivative liability		-		-		55,794,328		55,794,328
Total liabilities	$	-	$	1,946,578	$	55,794,328	$	57,740,906

	Fair value measurements at December 31, 2013
			Significant
	Quoted prices		other		Significant
	in active		observable		unobservable
	markets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Commodity derivatives - oil	$	-	$	818,637	$	-	$	818,637
Total assets	$	-	$	818,637	$	-	$	818,637
Liabilities:
Commodity derivatives - gas	$	-	$	472,564	$	-	$	472,564
Commodity derivatives - oil		-		423,217		-		423,217
Preferred stock derivative liability		-		-		51,290,414		51,290,414
Total liabilities	$	-	$	895,781	$	51,290,414	$	52,186,195

Commodity derivative instruments listed above include collars, swaps, and 3-way collars.  For additional information on the Company’s commodity derivatives, see Note C – Commodity Derivative Instruments.

11

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE B – FAIR VALUE MEASUREMENTS – Continued

Debt – The Company’s debt is recorded at the carrying amount on its Consolidated Balance Sheets.  For further discussion of the Company’s debt, please see Note F – Debt.  The carrying amount of floating-rate debt approximates fair value because the interest rates are variable and reflective of market rates.

Asset Retirement Obligations (ARO’s) – The Company estimates the fair value of ARO’s based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates.

At June 30, 2014, level 3 inputs were used as inputs to a Monte Carlo option pricing model to calculate the value of preferred shares and common shares, resulting in a value per share on a fully diluted and as-converted basis of $3,061.  The actual simulation considered an approximate log-normal distribution for the market capital of the Company, and was estimated to evolve monthly over time (two steps per month) through February 28, 2015.  It is assumed that, in the event of a failed merger or other events, there is some modest probability that at the end of 2014 or early in 2015, the Company will either complete a Liquidity Event (as defined in Note D – Stock Awards and Their Treatment) or be sold.  Each simulation considered and accounted for the probability of the completion of a Liquidity Event with some probability in each half-month time period in 2014.  The volatility was assumed to be 39.45% and was derived from implied volatilities of a number of public companies (tickers: AXAS, CRK, CRZO, GDP, PQ, SFY, SGY and WRES) adjusted for Yuma’s relatively lower amount of financial leverage at June 30, 2014.

A summary of the value and the changes in Yuma’s assets and liabilities classified as Level 3 measurements during the period ended June 30, 2014 is presented below:

	Preferred Stock
	Derivative Liability
June 30, 2014	$	55,794,328
December 31, 2013		51,290,414
Total change	$	4,503,914

NOTE C – COMMODITY DERIVATIVE INSTRUMENTS

Objective and Strategies for Using Commodity Derivative Instruments – In order to mitigate the effect of commodity price uncertainty and enhance the predictability of cash flows relating to the marketing of the Company’s crude oil and natural gas, Yuma enters into crude oil and natural gas price commodity derivative instruments with respect to a portion of the Company’s expected production.  The commodity derivative instruments used include variable to fixed price commodity swaps, two-way and three-way collars.

12

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE C – COMMODITY DERIVATIVE INSTRUMENTS – Continued

The fixed price swap and two-way collar contracts entitle Yuma (floating price payor) to receive settlement from the counterparty (fixed price payor) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price.  Yuma would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or selling price, which would be the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price with respect to each calculation period.  The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price with respect to each calculation period.

A three-way collar consists of a two-way collar contract combined with a put option contract sold by Yuma with a strike price below the floor price of the two-way collar.  The Company receives price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price.  If commodity prices fall below the sold put option strike price, Yuma receives the cash market price plus the difference between the two put option strike prices.  This type of instrument allows Yuma to capture more value in a rising commodity price environment, but limits the benefits in a downward commodity price environment.

While these instruments mitigate the cash flow risk of future reductions in commodity prices, they may also curtail benefits from future increases in commodity prices.

Yuma elected to discontinue hedge accounting for all commodity derivative instruments beginning with the 2013 financial year.  The balance in other comprehensive income (“OCI”) at year-end 2012 will remain in accumulated other comprehensive income (“AOCI”) until such time that the original hedged forecasted transaction occurs.  The last of these contracts will expire in December 2016.  Starting with year 2013, mark-to-market adjustments to the contracts that were in AOCI at year-end 2012 will not be made to AOCI, but instead are recognized in earnings, as are all other commodity derivative contracts going forward.  As a result of discontinuing the application of hedge accounting, Yuma’s earnings are potentially more volatile.

See Note B – Fair Value Measurements for a discussion of methods and assumptions used to estimate the fair values of the Company’s commodity derivative instruments.

Counterparty Credit Risk – Commodity derivative instruments expose Yuma to counterparty credit risk.  The Company’s commodity derivative instruments are with Société Générale (“SocGen”) which is rated “A” by Standard and Poor’s, “A2” by Moody’s,  and “A” by Fitch.  Commodity derivative contracts are executed under master agreements which allow Yuma, in the event of default, to elect early termination of all contracts.  If Yuma chooses to elect early termination, all asset and liability positions would be netted and settled at the time of election.

Commodity derivative instruments open as of June 30, 2014 are provided below.  Natural gas prices are New York Mercantile Exchange (“NYMEX”) Henry Hub prices, and crude oil prices are NYMEX West Texas Intermediate, except for the oil swaps noted below that are based on Argus Light Louisiana Sweet.

13

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE C – COMMODITY DERIVATIVE INSTRUMENTS – Continued

	Prices are Weighted Averages
	2014		2015			2016
	Settlement		Settlement			Settlement
NATURAL GAS (MMBtu):
3-way collars
Volume		749,285		2,377,371			1,122,533
Ceiling sold price (call)	$	4.37	$	4.47		$	4.35
Floor purchased price (put)	$	4.08	$	4.00		$	4.10
Floor sold price (short put)	$	3.30	$	3.25		$	3.25
Swaps
Volume		752,266		458,622			-
Price	$	4.05	$	4.08			-
Reverse Swaps
Volume		142,233		293,234			-
Price	$	4.27	$	4.33			-
CRUDE OIL (Bbls):
3-way collars
Volume		23,700		89,512			70,263
Ceiling sold price (call)	$	103.65	$	104.36		$	106.39
Floor purchased price (put)	$	90.95	$	86.49		$	92.38
Floor sold price (short put)	$	69.37	$	65.82		$	72.38
Swaps
Volume		121,434		-			-
Price	$	94.03		-			-
Reverse Swaps
Volume		45,840		-			-
Price	$	95.30		-			-
Swaps at Argus Light Louisiana Sweet
Volume		17,345		-			-
Price	$	99.40		-			-
Sold puts
Volume		27,000		-			-
Floor sold price (short put)	$	70.00		-			-
Put Spread
Volume		-		27,588			-
Floor purchased price (put)		-	$	90.00	*		-
Floor sold price (short put)		-	$	75.00	*		-
* Contracts include a premium to be paid by Yuma of $5.56 per barrel as the contracts mature ($153,389 total
premium). The premium is not included in these prices.

14

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE C – COMMODITY DERIVATIVE INSTRUMENTS – Continued

Derivatives for each commodity are netted on the Consolidated Balance Sheets as they are all contracts with the same counterparty.  The following table presents the fair value and balance sheet location of each classification of commodity derivative contracts on a gross basis without regard to same-counterparty netting:

	Fair value as of
	June 30,			December 31,
	2014			2013
Asset commodity derivatives:
Current assets	$	1,036,103		$	1,109,403
Noncurrent assets		1,471,619			2,861,225
		2,507,722			3,970,628
Liability commodity derivatives:
Current liabilities		(2,799,575	)		(1,786,535	)
Noncurrent liabilities		(1,421,099	)		(2,261,237	)
		(4,220,674	)		(4,047,772	)
Total commodity derivative instruments	$	(1,712,952	)	$	(77,144	)

Sales of natural gas and crude oil on the Consolidated Statements of Operations are comprised of the following:

	Quarter Ended						Year to Date Ended
	June 30,						June 30,
	2014			2013			2014			2013
Sales of natural gas and crude oil	$	11,709,051		$	6,810,757		$	24,016,069		$	12,254,055
Gains (losses) realized on commodity derivatives		(1,044,416	)		(84,349	)		(2,041,047	)		(242	)
Gains (losses) unrealized on commodity derivatives		(708,547	)		1,938,452			(1,686,933	)		1,262,839
Amortized gains from benefit of sold qualified gas options		23,437			18,150			46,875			36,300
Total sales of natural gas and crude oil	$	9,979,525		$	8,683,010		$	20,334,964		$	13,552,952

15

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE C – COMMODITY DERIVATIVE INSTRUMENTS – Continued

A reconciliation of the components of accumulated other comprehensive income (loss) in the Consolidated Statements of Changes in Equity is presented below:

	Year to Date Ended						Year Ended
	June 30, 2014						December 31, 2013
	Before tax			After tax			Before tax			After tax
Balance, beginning of period	$	63,041		$	38,770		$	437,140		$	268,841
Other reclassifications due to expired contracts previously subject to hedge accounting rules		51,125			31,442			(301,499	)		(185,422	)
Amortized gains from benefit of sold qualified options realized in income		(46,875	)		(28,828	)		(72,600	)		(44,649	)
Balance, end of period	$	67,291		$	41,384		$	63,041		$	38,770

NOTE D – STOCK AWARDS AND THEIR TREATMENT

On April 1, 2014, the Company granted 44 RSA’s to employees in lieu of cash awards for 2013 under the 2013 Annual Incentive Plan that vest immediately at the completion of a Liquidity Event and any underwriter lock-up period, subject to continued service as an employee through such time.  Should an employee leave the Company, any unvested shares are forfeited.

On May 20, 2014, the Company granted 451 RSA’s to employees with a vesting schedule of one-third May 20, 2015, one-third January 1, 2016 and one-third January 1, 2017, subject to the completion of a Liquidity Event and any underwriter lock-up period.  Should an employee leave the Company, any unvested shares are forfeited.

The term “Liquidity Event” means either (i) the closing of an initial public offering of Company securities raising gross proceeds of at least $40 million, or (ii) the closing of a merger or stock exchange between the Company or its stockholders pursuant to which the Company stockholders own in excess of 50% of the common equity of the surviving company and such surviving company is subject to the reporting obligations under Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On May 20, 2014, the Board of Directors recommended amending the vesting schedules to defer the first vesting of substantially all of the outstanding RSA’s to April 1, 2015.  This recommendation was implemented by Management.

16

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE D – STOCK AWARDS AND THEIR TREATMENT – Continued

A summary of the status of the RSA’s and changes for the year to date ending June 30, 2014 is presented below.

	Number of		Weighted
	unvested		average
	RSA		grant-date
	shares		fair value
Unvested shares as of January 1, 2014		2,739	$2,542 per share
Granted on March 6, 2014		259	$2,946 per share
Granted on April 1, 2014		44	$2,946 per share
Granted on May 20, 2014		451	$2,998 per share
Vested		-
Forfeited		-
Unvested shares as of June 30, 2014		3,493	$2,636 per share

‘

On April 1, 2013, the Company granted 163 Restricted Stock Units or “RSU’s”. In order to vest, an employee must have continuous service with the Company from time of the grant through April 1, 2016, the Vesting Date.  The RSU’s may be settled in cash and do not require the eventual issuance of common stock (although it is an election available to the Company); consequently, the awards are liability based and the booked valuation will change as the market value for common stock (as determined by an outside consulting firm) changes.  Compensation expense is recognized over the three-year vesting period.

A summary of the status of the unvested RSU’s and changes during the year to date ended June 30, 2014 is presented below.

	Number of			Weighted
	unvested			average
	RSU			grant-date
	shares			fair value
Unvested shares as of January 1, 2014		158		$2,062 per share
Forfeited		(9	)	$2,062 per share
Unvested shares as of June 30, 2014		149		$2,062 per share

17

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE E – EARNINGS PER COMMON SHARE

Earnings per common share are computed by dividing earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the period.  Potential common stock equivalents are determined using the “if converted” method.

Potentially dilutive securities for the computation of diluted weighted average shares outstanding are as follows:

	Quarter Ended				Year to Date Ended
	June 30,				June 30,
	2014		2013		2014		2013
Series A Convertible Preferred Stock		18,888		16,609		18,882		16,200
Series B Convertible Preferred Stock		9,992		9,450		9,991		9,449
Restricted Stock Awards		3,014		1,923		2,798		967
Restricted Stock Units		149		163		149		82
		32,043		28,145		31,820		26,698

The Company excludes convertible preferred stock and stock-based awards whose effect would be anti-dilutive from the calculation.  For the quarters and year to date periods ended June 30, 2014 and 2013, adjusted earnings were losses, therefore common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive.

NOTE F – DEBT

	June 30,			December 31,
	2014			2013
Variable rate revolving credit facility payable to Société Générale, OneWest Bank, FSB, and View Point Bank, N.A., maturing May 20, 2017, with possible acceleration (see below), secured by oil and natural gas reserves held by Yuma Exploration and Production Company, Inc. and guaranteed by YEI.	$	24,775,000		$	31,215,000
Installment loan due February 28, 2015, originating from the financing of insurance premiums at 3.65% interest rate.		507,654			178,027
		25,282,654			31,393,027
Less:  Current portion		(507,654	)		(178,027	)
Total long-term debt	$	24,775,000		$	31,215,000

18

Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE F – DEBT – Continued

On February 13, 2013, the credit facility was amended to bring SocGen in as a new participant and as a replacement for Union Bank N. A. (“Union”) as the Administrative Agent, and to remove Amegy from the syndication (although still remaining Yuma’s bank for operations).  The participation allocation became 68.75% for SocGen and 31.25% for Union.  The new interest rate margins are as follows:

				LIBOR
Borrowing base utilization	Prime margin			margin
Utilization > 90%		2.25	%		3.25	%
75% < utilization < 90%		2.00	%		3.00	%
50% < utilization < 75%		1.75	%		2.75	%
25% < utilization < 50%		1.50	%		2.50	%
Utilization < 25%		1.25	%		2.25	%

On May 20, 2013, a third amendment to the credit agreement brought in OneWest Bank, FSB (“OneWest”) to replace Union with new participation equal for SocGen and OneWest at 50/50.  With the new amendment, the credit agreement now matures May 20, 2017; provided, however, that if the Series A Preferred Stock is not terminated or the redemption date of that series is not extended past May 20, 2018, and changed on or prior to January 1, 2016, the maturity date of the credit agreement accelerates to no later than April 30, 2016.  The fee paid to extend the maturity date was $216,000, and is being amortized over the life of the loan.

On September 27, 2013, the Borrowing Base Redetermination Agreement and Assignment brought in View Point Bank, N.A. (“View Point”) as a third lender in the credit agreement.  Participating percentages at September 27, 2013 became 37.5% for SocGen, 37.5% for OneWest and 25% for View Point.

Costs paid to SocGen to bring them into the syndicate include a $150,000 arrangement fee, an $88,000 upfront fee, and $87,598 in legal fees.  Costs paid to replace Union with OneWest were a $50,000 arrangement fee and $37,061 in legal fees.  On September 27, 2013, Yuma paid SocGen a $24,000 redetermination fee whereby the borrowing base was increased $4 million to $40 million.  Legal fees for that redetermination were $4,080.  Effective April 22, 2014, Yuma entered into the Fourth Amendment to its Credit Agreement with its administrative agent SocGen and two additional banks making up its senior facility.  This amendment, among other things, provides for a borrowing base of $40 million, and an additional non-conforming borrowing base over and above the conforming base of $4.5 million.  There was a redetermination fee of $20,250.  All these costs are being amortized over the life of the credit facility.  SocGen is also paid an annual administrative fee each February of $25,000 amortized over each year.  The unamortized Amegy and Union costs of $123,925 and $189,727 were written off immediately upon their exit from the syndicate.  SocGen also required all commodity derivatives be moved from BP Corporation North America, Inc. to SocGen and charged a fee of $175,000 for the novation.  This fee was fully expensed in the second quarter of 2013.

19

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE F – DEBT – Continued

The following summarizes interest expense for the periods ending June 30, 2014 and 2013.

	Quarter Ended						Year to Date Ended
	June 30,						June 30,
	2014			2013			2014			2013
Credit Facility	$	262,714		$	312,082		$	580,625		$	524,483
Credit Facility commitment fees		18,482			10,548			28,076			24,913
Amortization and write offs of Credit Facility loan costs		47,167			231,039			93,240			395,167
Insurance installment loan		3,642			5,568			4,289			6,567
Other interest charges		358			-			2,453			12,393
Capitalized interest		(264,507	)		(299,748	)		(501,408	)		(538,811	)
Total interest expense	$	67,856		$	259,489		$	207,275		$	424,712

The terms of the credit agreement require Yuma Exploration and Production Company, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Exploration”), to meet a specific current ratio, interest coverage ratio, and a funded debt to EBITDA ratio.  In addition, the credit facility requires the guarantee of Yuma.  Exploration was in compliance with the loan covenants as of June 30, 2014.

NOTE G – INCOME TAXES

The following summarizes the income tax expense (benefit) and effective tax rates:

	Three Months Ended
	June 30,
	2014			2013
Consolidated Net Income (Loss) before Income Taxes	$	(7,835,697	)	$	(25,063,451	)
		(285,000	)		(73,600	)
Income Tax Expense (Benefit) Effective Tax Rate		3.64	%		0.29	%

The differences between the U. S. federal statutory rate of 35% and Yuma’s effective tax rates for the three months ended June 30, 2014 and 2013 are due primarily to the tax effects of the excess of book basis over the tax basis in the full cost pool and the net operating loss carryforwards for each period.

20

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H – CONTINGENCIES

1.   Certain Legal Proceedings

From time to time, the Company is party to various legal proceedings arising in the ordinary course of business.  While the outcome of lawsuits cannot be predicted with certainty, the Company is not currently a party to any proceeding that it believes, if determined in a manner adverse to the Company, could have a potential material adverse effect on the Company’s financial condition, results of operations, or cash flows.

2.   Environmental Remediation Contingencies

As of June 30, 2014, there were no known environmental or other regulatory matters related to the Company’s operations that were reasonably expected to result in a material liability to the Company.  The Company’s operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection.

Yuma has been named as one of 97 defendants in a matter entitled Board of Commissioners of the Southeast Louisiana Flood Protection Authority – East, Individually and As the Board Governing the Orleans Levee District, the Lake Borgne Basin Levee District, and the East Jefferson Levee District v. Tennessee Gas Pipeline Company, LLC, et al., Civil District Court for the Parish of Orleans, State of Louisiana, No. 13-6911, Division “J” - 5, now removed as Civil Action No. 13-5410, before the United Stated District Court, Eastern District of Louisiana.  Plaintiff filed the suit on July 24, 2013 seeking damages and injunctive relief arising out of defendants’ drilling, exploration, and production activities from the early 1900s to the present day in coastal areas east of the Mississippi River in Southeast Louisiana.

The suit alleges that defendants’ activities have caused “removal, erosion, and submergence” of coastal lands resulting in significant reduction or loss of the protection such lands afforded against hurricanes and tropical storms.  Plaintiff alleges that it now faces increased costs to maintain and operate the man-made hurricane protection system and may reach the point where that system no longer adequately protects populated areas.

Plaintiff lists hundreds of wells, pipelines, and dredging events as possible sources of the alleged land loss. Yuma is named in association with 11 wells, four rights-of-way, and one dredging permit.  The suit does not specify any deficiency or harm caused by any individual activity or facility.

Although the suit references various federal statutes as sources of standards of care, plaintiff claims that all causes of action arise under state law: negligence, strict liability, natural servitude of drain, public nuisance, private nuisance, and as third-party beneficiary under breach of contract.

The lawsuit is in its early stages.  No broad activity is expected until after the federal court decides whether to remand the matter to state court.  The court retaining jurisdiction will then set a scheduling order under which preliminary motions will be heard, likely over the next several months.  Potential motions to dismiss are numerous, including, challenges to plaintiff’s right to bring suit, no cause of action, and improper parties.

21

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE H – CONTINGENCIES – Continued

Recently, two seats on the Levee Board have expired and are expected to be replaced by the Governor in the near future by individuals not in favor of continuing the lawsuit.  Defendants in the matter are awaiting these appointments.  At this time, the Company cannot predict the outcome of this case and, in management’s opinion, assess any potential liability; therefore no liability has been recorded on the Company’s books.

NOTE I – MERGER AGREEMENT

On February 6, 2014, Yuma and Pyramid Oil Company (“Pyramid”), which is traded on the NYSE MKT (“PDO”), announced they had entered into a definitive merger agreement (the “initial merger agreement”) for an all-stock transaction.  Upon completion of the transaction, which is subject to the approval of stockholders of both companies, Pyramid will change its name to “Yuma Energy, Inc.,” and relocate its headquarters to Houston, Texas, while maintaining offices in Bakersfield, California, to oversee its California operations.

Under the terms of the merger agreement, Pyramid will issue an aggregate of approximately 66 million shares of its common stock to Yuma stockholders, resulting in former Yuma stockholders owning approximately 93% of the combined company.  Upon closing, there will be an aggregate of approximately 71 million shares of common stock outstanding.  The transaction is expected to qualify as a tax-deferred reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”).

On April 25, 2014, Pyramid Delaware Merger Subsidiary, Inc., a Delaware corporation (“Pyramid Delaware”) and wholly-owned subsidiary of Pyramid, filed a Registration Statement on Form S-4 (“Form S-4”) with the SEC to effectuate (i) the proposed reincorporation of Pyramid from California to Delaware through the merger of Pyramid with and into Pyramid Delaware (the “reincorporation”), and (ii) the merger of Pyramid Merger Subsidiary, Inc., a Delaware corporation and wholly-owned subsidiary of Pyramid Delaware (“Merger Subsidiary”), with and into Yuma, with Yuma becoming a wholly-owned subsidiary of Pyramid Delaware (the “merger”). The Form S-4 was subsequently amended on June 13, 2014 and July 16, 2014. On August 1, 2014, Pyramid Delaware requested that the Form S-4 be withdrawn. On August 1, 2014, Pyramid, Pyramid Delaware, Merger Subsidiary and Yuma entered into an Amended and Restated Agreement and Plan of Merger and Reorganization (the “merger agreement”) which maintained the same economics of the transaction, but eliminated the reincorporation. Pyramid subsequently filed a Registration Statement on Form S-4 (the “Pyramid Form S-4”) with the SEC on August 4, 2014 and amended on August 7, 2014, and was declared effective on August 8, 2014.

On September 10, 2014, the merger of the two companies was approved by the common stockholders of Pyramid and the common and preferred stockholders of Yuma, as well as other customary approvals, including authorization to list the newly issued shares on the NYSE MKT.

As a result of the merger agreement with Pyramid Oil Company, the expenses of approximately $1.6 million incurred by the Company in exploring several alternative options to go public were written off during the first quarter of 2014.

22

Yuma Energy, Inc.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE J – SUBSEQUENT EVENTS

On July 9, 2014, Yuma Exploration and Production Company, Inc. and other Yuma entities were named in a lawsuit concerning the death of an employee of Timco Services during the drilling of the Crosby 12 #1 well.  Yuma has tendered its defense to its liability insurance carriers who are responding.

The Company has evaluated subsequent events through September 22, 2014, the date these financial statements were available to be issued.  The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements, except as noted above or already recognized or disclosed in the Company’s filings with the SEC.

23

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On September 10, 2014, Pyramid Oil Company (“Pyramid”) completed its acquisition of Yuma Energy, Inc. (“Yuma”) when a wholly-owned subsidiary of Pyramid merged with and into Yuma, with Yuma becoming a wholly-owned subsidiary of Pyramid (the “merger”). At the closing of the merger, Pyramid issued approximately 66,336,701 shares of shares of common stock, no par value per share of Pyramid (“Common Stock”) and Pyramid changed its name to “Yuma Energy, Inc.”

The unaudited pro forma condensed combined financial statements have been derived from and should be read in conjunction with (i) Pyramid’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and the notes related thereto; and (ii) Yuma’s consolidated financial statements for the year ended December 31, 2013 and 2012, and for the six months ended June 30, 2014 and 2013 and the notes related thereto attached as Exhibit 99.2 to Amendment No. 1 to the Current Report on Form 8-K.

The unaudited pro forma condensed combined financial information and explanatory notes combine the historical financial statements of Pyramid and Yuma as of June 30, 2014 with respect to the balance sheet information (using currently available fair value information for Pyramid) and as of January 1, 2013 (with respect to the statements of operations information for the six months ended June 30, 2014 and for the year ended December 31, 2013). The unaudited pro forma condensed combined financial information shows the pro forma impact of the merger of Pyramid and Yuma on the historical financial position and results of operations under the purchase method of accounting with Yuma treated as the acquirer. Under this method of accounting, the assets and liabilities of Pyramid are recorded at their estimated fair values as of the date the merger is effective. As part of the merger, Yuma’s outstanding preferred stock was converted to Common Stock and Yuma’s derivative liability was reclassified to equity of Pyramid and adjustments have been made to reflect the conversion of Yuma’s preferred stock to Common Stock.

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined companies had the companies actually been combined and had the impact of possible revenue enhancements and expense efficiencies, among other factors, been considered.

1

Yuma Energy, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Balance Sheet

As of June 30, 2014

	Yuma Historical			Pyramid Historical			Merger Pro Forma Adjustments			Yuma Pro Forma Combined
Current assets:
Cash and cash equivalents	$	6,231,927		$	4,355,590		$	-		$	10,587,517
Short-term investments		-			2,143,028			-			2,143,028
Accounts receivable, net of allowance for doubtful accounts		12,041,683			486,632			-			12,528,315
Note receivable		4,000			-			-			4,000
Prepayments		550,252			126,839			-			677,091
Crude oil inventory		-			92,524			(92,524	)(10)		-
Deferred taxes		146,964			87,000			-			233,964
Other deferred charges		181,483			-			-			181,483
TOTAL CURRENT ASSETS		19,156,309			7,291,613			(92,524	)		26,355,398
Oil and natural gas properties:
Not subject to amortization		31,827,542			-			-			31,827,542
Subject to amortization		154,482,793			20,312,374			(9,352,574	)(1)		165,442,593
TOTAL PROPERTY AND EQUIPMENT		186,310,335			20,312,374			(9,352,574	)		197,270,135
Less:  accumulated depreciation, depletion and amortization		(96,117,943	)		(17,942,586	)		17,942,586	(1)(6)		(96,117,943	)
NET OIL AND GAS PROPERTIES		90,192,392			2,369,788			8,590,012			101,152,192
Other operating property and equipment		2,127,174			4,316,426			1,280,574	(1)		7,724,174
Less: accumulated depreciation and amortization		(1,882,430	)		(3,586,687	)		3,586,687	(1)		(1,882,430	)
Net other operating property and equipment		244,744			729,739			4,867,261			5,841,744
Other assets
Receivable from affiliate		-			-			-			-
Commodity derivatives		233,626			-			-			233,626
Long-term investments		-			1,146,674			-			1,146,674
Goodwill		-			-			3,427,576	(1)		3,427,576
Other noncurrent assets		327,879			261,380			-			589,259
TOTAL OTHER ASSETS		561,505			1,408,054			3,427,576			5,397,135
Total Assets	$	110,154,950		$	11,799,194		$	16,792,325		$	138,746,469
Current liabilities:
Current maturities of debt	$	507,654		$	-		$	-		$	507,654
Accounts payable, principally trade		22,136,930			544,977			-			22,681,907
Commodity derivatives		1,763,472			-			-			1,763,472
Asset retirement obligations		915,346			-			-			915,346
Liability for deferred compensation		-			39,166			-			39,166
Other accrued liabilities		1,900,108			85,752			1,500,000	(2)		3,485,860
TOTAL CURRENT LIABILITIES		27,223,510			669,895			1,500,000			29,393,405
Long-Term Debt
Bank debt		24,775,000			-			-			24,775,000
Other Noncurrent Liabilities
Preferred stock derivative liability, Series A and B		55,794,328			-			(55,794,328	)(7)		-
Asset retirement obligations		10,075,084			1,329,352			-			11,404,436
Commodity derivatives		183,106			-			-			183,106
Deferred taxes		12,027,841			(1,094,400	)		4,710,046	(1)		15,643,487
Restricted stock units		194,471			-			-			194,471
Other deferred credits		45,142			-			-			45,142
TOTAL OTHER NONCURRENT LIABILITIES		78,319,972			234,952			(51,084,282	)		27,470,642
Preferred Stock, Series A and Series B
Subject to mandatory redemption		40,366,251			-			(40,366,251	)(7)		-
Equity
Common stock		542			-			70,683	(7)(8)		71,225
Capital in excess of par value of common stock		2,668,923			1,847,384			128,611,491	(6)(7)(8)(10)		133,127,798
Accumulated other comprehensive income		41,384			-			-			41,384
Accumulated earnings (deficit)		(63,240,632	)		9,046,963			(21,939,316	)(2)(7)		(76,132,985	)
TOTAL EQUITY		(60,529,783	)		10,894,347			106,742,858			57,107,422
Total Liabilities and Equity	$	110,154,950		$	11,799,194		$	16,792,325		$	138,746,469

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

2

Yuma Energy, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Six Months Ended June 30, 2014

	Yuma Historical			Pyramid Historical			Merger Pro Forma Adjustments			Yuma Pro Forma Combined
Revenues
Sales of natural gas and crude oil	$	20,334,964		$	2,066,356		$	-		$	22,401,320
Other revenue		543,636			-			-			543,636
TOTAL REVENUES		20,878,600			2,066,356			-			22,944,956
Expenses
Marketing cost of sales		604,018			-			-			604,018
Lease operating		6,923,148			993,231			-			7,916,379
Re-engineering and workovers		551,911			-			-			551,911
General and administrative - stock based compensation		76,840			-			-			76,840
General and administrative - other		4,939,121			940,370			-			5,879,491
Depreciation, depletion and amortization		11,738,608			217,511			533,631	(3)		12,489,750
Asset retirement obligation accretion expense		288,089			23,490			-			311,579
Bad debt expense		29,999			-			-			29,999
Recovery of bad debts		(1,984	)		-			-			(1,984	)
TOTAL EXPENSES		25,149,750			2,174,602			533,631			27,857,983
Income (loss) from operations		(4,271,150	)		(108,246	)		(533,631	)		(4,913,027	)
Other Income (Expense)
Change in fair value of preferred stock derivative liability		(4,503,914	)		-			4,503,914	(7)		-
Interest expense		(207,275	)		-			-			(207,275	)
Interest income		2,503			19,397			-			21,900
Other, net		161			6,679			-			6,840
TOTAL OTHER INCOME (EXPENSE)		(4,708,525	)		26,076			4,503,914			(178,535	)
NET INCOME (LOSS) BEFORE INCOME TAXES		(8,979,675	)		(82,170	)		3,970,283			(5,091,562	)
Income tax expense (benefit)		(1,134,000	)		3,500			(186,771	)(5)		(1,317,271	)
NET INCOME (LOSS)		(7,845,675	)		(85,670	)		4,157,054			(3,774,291	)
Preferred Stock, Series A and Series B
Accretion		566,529			-			(566,529	)(7)		-
Dividends paid in cash		98,960			-			(98,960	)(7)		-
Dividends paid in kind		4,133,380			-			(4,133,380	)(7)		-
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(12,644,544	)	$	(85,670	)	$	8,955,923		$	(3,774,291	)
EARNINGS (LOSS) PER COMMON SHARE
Basic	$	(233.14	)	$	(0.02	)	$	0.14		$	(0.05	)
Diluted	$	(233.14	)	$	(0.02	)	$	0.14		$	(0.05	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic		54,236			4,721,418			66,503,368	(9)		71,224,786
Diluted		54,236			4,721,418			66,503,368	(9)		71,224,786

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

3

Yuma Energy, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2013

	Yuma Historical			Pyramid Historical			Merger Pro Forma Adjustments			Yuma Pro Forma Combined
Revenues
Sales of natural gas and crude oil	$	28,075,603		$	4,391,824		$	-		$	32,467,427
Other revenue		1,066,969			-			-			1,066,969
TOTAL REVENUES		29,142,572			4,391,824			-			33,534,396
Expenses
Marketing cost of sales		1,234,308			-			-			1,234,308
Lease operating		9,316,364			2,108,765			-			11,425,129
Re-engineering and workovers		2,521,707			-			-			2,521,707
General and administrative - stock based compensation		452,058			164,413			-			616,471
General and administrative - other		5,603,475			1,245,695			-			6,849,170
Deferred compensation		-			1,063,445			-			1,063,445
Depreciation, depletion and amortization		12,077,368			507,157			701,448	(3)		13,285,973
Asset retirement obligation accretion expense		668,497			37,477			-			705,974
(Gain) loss on asset disposal		(19,307	)		(809,476	)		-			(828,783	)
Valuation allowances		-			151,243			(151,243	)(4)		-
Bad debt expense		193,601			-			-			193,601
Recovery of bad debts		(2,520	)		-			-			(2,520	)
TOTAL EXPENSES		32,045,551			4,468,719			550,205			37,064,475
Income (loss) from operations		(2,902,979	)		(76,895	)		(550,205	)		(3,530,079	)
Other Income (Expense)
Change in fair value of preferred stock derivative liability		(26,258,559	)		-			26,258,559	(7)		-
Interest expense		(567,676	)		-			-			(567,676	)
Interest income		7,336			40,519			-			47,855
Bank mandated commodity derivatives novation cost		(175,000	)		-			-			(175,000	)
Other, net		(72,953	)		-			-			(72,953	)
TOTAL OTHER INCOME (EXPENSE)		(27,066,852	)		40,519			26,258,559			(767,774	)
NET INCOME (LOSS) BEFORE INCOME TAXES		(29,969,831	)		(36,376	)		25,708,354			(4,297,853	)
Income tax expense (benefit)		3,080,272			(193,645	)		(192,572	)(5)		2,694,055
NET INCOME (LOSS)		(33,050,103	)		157,269			25,900,926			(6,991,908	)
Preferred Stock, Series A and Series B
Accretion		1,101,972			-			(1,101,972	)(7)		-
Dividends paid in cash		145,900			-			(145,900	)(7)		-
Dividends paid in kind		5,412,281			-			(5,412,281	)(7)		-
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(39,710,256	)	$	157,269		$	32,561,079		$	(6,991,908	)
EARNINGS (LOSS) PER COMMON SHARE
Basic	$	(732.18	)	$	0.03		$	0.49		$	(0.10	)
Diluted	$	(732.18	)	$	0.03		$	0.49		$	(0.10	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic		54,236			4,888,085			66,336,701			71,224,786
Diluted		54,236			4,888,085			66,336,701			71,224,786

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

4

Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

1. These adjustments reflect the elimination of the components of Pyramid’s historical stockholders’ equity, the estimated value of consideration to be paid by Yuma in the merger using the closing price of Common Stock on September 10, 2014 and to reflect the adjustments to the historical book values of Pyramid’s assets and liabilities as of June 30, 2014 to their estimated fair values, in accordance with acquisition accounting. The following table reflects the preliminary allocation of the total purchase price of Pyramid to the assets acquired and the liabilities assumed and the resulting goodwill based on the preliminary estimates of fair value:

Purchase Price(i):
Shares of Common Stock held by Pyramid stockholders		4,888,085
Total Common Stock issued to Pyramid stockholders		4,888,085
Common Stock price	$	4.70
Fair value of Common Stock issued	$	22,974,000
Total purchase price	$	22,974,000
Estimated Fair Value of Liabilities Assumed:
Current liabilities	$	669,895
Long-term deferred tax liability(ii)		3,615,646
Fair value of options assumed by Yuma(iv)		95,150
Other non-current liabilities		1,329,352
Amount attributable to liabilities assumed		5,710,043
Total purchase price plus liabilities assumed		28,684,043
Estimated Fair Value of Assets Acquired:
Current assets		7,291,613
Natural gas and oil properties(iii)		10,959,800
Net other operating property and equipment		5,597,000
Other non-current assets		1,408,054
Amount attributable to assets acquired		25,256,467
Goodwill(i)	$	3,427,576
Eliminate Pyramid historical additional paid-in capital	$	(1,847,384	)
Fair value of Common Stock issued net of par value		22,969,112
Pro forma adjustments to additional paid-in capital	$	21,121,728

(i) Under the terms of the merger agreement, Pyramid stockholders own 7% of the combined entity. The total purchase price is based upon the closing price of $4.70 per share of Common Stock on September 10, 2014 and 4,888,085 shares of Common Stock outstanding at the effective time of the merger.

(ii) Yuma received a carryover tax basis in Pyramid’s assets and liabilities because the merger was not a taxable transaction under the United States Internal Revenue Code of 1986, as amended (the “Code”). Based upon the preliminary purchase price allocation, a step-up in financial reporting carrying value related to the property acquired from Pyramid, net of the existing Pyramid deferred tax asset of $1.1 million, is expected to result in a combined deferred tax liability of approximately $15.6 million, an increase of approximately $4.7 million to Yuma’s and Pyramid’s existing $10.9 million net deferred tax liability.

(iii) Weighted average commodity prices utilized in the determination of the pro forma fair value of natural gas and oil properties were $3.92 per Mcf of natural gas and $94.28 per barrel of oil, after adjustment for transportation fees and regional price differentials. An increase or decrease in commodity prices as of the closing date of the merger will result in a corresponding increase or decrease in the fair value of the properties and related deferred tax liabilities and a decrease or increase to goodwill.

(iv) To adjust for the outstanding stock options to purchase Common Stock that will be assumed by Yuma after the merger, assuming that no options are exercised prior to the effective time of the merger. The $95,150 fair value of the assumed options was calculated using Black-Scholes valuation model with assumptions for the following variables: closing price of Common Stock on the closing date, risk-free interest rates, and Pyramid’s stock volatility.

5

2.           Pro forma adjustments to certain components of stockholders’ equity are as follows:

Eliminate Pyramid’s historical retained earnings	$	(9,046,963	)
Accrue estimated transaction costs incurred by Yuma (i)		(1,500,000	)
Pro forma adjustments to accumulated earnings (deficit)	$	(10,546,963	)

(i) To accrue for estimated transaction costs of $1.5 million related to the merger with Pyramid not reflected in the financial statements. No adjustments have been made to the unaudited pro forma income statement as these costs are non-recurring in nature.

3. To adjust the historical depletion, depreciation and amortization (DD&A) provision to the estimated total for the combination of Yuma and Pyramid under the Full Cost method of accounting. The assets of Yuma at cost were combined with Pyramid’s assets based on the fair market value of the oil and gas properties and other operating property and equipment of Pyramid as estimated at the time of the merger. The DD&A was recalculated assuming the combined company’s assets under the Full Cost method of accounting. For oil and gas properties, the units of production methodology was applied consistent with the Full Cost method of accounting. For other property and equipment the assets were depreciated based upon the estimated useful life of the properties. This resulted in an increase to DD&A of $701,448 for the year ended December 31, 2013 and $533,631 for the six months ended June 30, 2014.

4. To eliminate the historical oil and natural gas properties valuation allowance as valuation allowances of oil and natural gas properties are evaluated on a country by country cost center basis under Full Cost rules as compared to a field by field basis under Successful Efforts rules. There would not have been an impairment as measured under Full Cost accounting, therefore an adjustment is necessary to eliminate the historical valuation allowance recorded in the year ended December 31, 2013.

5. To adjust the income tax provision for the estimated effects of combining Yuma’s and Pyramid’s operations and other, pre-tax pro forma adjustments (which were adjusted for income taxes using a combined federal and state tax rate of 35%).

6. To adjust Pyramid’s accumulated DD&A and valuation allowances in the amount of $1,794,059 ($1,260,428 adjustment to convert to full cost as of December 31, 2013, plus the increase to depletion year to date June 30, 2014 of $533,631) to what would have been recorded had it been reporting its oil and gas operations under the Full Cost method of accounting.

7. To record the conversion of Yuma’s Series A and Series B preferred stock to Yuma common stock and to record the transfer and elimination of the associated derivative liability.  As part of the merger, Yuma’s preferred stock was converted into Yuma common stock, and as a result there will be no future accretion expense or dividends related to the Yuma preferred stock. The adjustments to the pro forma balance sheet relating to the derivative conversion takes place in two steps. The first step is to mark the derivative liability to market (an adjustment of $11,392,354 at closing) increasing the overall derivative liability to $67,186,682. The increase in the derivative liability results in an increase to accumulated deficit by $11,392,354. The second step is to record the conversion of Yuma’s Series A and Series B preferred stock balance of $40,366,250 and derivative liability of $67,186,682 to common stock which results in a credit to common stock for $22,884 and a credit to capital in excess of par of $107,530,048.  In the adjustments to the pro forma income statement, the change in fair value of the preferred stock derivative liability was eliminated along with the accretion and dividend expenses related to Yuma’s preferred stock.

8. To record the issuance of 66,336,701 shares of Common Stock to the holders of Yuma common stock (including the conversion of Yuma preferred stock to Yuma common stock), plus an additional 100,000 shares to certain employees, directors and consultants of Pyramid which vest upon the change in control.

9. In addition to the shares in Note 8 above, 66,667 shares are also included in adjustments to convert Pyramid historical weighted average shares to historical ending shares as of June 30, 2014, resulting in a pro forma combined number of shares outstanding at the time of merger.

10. Crude oil inventory, or its fluctuations, is not significant and as such is not segregated from lease operating expenses by Yuma.  To be consistent, Pyramid’s inventory account has been reclassified to lease operating expenses.  On the Balance Sheet, the existing balance was reclassified to paid-in-capital. Since this change is immaterial in the current period, it was ignored in the Statement of Operations. This is not an accounting change for the merged companies as Pyramid is considered the acquired entity for accounting purposes.

6
 

EX-99.4

Exhibit 99.4

INDEX TO FINANCIAL STATEMENTS

	Page
Yuma Energy, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2013 and 2012	F-3
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011	F-5
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011	F-6
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2013 and 2012	F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011	F-8
Notes to Consolidated Financial Statements	F-10

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Yuma Energy, Inc.

We have audited the accompanying consolidated balance sheets of Yuma Energy, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yuma Energy, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Houston, Texas

April 24, 2014

F-2

Yuma Energy, Inc.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2013			2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,194,511		$	5,285,022
Accounts receivable, net of allowance for doubtful accounts:
Trade		10,833,211			5,792,210
CEO and employees		155,080			63,517
Other		417,850			151,538
Note receivable		4,000			4,216
Derivative instruments		-			454,882
Prepayments		433,991			1,303,541
Deferred taxes		146,964			-
Other deferred charges		162,416			146,447
Total current assets		16,348,023			13,201,373
OIL AND GAS PROPERTIES, at cost (full cost method):
Not subject to amortization		24,051,278			21,306,325
Subject to amortization		152,863,988			124,391,475
		176,915,266			145,697,800
Less:  accumulated depreciation, depletion and amortization		(84,438,840	)		(72,510,968	)
Net oil and gas properties		92,476,426			73,186,832
OTHER OPERATING PROPERTY  AND EQUIPMENT, at cost		2,066,760			2,045,484
Less:  accumulated depreciation and amortization		(1,822,925	)		(1,732,467	)
Net other operating property and equipment		243,835			313,017
OTHER ASSETS:
Receivables from affiliate		95,634			93,141
Derivative instruments		818,637			1,360
Other noncurrent assets		1,649,413			219,297
Total other assets		2,563,684			313,798
Total assets	$	111,631,968		$	87,015,020

The accompanying notes are an integral part of these financial statements.

F-3

Yuma Energy, Inc.

CONSOLIDATED BALANCE SHEETS - CONTINUED

	December 31,
	2013			2012
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of debt	$	178,027		$	183,601
Accounts payable, principally trade		15,116,560			7,905,349
Derivative instruments		677,132			-
Asset retirement obligations		1,755,650			632,975
Other accrued liabilities		1,127,283			978,449
Total current liabilities		18,854,652			9,700,374
LONG-TERM DEBT, net of current maturities:
Bank debt		31,215,000			17,875,000
OTHER NONCURRENT LIABILITIES:
Preferred stock derivative liability, Series A and B		51,290,414			25,031,855
Asset retirement obligations		8,942,029			3,600,807
Derivative instruments		218,649			-
Deferred taxes		13,160,205			10,077,292
Restricted stock units		102,532			-
Other deferred credits		69,998			11,761
Total other noncurrent liabilities		73,783,827			38,721,715
PREFERRED STOCK, Series A and B, subject to mandatory redemption		35,666,342			29,152,089
EQUITY:
Common stock		542			540
Capital in excess of par value of common stock		2,668,923			2,182,293
Accumulated other comprehensive income		38,770			268,841
Accumulated earnings (deficit)		(50,596,088	)		(10,885,832	)
Total equity		(47,887,853	)		(8,434,158	)
Total liabilities and equity	$	111,631,968		$	87,015,020

The accompanying notes are an integral part of these financial statements.

F-4

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years ended December 31,
	2013			2012			2011
REVENUES:
Sales of natural gas and crude oil	$	28,075,603		$	21,282,115		$	18,954,437
Other revenue		1,066,969			601,794			477,102
Total revenues		29,142,572			21,883,909			19,431,539
EXPENSES:
Marketing cost of sales		1,234,308			891,118			4,152,979
Lease operating		9,316,364			5,098,868			4,792,117
Re-engineering and workovers		2,521,707			433,599			1,340,127
General and administrative - stock based compensation		452,058			-			-
General and administrative - other		5,603,475			4,339,362			3,485,172
Depreciation, depletion and amortization		12,077,368			5,074,070			2,865,878
Asset retirement obligation accretion expense		668,497			265,323			239,612
(Gain) loss on asset disposal		(19,307	)		9,674			138,174
Bad debt expense		193,601			210,187			237,821
Recovery of bad debts		(2,520	)		(68,621	)		-
Total expenses		32,045,551			16,253,580			17,251,880
INCOME (LOSS) FROM OPERATIONS		(2,902,979	)		5,630,329			2,179,659
OTHER INCOME (EXPENSE):
Change in fair value of preferred stock  derivative liability - Series A in all years,  Series B in 2013 and 2012		(26,258,559	)		(17,098,504	)		(5,604,231	)
Interest expense		(567,676	)		(210,083	)		(597,223	)
Interest income		7,336			8,138			14,178
Bank mandated derivative instruments novation cost		(175,000	)		-			-
Other, net		(72,953	)		(1,039	)		166,296
Total other income (expense)		(27,066,852	)		(17,301,488	)		(6,020,980	)
NET LOSS FROM CONTINUING OPERATIONS BEFORE TAXES		(29,969,831	)		(11,671,159	)		(3,841,321	)
Income tax expense		3,080,272			3,098,309			853,496
NET LOSS FROM CONTINUING OPERATIONS		(33,050,103	)		(14,769,468	)		(4,694,817	)
DISCONTINUED OPERATIONS - PIPELINE SEGMENT		-			-			(18,038	)
NET LOSS		(33,050,103	)		(14,769,468	)		(4,712,855	)
LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST		-			-			2,525
NET LOSS ATTRIBUTABLE TO YUMA ENERGY, INC.		(33,050,103	)		(14,769,468	)		(4,715,380	)
Preferred Stock, Series A and Series B
Accretion		1,101,972			963,900			-
Dividends paid in cash		145,900			1,362,437			438,150
Dividends paid in kind		5,412,281			-			-
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(39,710,256	)	$	(17,095,805	)	$	(5,153,530	)
EARNINGS (LOSS) PER COMMON SHARE
Basic	$	(732	)	$	(317	)	$	(95	)
Diluted	$	(732	)	$	(317	)	$	(95	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic		54,236			54,000			54,000
Diluted		54,236			54,000			54,000

The accompanying notes are an integral part of these financial statements.  

F-5

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years ended December 31,
	2013			2012			2011
NET LOSS	$	(33,050,103	)	$	(14,769,468	)	$	(4,712,855	)
OTHER COMPREHENSIVE INCOME (LOSS)
Change in fair value of derivative instruments		-			1,075,885			(776,933	)
Less income taxes		-			414,217			(299,119	)
Change in fair value of derivative instruments, net of income taxes		-			661,668			(477,814	)
Reclassification of gain on settled commodity derivatives		(301,499	)		(398,604	)		(198,885	)
Less income taxes		(116,077	)		(153,463	)		(76,571	)
Reclassification of gain on settled commodity derivatives, net of income taxes		(185,422	)		(245,141	)		(122,314	)
Reclassification of gain from amortization of derivative instruments sold		(72,600	)		(128,513	)		-
Less income taxes		(27,951	)		(49,478	)		-
Reclassification of gain from amortization of derivative instruments sold, net of income taxes		(44,649	)		(79,035	)		-
OTHER COMPREHENSIVE INCOME (LOSS)		(230,071	)		337,492			(600,128	)
COMPREHENSIVE LOSS		(33,280,174	)		(14,431,976	)		(5,312,983	)
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST		-			-			2,525
COMPREHENSIVE LOSS ATTRIBUTABLE TO YUMA ENERGY, INC.	$	(33,280,174	)	$	(14,431,976	)	$	(5,315,508	)

The accompanying notes are an integral part of these financial statements.

F-6

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Years ended December 31,
	2013			2012
COMMON STOCK:
Balance at beginning of period - 54,000 shares, $.01 par	$	540		$	540
Employee restricted stock awards (236 shares)		2			-
Balance at end of period - 54,236 shares, $.01 par		542			540
CAPITAL IN EXCESS OF PAR VALUE OF COMMON STOCK:
Balance at beginning of period		2,182,293			2,182,293
Employee restricted stock awards (236 shares)		486,630			-
Balance at end of period		2,668,923			2,182,293
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance at beginning of period		268,841			(68,651	)
Comprehensive income (loss) from derivative instruments, net of income taxes		(230,071	)		337,492
Balance at end of period		38,770			268,841
ACCUMULATED EARNINGS (DEFICIT):
Balance at beginning of period		(10,885,832	)		6,209,973
Net income (loss) attributable to Yuma Energy, Inc.		(33,050,103	)		(14,769,468	)
Preferred stock accretion (Series A and B)		(1,101,972	)		(963,900	)
Preferred stock cash dividends (Series A and B)		(145,900	)		(1,362,437	)
Preferred stock dividends paid in kind (Series A and B)		(5,412,281	)		-
Balance at end of period		(50,596,088	)		(10,885,832	)
TOTAL STOCKHOLDERS' EQUITY IN YUMA ENERGY, INC.		(47,887,853	)		(8,434,158	)
NONCONTROLLING PARTNERSHIP INTEREST:
Balance at beginning of period		-			241,938
Buy out partnership interests		-			(241,938	)
Balance at end of period		-			-
TOTAL EQUITY	$	(47,887,853	)	$	(8,434,158	)

The accompanying notes are an integral part of these financial statements.

F-7

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years ended December 31,
	2013			2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net loss to net cash provided by operating activities:
Net loss	$	(33,050,103	)	$	(14,769,468	)	$	(4,712,855	)
Loss from operations of discontinued pipeline segment		-			-			18,038
Increase in fair value of preferred stock liability		26,258,559			17,098,504			5,604,231
Depreciation, depletion and amortization of  property and equipment		12,077,368			5,074,070			2,865,878
Accretion of asset retirement obligation		668,497			265,323			239,612
Stock-based compensation net of capitalized cost		452,058			-			-
Amortization of other assets and liabilities		166,608			86,421			838,303
Deferred tax expense		3,080,272			3,098,309			853,496
Bad debt expense		193,601			210,187			237,821
Recovery of bad debts		(2,520	)		(68,621	)		-
(Gain) loss on disposal of property and equipment		(19,307	)		9,674			138,174
Write off credit financing costs		313,652			30,000			104,112
Amortization of benefit from derivative instruments (sold) and purchased, net		(72,600	)		(112,508	)		-
Net derivative instrument mark-to-market (gain) loss		231,886			(1,256,918	)		(231,847	)
Other		499			3,484			-
Cash flow from direct operations		10,298,470			9,668,457			5,954,963
Changes in current operating assets and liabilities:
Accounts receivable		(5,589,957	)		407,732			(1,382,013	)
Note receivable		216			(4,216	)		-
Other current assets		869,550			(689,537	)		(1,052,802	)
Restricted cash		-			341,474			(5,172	)
Accounts payable		7,211,211			(4,770,660	)		(480,460	)
Other current liabilities		148,834			(56,514	)		336,918
Noncurrent payable to commodity hedge advisor		69,998			-			-
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
CONTINUING OPERATIONS		13,008,322			4,896,736			3,371,434
DISCONTINUED OPERATIONS		-			-			(636,113	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		13,008,322			4,896,736			2,735,321

F-8

Yuma Energy, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

	Years ended December 31,
	2013			2012			2011
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures on property, plant and equipment	$	(26,248,133	)	$	(31,796,630	)	$	(10,676,504	)
Proceeds from sale of property		902,166			1,386,649			-
Increase in noncurrent receivable from affiliate		(2,493	)		(2,486	)		(2,481	)
NET CASH USED BY INVESTING ACTIVITIES		(25,348,460	)		(30,412,467	)		(10,678,985	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings		872,754			606,238			640,777
Payments on borrowings		(878,328	)		(659,101	)		(679,051	)
Change in borrowing on line of credit		13,340,000			14,900,000			(12,983,696	)
Line of credit financing costs		(681,739	)		(280,166	)		(198,279	)
Deferred offering costs		(1,257,160	)		-			-
Net proceeds from issuance of preferred stock		-			17,183,705			13,333,604
Cash dividends to preferred stockholders		(145,900	)		(1,362,437	)		(438,150	)
Distributions to common stockholders		-			-			(8,123	)
Buy-out Yuma Production 1985, Ltd. minority interest partners		-			(245,422	)		-
Derivative instruments sold (purchased)		-			(16,004	)		294,862
Decrease in noncurrent payable to affiliate		-			(247,092	)		(2,800	)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		11,249,627			29,879,721			(40,856	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,090,511	)		4,363,990			(7,984,520	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		5,285,022			921,032			8,905,552
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,194,511		$	5,285,022		$	921,032
Supplemental disclosure of cash flow information:
Interest payments (net of interest capitalized)	$	22,210		$	160,720		$	383,103
Interest capitalized	$	1,031,816		$	681,090		$	108,060
Income tax payments for continuing operations	$	-		$	-		$	58,399
Income tax payments for discontinued operations	$	-		$	-		$	456,952
Supplemental disclosure of significant non-cash activity:
Preferred dividends paid in kind	$	5,412,281		$	-		$	-
Dividend of Argentina property to common shareholder	$	-		$	-		$	250,000

The accompanying notes are an integral part of these financial statements.

F-9

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – ORGANIZATION, CONSOLIDATION AND NATURE OF BUSINESS

The Yuma Companies, Inc. formally changed its name to Yuma Energy, Inc. on August 21, 2013. The management of the Company believes that the new name more clearly denotes the nature of Yuma’s business operations and strategy.

Yuma Energy, Inc., a Delaware corporation (“YEI”, and together with its subsidiaries and affiliated companies, “Yuma”, “the Company” or “Companies”) was incorporated on October 30, 1996 and has a majority common stockholder, Sam L. Banks (99.6 percent at year-end 2013 and effectively 100 percent before 2013). Yuma is an independent energy company engaged in oil and natural gas exploration and production and natural gas marketing.

The Consolidation

YEI has four wholly owned subsidiaries as listed below. Their financial statements are consolidated with those of YEI.

		State of	Date of
Company name	Reference	incorporation	incorporation
Yuma Exploration and Production Company, Inc.	“Exploration”	Delaware	01/16/92
Yuma Petroleum Company	“Petroleum”	Delaware	12/19/91
Texas Southeastern Gas Marketing Company	“TSM”	Texas	09/12/96
Yuma Production Company	“YPD”	Texas	08/12/85

Exploration identifies and captures economic deposits of hydrocarbons by using: (i) 3-D seismic imaging and other advanced technologies, with an emphasis on acquiring proprietary 3-D seismic to systematically explore, exploit and develop onshore and offshore crude oil and natural gas provinces; (ii) unconventional oil resource plays; and (iii) high impact deep structural prospects located beneath known producing trends. This approach is bolstered by strategic producing property acquisitions. Historically, Exploration has sold working interests in prospects to industry partners on traditional terms. Exploration’s operations are primarily conducted in the Gulf Coast region, with Yuma having interests in approximately 300 wells.

Yuma Petroleum Company was incorporated in Texas on July 15, 1983 and was re-domesticated in Delaware on December 19, 1991.  Petroleum became relatively inactive during 1998 due to the transfer of substantially all exploration and production activities to Exploration.

TSM is primarily engaged in the marketing of natural gas in Louisiana.

YPD acted as the general partner of Yuma Production 1985, Ltd. (“Yuma 85”), which was dissolved on January 1, 2012.

F-10

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Presentation

The accompanying financial statements include the accounts of Yuma on a consolidated basis. All significant intercompany accounts and transactions between YEI, Exploration, Petroleum, TSM, and YPD have been eliminated in the consolidation.

The companies maintain their accounts on the accrual method of accounting in accordance with United States Generally Accepted Accounting Principles (“GAAP”). Each of the Companies has a fiscal year ending December 31.

2. Management’s Use of Estimates

In preparing financial statements in conformity with GAAP, Management is required to make informed estimates and assumptions with consideration given to materiality. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include: estimates of proved reserves and related estimates of the present value of future net revenues; the carrying value of oil and gas properties; estimates of fair value; asset retirement obligations; income taxes; derivative financial instruments; valuation allowances for deferred tax assets; uncollectible receivables; useful lives for depreciation; future cash flows associated with assets; obligations related to employee benefits; and legal and environmental risks and exposures.

3. Reclassifications

When required for comparability, reclassifications are made to the prior period financial statements to conform to the current year presentation.

4. Fair Value

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 (exit price). The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes inputs based upon the degree to which they are observable. The three levels of the fair value hierarchy are as follows:

Level 1 – inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives).

Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).

F-11

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Level 3 – inputs that are not observable from objective sources, such as the Company’s internally developed assumptions about market participant assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in the Company’s internally developed present value of future cash flows model that underlies the fair value measurement.)

In determining fair value, the Company utilizes observable market data when available, or models that utilize observable market data. In addition to market information, the Company incorporates transaction-specific details that, in Management’s judgment, market participants would take into account in measuring fair value.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the category is based on the lowest level input that is significant to the fair value measurement of the instrument (see Note G – Fair Value Measurements).

The carrying amount of cash and cash equivalents, accounts receivable and accounts payable reported on the balance sheet approximates fair value.

Nonfinancial assets and liabilities initially measured at fair value include asset retirement obligations and exit or disposal costs.

Level 3 Valuation Techniques – Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial liabilities consist of the Series A Preferred Stock issued July 1, 2011, and the Series B Preferred Stock issued July and August of 2012, for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation (see Note I – Series A and Series B Preferred Stock). Yuma has valued certain possible financial scenarios relating to its securities using a Monte Carlo simulation model with the assistance of an independent valuation consultant. (Yuma’s securities have certain provisions, including automatic conditional conversion, re-pricing/down-round, change of control, default and follow-on offering that necessitate financial modeling.) These models incorporate transaction details such as the stock price of comparable companies in the same industry, contractual terms, maturity, and risk free interest rates, as well as assumptions about future financings, volatility, and holder behavior as of issuance, and each quarter thereafter for each of the Series A and the Series B Preferred Shares (see Note J – Preferred Stock Derivative Liability).

5. Statement of Cash Flow

Cash on hand, deposits in banks and short-term investments with original maturities of three months or less are considered cash and cash equivalents. The cash flow of a derivative instrument of an identifiable transaction is classified in the same category as the cash flow from the item being hedged.

6. Trade Receivables

Accounts receivable are stated net of allowance for doubtful accounts of $55,000 and $125,000 at December 31, 2013 and 2012, respectively.

F-12

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Management evaluates accounts receivable quarterly on an individual account basis, making individual assessments of collectability, and reserves those amounts it deems potentially uncollectible.

7. Natural Gas Imbalances

Pipeline gas imbalances represent the differences in measured volumes between gas receipts from suppliers and/or transporters and gas deliveries to end users, transporters and/or other purchasers. Most imbalances are settled monthly through cash-out mechanisms provided for in sales and transportation contracts. Other imbalances are carried forward until over or under deliveries in succeeding months can offset them. Gas imbalances are valued at cost utilizing the weighted average method.

Exploration utilizes the “sales method” to account for natural gas production volume imbalances. Under this method, income is recorded based on Exploration’s net revenue interest in production taken for delivery. At December 31, 2013, Exploration had a net payable of approximately 23,669 Mcf under various natural gas balancing agreements, as compared to a 22,771 Mcf net payable at December 31, 2012.

8. Inventories

Inventories, consisting principally of oilfield equipment, are carried at the lower of cost or market. The Company will often have tangible materials purchased for a well carried for the joint account (oil and gas property full cost pool on the balance sheet) pending sale or disposition.

9. Derivative Instruments

All derivative instruments (including certain derivative instruments embedded in other contracts) are recorded in Yuma’s Consolidated Balance Sheets as either an asset or liability and measured at fair value. Changes in the derivative instrument’s fair value are recognized currently in earnings, unless the derivative instrument was designated as a cash flow hedge. Under cash flow hedge accounting, unrealized gains and losses were reflected in stockholders’ equity as accumulated other comprehensive income (“AOCI”) to the extent they were effective until the forecasted transaction occurred. Yuma discontinued cash flow hedge accounting effective January 1, 2013. The result of this change in policy is that the amount carried in AOCI at December 31, 2012 is amortized to oil and gas revenues during the month the hedges settle. Subsequent to December 31, 2012, all hedges are treated as non-qualifying derivative instruments and all new mark-to-market adjustments are in “Sales of natural gas and crude oil” in the Consolidated Statements of Operations.

For cash flow hedge accounting, a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Only derivative instruments that are expected to be highly effective in offsetting anticipated gains or losses on the hedged cash flows and that are subsequently documented to have been highly effective can qualify for hedge accounting. Effectiveness must be assessed both at inception of the hedge and on an ongoing basis. Any ineffectiveness in derivative instruments whereby gains or losses do not exactly offset anticipated gains or losses of hedged cash flows is measured and recognized in earnings in the period in which it occurs. When using hedge accounting, hedge effectiveness is assessed quarterly based on total changes in the derivative instrument’s fair value by performing regression analysis. A hedge is considered effective if certain statistical tests are met. Yuma recorded hedge ineffectiveness in “Sales of natural gas and crude oil” in the Consolidated Statements of Operations.

F-13

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

10. Oil and Natural Gas Properties

Investments in oil and natural gas properties are accounted for using the full cost method of accounting. Under this method, all costs directly related to the acquisition, exploration, exploitation and development of oil and natural gas properties are capitalized.

Costs of reconditioning, repairing, or reworking of producing properties are expensed as incurred. Costs of workovers adding proved reserves are capitalized. Projects to deepen existing wells, recomplete to a shallower horizon, or improve (not restore) production to proved reserves are capitalized.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.

Depreciation, Depletion and Amortization – The capitalized cost of oil and natural gas properties, excluding unevaluated properties, is amortized using the unit-of-production method (equivalent physical units of 6 Mcf of natural gas to each barrel of oil equivalent, or “Boe”) using estimates of proved reserve quantities. Investments in unproved properties are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of the assessment indicate that the properties are impaired, the amount of impairment is added to the proved oil and gas property costs to be amortized. The amortizable base includes future development, abandonment and restoration costs. The rate for depreciation, depletion and amortization (“DD&A” or “depletion”) per Boe for Yuma was $23.87, $19.84 and $16.26 for 2013, 2012 and 2011, respectively. DD&A expense for oil and natural gas properties was $11,927,872, $4,956,196 and $2,772,890 for 2013, 2012 and 2011, respectively.

Impairments – Total capitalized costs of oil and gas properties are subject to a limit, or so-called “ceiling test.” The ceiling test limits total capitalized costs less related accumulated DD&A and deferred income taxes to a value not to exceed the sum of (i) the present value, discounted at a ten percent annual interest rate, of future net revenue from estimated production of proved oil and gas reserves, based on current economic and operating conditions less future development costs (excluding retirement costs); plus (ii) the cost of properties not subject to amortization (which includes all unproved properties); less (iii) income tax effects related to differences in the book and tax basis of oil and gas properties. If unamortized capitalized costs less related deferred income taxes exceed this limit, the excess is charged to DD&A in the quarter the assessment is made. An expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period. These net unamortized costs, tested each calendar quarter, have not exceeded the cost center ceiling for 2013, 2012 and 2011, the report periods.

F-14

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Oil and natural gas properties not subject to amortization consist of undeveloped leaseholds and exploratory and developmental wells in progress before the assignment of proved reserves. Management reviews the costs of these properties periodically for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by Management in impairment assessments include drilling results by the Company and other operators, the terms of oil and gas leases not held for production, and available funds for exploration and development.

The table below shows the cost of unproved properties and well and development costs in progress not subject to amortization at December 31, 2013, and the year in which those costs were incurred.

	Year of acquisition
	2013		2012		2011		Prior			Total
Leasehold acquisition cost	$	1,704,190	$	15,349,192	$	6,788,539	$	(2,890,695	)	$	20,951,226
Exploration and development cost		1,059,262		111,910		62,727		8,728			1,242,627
Capitalized interest		829,456		670,190		72,593		285,186			1,857,425
Total	$	3,592,908	$	16,131,292	$	6,923,859	$	(2,596,781	)	$	24,051,278

Capitalized Interest – Capitalized interest is included as part of the cost of oil and gas properties. The Company capitalized $1,031,816, $681,090 and $108,060 of interest associated with the line of credit (see Note N – Debt and Change in Banking Line and Agent Bank) during 2013, 2012 and 2011, respectively. The capitalization rates are based on the Company’s weighted average cost of borrowings used to finance prospect generation.

Capitalized Internal Costs – Internal costs incurred that are directly identified with acquisition, exploration and development activities undertaken by the Company for its own account, and that are not related to production, general corporate overhead or similar activities, are also capitalized. Yuma capitalized $2,702,952, $2,589,342 and $2,779,203 of allocated indirect costs, excluding interest, related to these activities during 2013, 2012 and 2011, respectively.

The Company develops oil and gas drilling projects called “prospects” by industry participants and markets participation in these projects. In doing this, the Company typically receives an amount in excess of its hard costs in seismic, land, brokerage, brochuring and marketing costs. It typically markets interests in the project on a “third for a quarter” basis, whereby the participant pays a percentage of the cost to casing point or through prospect payout and then has their participation interest reduced by twenty-five percent (25%) with the Company earning the difference. This difference is referred to as the “carried interest.”

F-15

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

The Company assembles 3-D seismic survey projects and markets participating interests in the projects. The Company typically recovers all of its costs plus allocated overhead, and receives a quarterly general and administrative (“G&A”) cost reimbursement paid by the various participants in the project during the 3-D seismic acquisition phase and the 3-D seismic interpretation phase. The proceeds from the sale of the 3-D seismic survey along with the quarterly G&A reimbursements are included in the full cost pool caption “Not subject to amortization.” In addition, the participants in the 3-D seismic survey typically carry the Company for a percentage of the costs associated with the 3-D survey acquisition, ranging from 25 to 35 percent. The Company received G&A cost reimbursements of $42,329, $172,173 and $985,544 in 2013, 2012 and 2011, respectively.

11. Other Property and Equipment

Other property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, while maintenance, repairs and minor replacements which do not improve or extend the life of such assets are charged to operations as incurred. Property and equipment sold, retired or otherwise disposed of are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in “(Gain) Loss on asset disposal” in the accompanying Consolidated Statements of Operations.

In compliance with the Tax Reform Act of 1986, assets placed in service subsequent to January 1, 1987 are depreciated using the modified accelerated cost recovery system (“MACRS”) for both financial reporting and federal income tax purposes. MACRS depreciation methods approximate depreciation expense computed under GAAP using the double declining balance method.

Leasehold improvements, principally office space, are depreciated by the straight line method over the term of the lease.

	Estimated
	useful	December 31,			December 31,
	life in years	2013			2012
Office business machines	3 - 5	$	1,350,568		$	1,332,558
Furniture and fixtures	7		383,585			380,319
Leasehold improvements	5		332,607			332,607
Total other property and equipment			2,066,760			2,045,484
Less:  Accumulated depreciation and leasehold improvement amortization			(1,822,925	)		(1,732,467	)
Net book value		$	243,835		$	313,017

Depreciation and leasehold improvement amortization expense totaled $149,496, $117,874 and $92,989 for the years ended December 31, 2013, 2012 and 2011, respectively.

F-16

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

12. Accounts Payable

Accounts payable consist principally of trade payables and costs associated with oil and natural gas exploration.

13. Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation or other sources, along with liabilities for environmental remediation or restoration claims, are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Expenditures related to environmental matters are expensed or capitalized in accordance with the Company’s accounting policy for property and equipment.

14. Revenue Recognition

Revenue is recognized by Exploration when deliveries of crude oil, natural gas and condensate are delivered to the purchaser and title has transferred. Crude oil sales in Louisiana, representing a significant portion of the company’s production, are typically indexed to Light Louisiana Sweet (“LLS”). TSM recognizes revenue from sales of gas primarily to other marketing companies and industrials in the period in which the gas is delivered and billed to the customer. Sales are based on index prices per MMBtu or the daily “spot” price as published in national publications with a mark-up or mark-down defined by contract with each customer.

15. Income Taxes

The Company files a consolidated federal tax return (with the exception of Yuma 85). Deferred taxes have been provided for temporary differences. These differences create taxable or tax-deductible amounts for future periods (see Note P – Income Taxes).

16. Other Taxes

Taxes incurred, other than income taxes, are as follows:

	December 31,		December 31,		December 31,
	2013		2012		2011
Production and severance tax	$	2,403,263	$	2,002,397	$	1,543,868
Ad valorem tax		732,302		114,261		65,716
Sales tax		180,498		40,146		77,647
State franchise taxes		41,072		2,390		7,688
Total	$	3,357,135	$	2,159,194	$	1,694,919

F-17

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

The Company reports oil and gas sales gross and, accordingly, includes net production, severance, and ad valorem taxes on the accompanying Consolidated Statements of Operations as a component of lease operating expenses. Sales taxes are collected from customers on sales of natural gas by TSM, and remitted to the appropriate state agency. Exploration accrues sales tax on applicable purchases of materials, and remits funds directly to the taxing jurisdictions.

17. Financial Instruments

The Company’s financial instruments consist of cash, receivables, payables, long-term debt, oil and natural gas derivatives, and Series A and Series B Preferred Stock. The carrying amount of cash, receivables and payables approximates fair value because of the short-term nature of these items. The carrying amount of long-term debt as of December 31, 2013 and 2012 approximates fair value because the interest rate on this instrument is variable. The fair value of the oil and natural gas derivative instruments is included below in Note H – Commodity Derivative Instruments. The embedded derivative associated with each of the Series A and Series B Preferred Stock has been bifurcated and is carried at fair value and is further described in Note I – Series A and Series B Preferred Stock and Note J – Preferred Stock Derivative Liability.

18. Accumulated Other Comprehensive Income

AOCI includes changes in equity that are excluded from the Consolidated Statements of Operations and were recorded directly into a separate section of equity on the Consolidated Balance Sheets. The Company’s AOCI shown on the Consolidated Balance Sheets and the Consolidated Statements of Changes in Equity consists of unrealized income and losses on cash flow hedges; however, Yuma discontinued hedge accounting effective January 1, 2013. AOCI is now comprised of the balance as of December 31, 2012 for the derivative instruments that qualified for hedge accounting at that time less those contracts that have expired since. AOCI will continue to be adjusted for the contracts as they settle.

19. General and Administrative Expenses - Other

G&A expenses are reported net of amounts capitalized pursuant to the full cost method of accounting.

Reimbursements of G&A expenses, if received from working interest owners of producing oil and gas properties operated by the Company (COPAS, or Council of Petroleum Accountants Societies, overhead), are reported as a reduction to G&A expense. Reimbursements of G&A expenses, if received from joint venture participants in 3-D seismic acquisition surveys, are initially reported as a reduction of capitalized G&A expenses on the Consolidated Balance Sheets in the full cost pool caption “Not subject to amortization”.

20. Stock-Based Compensation Plans

The Company adopted the 2011 Stock Option Plan on June 21, 2011 (see Note O – Stockholders’ Equity).

The Company adopted an Annual Incentive Plan for 2013 and 2012 (see Note R – Employee Benefit Plans).

F-18

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

21. General and Administrative Expenses – Stock-Based Compensation

This includes payments to employees in Restricted Stock Awards and Restricted Stock Units. As such, these amounts are non-cash Company stock-based awards. See Note L – Stock Awards and Their Treatment for valuation and recognition procedures.

22. Re-engineering and Workovers

One of the Company’s core business strategies is to perform a comprehensive field re-engineering and design to increase and maintain production, lower per-unit operating expenses, and improve field economics. Re-engineering projects are undertaken with the intent of lowering per-unit operating expenses and/or reducing field down-time. In addition, the Company seeks to implement more efficient production practices in order to increase production and/or arrest natural field production declines. These practices are often deployed in fields in connection with or in anticipation of further field development activities such as installation of secondary recovery operations or additional drilling. Workovers included within this category relate to significant non-recurring operations.

24. Other Noncurrent Assets

Included in the noncurrent assets are deferred offering costs. During 2013, Yuma explored several options to go public, including a possible listing on the Australian Stock Exchange (“ASX”). To accomplish this, the Company engaged numerous legal, accounting, and reserve engineering specialists to assist in this process.

25. Changes in Accounting Principles

Not Yet Adopted

In June 2013, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force consensus which requires that an unrecognized tax benefit (or a portion thereof) be presented as a reduction to a deferred tax asset for an available net operating loss carryforward, a similar tax loss or tax credit carryforward. This accounting standards update is effective for Yuma beginning in the first quarter of 2014 and should be applied prospectively to unrecognized tax benefits that exist as of the effective date. Early adoption and retrospective application are permitted. Adoption of this accounting standards update will not have a significant impact on the Company’s consolidated results of operations, financial position or cash flows.

F-19

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

In February 2013, an accounting standards update was issued to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, which are separately addressed within GAAP. An entity is required to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of 1) the amount the entity agreed to pay on the basis of its arrangement among its co-obligors and 2) any amount the entity expects to pay on behalf of its co-obligors. Disclosure of the nature of the obligation, including how the liability arose, the relationship with other co-obligors and the terms and conditions of the arrangement is required. In addition, the total outstanding amount under the arrangement, not reduced by the effect of any amounts that may be recoverable from other entities, plus the carrying amount of any liability or receivable recognized must be disclosed. This accounting standards update is effective for the Company beginning in the first quarter of 2014 and should be applied retrospectively for those in-scope obligations resulting from joint and several liability arrangements that exist at the beginning of 2014. Early adoption is permitted. Adoption of this accounting standards update will not have a significant impact on Yuma’s consolidated results of operations, financial position or cash flows.

Recently adopted

In February 2013, an accounting standards update was issued to improve the reporting of reclassifications out of accumulated other comprehensive income. This standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This accounting standards update was effective for the Company beginning the first quarter of 2013. Adoption of this standard did not have a significant impact on Yuma’s consolidated results of operations, financial position or cash flows.

In December 2011, an accounting standards update designed to enhance disclosures about offsetting assets and liabilities was issued. Further clarification limiting the scope of these disclosures to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions was issued in January 2013. The disclosures are intended to enable financial statement users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. Entities are required to disclose both gross information and net information about in-scope financial instruments that are either offset in the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. These disclosures were effective for the Company beginning the first quarter of 2013 and must be made retrospectively for comparable periods. Adoption of this amendment did not have a significant impact on the Company’s consolidated results of operations, financial position or cash flows.

The FASB amended the reporting standards for comprehensive income in June 2011 to eliminate the option to present the components of AOCI as part of the statement of changes in stockholders’ equity. The new guidance allows companies only two choices for presenting net income and other comprehensive income: in a single continuous statement, or in two separate, but consecutive, statements. In the two statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of AOCI, and total comprehensive income. The amendments did not change the items that must be reported in AOCI or when an item of AOCI must be reclassified to net income. Adoption had no impact on the Company’s consolidated results of operations, financial position or cash flows, but only changed presentation of AOCI.

F-20

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

In May 2011, the FASB issued an update amending the accounting standards for fair value measurement and disclosure, resulting in common principles and requirements under GAAP and International Financial Reporting Standards (“IFRS”). The amendments change the wording used to describe certain of the GAAP requirements either to clarify the intent of existing requirements, to change measurement or expand disclosure principles or to conform to the wording used in IFRS, and are applied prospectively for interim and annual periods beginning with the first quarter of 2012. The adoption of the amendments had no impact on the Company’s consolidated financial statements.

NOTE C – ADDISON ACQUISITION

On April 5, 2013, Yuma acquired approximately 51,460 net acres held by production adjacent to Yuma’s current 25,926 net acres in the Austin Chalk from Addison Oil, L.L.C. (“Addison”). This acquisition increased the Company’s acreage holdings in the Austin Chalk to over 77,000 net acres. The purchase price was $7.5 million, with an effective date of January 1, 2013. The Company granted a two percent overriding royalty to the sellers, and sellers have a right to participate in new wells or new side tracks for a twenty-five percent (25%) working interest. This acquisition complemented Yuma’s existing acreage position and substantially increased the Company’s number of proved undeveloped drilling locations and proved reserve value.

In conjunction with this acquisition, Yuma recorded $6,043,412 for the associated future asset retirements and $1,440,702 in suspended royalty and revenue obligations, net of related receivables.

NOTE D – ASSET RETIREMENT OBLIGATIONS

The Company records the cost of obligations associated with the retirement of tangible long-lived assets at fair value when the asset is acquired. The asset retirement obligations (“ARO’s”) are recorded as liabilities and the associated costs are capitalized as part of the related long-lived assets and then depreciated over the remaining useful lives. Changes in the liabilities resulting from the passage of time are recognized as operating (accretion) expenses and are allocated using the interest method. For Yuma, ARO’s relate to the abandonment of Exploration’s oil and gas producing facilities.

Since Exploration uses the full cost method, settlement recognition is impacted. If a liability is settled for an amount other than the recorded amount, an adjustment is made to the full cost pool, with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves. In addition, Exploration carries ARO assets on the balance sheet as part of its full cost pool, and includes these ARO assets in its amortization base for the purposes of calculating depreciation, depletion and amortization expense. For the purposes of calculating the ceiling test, the future cash outflows associated with settling the ARO liability are excluded from the computation of the discounted present value of estimated future net revenues.

The net increase to ARO during 2013 from the Addison acquisition was $6,043,412. An initial Addison ARO estimate of $10,967,986 was recorded in the second quarter but the lives and costs were subsequently reevaluated with a resulting reduction of $4,924,574.

F-21

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE D – ASSET RETIREMENT OBLIGATIONS – Continued

Asset Retirement Obligations

	December 31,			December 31,
	2013			2012
Beginning of year balance	$	4,233,782		$	3,795,027
Liabilities incurred during year		11,178,614			106,846
Liabilities settled during year		(1,278,774	)		(371,717	)
Accretion expense		668,497			265,323
Revisions in estimated cash flows		(4,104,440	)		438,303
End of year balance	$	10,697,679		$	4,233,782

NOTE E – RECEIVABLES AND PAYABLES WITH AFFILIATES, CHIEF EXECUTIVE OFFICER AND EMPLOYEES

The following table provides information with respect to related party transactions with affiliates, the Chief Executive Officer (“CEO”) of the Company, and employees. The trade receivable from the CEO is primarily for invoiced costs on prospects and wells (see Note F – Related Party Transactions).

	December 31,		December 31,
	2013		2012
Receivables from affiliates, CEO and employees:
Current:
Yuma CEO	$	135,080	$	42,617
Employees		20,000		20,900
		155,080		63,517
Noncurrent:
Yuma Gas Corporation		95,634		93,141
Total	$	250,714	$	156,658

F-22

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE F – RELATED PARTY TRANSACTIONS

Chief Executive Officer

Effective August 15, 2011, the Company entered into a Working Interest Incentive Plan (“WIIP”) with the Company’s CEO, Samuel L. Banks. Under the WIIP, Mr. Banks may purchase:

● Working interests in prospects from the Company or from unaffiliated third parties up to 2.5% of the Company’s working interest; and

● Working interests in production acquisitions that the Company undertakes in an amount up to 5% of the aggregate cost of the interest to be acquired.

The purchase price for any interests acquired from the Company shall be determined using the same cost basis as the Company acquired such interest. The terms under which the Executive acquires any interests shall be no better than the terms agreed to by unaffiliated third parties.

Working interests acquired during 2013 and 2012 under this plan are listed below:

					Amount
Year	Well, prospect or project	W.I.			paid
2013	Austin Chalk		1.0000	%	$	9,412
2013	Addison Acquisition		2.0000	%		150,000
2012	Sequoia		0.7366	%		6,506
2012	Amazon		0.2260	%		30,043
2012	Piranha		0.7106	%		5,330
2012	Musial		0.7158	%		5,726

Prior to the issuance of the Series A Preferred Stock in 2011, the Company declared the following distributions to the CEO and majority common stockholder:

● All right, title and interest in and to 4,289 shares of Arelauquen Golf and Country Club S. A. (valued at $250,000 by the Company);

● Rights to receive performance payments under that certain Asset Purchase and Sale Agreement dated January 28, 2010 by and among Texas Southeastern Gas Gathering Company, Yuma Energy, Inc., High Point Energy, LLC, and High Point Gas Gathering Company, L.P. The Company assigned no value to these performance payments, as there was no expectation that any of the contract bonus payment thresholds would be reached; and

● An after project payout 17.5781% working interest in the Cote de Mer prospect (value to be determined at the time payout is reached and the interest is earned by the Company and the assignment is made to the CEO, no value was assigned by the Company since the initial test well in this prospect was in the process of being plugged and abandoned at year-end 2013).

F-23

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE F – RELATED PARTY TRANSACTIONS – Continued

In 2006, the Company entered into participation agreements with several unrelated industry participants under which it would receive a 20% back-in interest after payout to the participants and the CEO would receive a 5% back-in interest. The agreements were renegotiated in 2010 reducing the total back-in interest by 40% with the Company receiving 12.5% and the CEO receiving 2.5%. The project, named La Posada, achieved multiple discrete payouts during 2013 based on differing participant cost basis and the participants assigned the agreed working interests directly to the Company and the CEO at time of payout.

NOTE G – FAIR VALUE MEASUREMENTS

Certain financial instruments are reported at fair value on the Consolidated Balance Sheets. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels (see the Fair Value section of Note B – Summary of Significant Accounting Policies). Yuma uses a market valuation approach based on available inputs and the following methods and assumptions to measure the fair values of its assets and liabilities, which may or may not be observable in the market.

Fair Value of Other Financial Instruments – The carrying values of financial instruments comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments.

Derivatives – The fair values of the Company’s commodity derivatives are based on third-party pricing models which utilize inputs that are either readily available in the public market, such as natural gas and oil forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are then compared to the values given by Yuma’s counterparties for reasonableness. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which results in the Company using market prices and implied volatility factors related to changes in the forward curves. Derivatives are also subject to the risk that counterparties will be unable to meet their obligations. Because the Company’s derivative counterparty was BP at December 31, 2012 (and Société Générale starting in April 2013) (see Note H – Commodity Derivative Instruments and Note X – Subsequent Events), Yuma has not considered non-performance risk in the valuation of the Company’s derivatives.

F-24

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE G – FAIR VALUE MEASUREMENTS – Continued

	Fair value measurements at December 31, 2013
			Significant
	Quoted prices		other		Significant
	in active		observable		unobservable
	markets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Commodity derivatives - oil	$	-	$	818,637	$	-	$	818,637
Total assets	$	-	$	818,637	$	-	$	818,637
Liabilities:
Commodity derivatives - gas	$	-	$	472,564	$	-	$	472,564
Commodity derivatives - oil		-		423,217		-		423,217
Preferred stock derivative liability		-		-		51,290,414		51,290,414
Total liabilities	$	-	$	895,781	$	51,290,414	$	52,186,195

	Fair value measurements at December 31, 2012
			Significant
	Quoted prices		other		Significant
	in active		observable		unobservable
	markets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Commodity derivatives - gas	$	-	$	348,430	$	-	$	348,430
Commodity derivatives - oil		-		107,812		-		107,812
Total assets	$	-	$	456,242	$	-	$	456,242
Liabilities:
Preferred stock derivative liability	$	-	$	-	$	25,031,855	$	25,031,855
Total liabilities	$	-	$	-	$	25,031,855	$	25,031,855

Derivative instruments listed above include collars, swaps, and 3-way collars. For additional information on the Company’s derivative instruments and derivative liabilities, see Note H – Commodity Derivative Instruments and Note J – Preferred Stock Derivative Liability.

F-25

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE G – FAIR VALUE MEASUREMENTS – Continued

Debt – The Company’s debt is recorded at the carrying amount on its Consolidated Balance Sheets. For further discussion of the Company’s debt, please see Note N – Debt and Change in Banking Line and Agent Bank. The carrying amount of floating-rate debt approximates fair value because the interest rates are variable and reflective of market rates.

Asset Retirement Obligations (ARO’s) – The Company estimates the fair value of ARO’s based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates. See Note D – Asset Retirement Obligations for a summary of changes in ARO’s.

A summary of the value and the changes in Yuma’s assets (liabilities) classified as Level 3 measurements during 2013 and 2012 is presented below:

	Preferred
	stock
	derivative
	liability
2013	$	51,290,414
2012		25,031,855
Total change	$	26,258,559

NOTE H – COMMODITY DERIVATIVE INSTRUMENTS

Objective and Strategies for Using Derivative Instruments – In order to mitigate the effect of commodity price uncertainty and enhance the predictability of cash flows relating to the marketing of the Company’s crude oil and natural gas, Yuma enters into crude oil and natural gas price derivative instruments with respect to a portion of the Company’s expected production. The derivative instruments used include variable to fixed price commodity swaps, two-way and three-way collars.

The fixed price swap and two-way collar contracts entitle Yuma (floating price payor) to receive settlement from the counterparty (fixed price payor) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price. Yuma would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or selling price. The amount payable by Yuma, if the floating price is above the fixed or selling price, is the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price in respect of each calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price in respect of each calculation period.

F-26

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H – COMMODITY DERIVATIVE INSTRUMENTS – Continued

A three-way collar consists of a two-way collar contract combined with a put option contract sold by Yuma with a strike price below the floor price of the two-way collar. The Company receives price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, Yuma receives the cash market price plus the difference between the two put option strike prices. This type of instrument allows Yuma to capture more value in a rising commodity price environment, but limits the benefits in a downward commodity price environment.

While these instruments mitigate the cash flow risk of future reductions in commodity prices, they may also curtail benefits from future increases in commodity prices.

See Note G – Fair Value Measurements for a discussion of methods and assumptions used to estimate the fair values of the Company’s derivative instruments.

Counterparty Credit Risk – Derivative instruments expose Yuma to counterparty credit risk. The Company’s commodity derivative instruments at December 31, 2012 were with British Petroleum (“BP”) Corporation North America Inc., a subsidiary of BP Energy Company. Starting in April of 2013, all hedges were moved (novated) to Société Générale (“SocGen”). SocGen is rated “A” by Standard and Poor’s, “A2” by Moody’s, “A” by Fitch, and “AA” by BBRS. Commodity derivative contracts are executed under master agreements which allow Yuma, in the event of default, to elect early termination of all contracts. If Yuma chooses to elect early termination, all asset and liability positions would be netted and settled at the time of election.

Derivative instruments open as of January 1, 2014 are provided below. Natural gas prices are New York Mercantile Exchange (“NYMEX”) Henry Hub prices, and crude oil prices are NYMEX West Texas Intermediate, except for the oil swaps noted below that are based on Argus Light Louisiana Sweet.

F-27

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H – COMMODITY DERIVATIVE INSTRUMENTS – Continued

	2014		2015			2016
	Settlement		Settlement			Settlement
NATURAL GAS (MMBtu):
3-way collars
Volume		779,285		2,377,371			1,122,533
Ceiling sold price (call)	$	4.47	$	4.47		$	4.35
Floor purchased price (put)	$	4.15	$	4.00		$	4.10
Floor sold price (short put)	$	3.35	$	3.25		$	3.25
Swaps
Volume		2,189,984		458,622			-
Price	$	4.08	$	4.08			-
Reverse Swaps
Volume		142,233		293,234			-
Price	$	4.27	$	4.32			-
CRUDE OIL (Bbls):
3-way collars
Volume		50,900		89,512			70,263
Ceiling sold price (call)	$	103.57	$	104.36		$	106.39
Floor purchased price (put)	$	90.88	$	86.49		$	92.38
Floor sold price (short put)	$	69.41	$	65.82		$	72.38
Swaps
Volume		276,126		-			-
Price	$	94.07		-			-
Swaps at Argus Light Louisiana Sweet
Volume		22,816		-			-
Price	$	99.40		-			-
Sold puts
Volume		54,000		-			-
Floor sold price (short put)	$	70.00		-			-
Put Spread
Volume		-		27,588			-
Floor purchased price (put)		-	$	90.00	*		-
Floor sold price (short put)		-	$	75.00	*		-

* Contracts include a premium to be paid by Yuma of $5.56 per barrel as the contracts mature ($153,389 total premium). The premium is not included in these prices.

F-28

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H – COMMODITY DERIVATIVE INSTRUMENTS – Continued

Derivatives for each commodity are netted on the Consolidated Balance Sheets as they are all contracts with the same counterparty. The following table presents the fair value and balance sheet location of each classification of commodity derivative contracts on a gross basis without regard to same-counterparty netting:

	Fair value as of
	December 31,			December 31,
	2013			2012
Asset commodity contracts:
Contracts designated as hedging instruments:
Current assets	$	-		$	800,407
Noncurrent assets		-			370,080
		-			1,170,487
Contracts not designated as hedging instruments:
Current assets		1,109,403			1,100,900
Noncurrent assets		2,861,225			636,748
		3,970,628			1,737,648
Liability commodity contracts:
Contracts designated as hedging instruments:
Current liabilities		-			(410,508	)
Noncurrent liabilities		-			(383,650	)
		-			(794,158	)
Contracts not designated as hedging instruments:
Current liabilities		(1,786,535	)		(1,035,917	)
Noncurrent liabilities		(2,261,237	)		(621,818	)
		(4,047,772	)		(1,657,735	)
Total derivative instruments	$	(77,144	)	$	456,242

F-29

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE H – COMMODITY DERIVATIVE INSTRUMENTS – Continued

Sales of natural gas and crude oil on the Consolidated Statements of Operations are comprised of the following:

	Years ended December 31,
	2013			2012			2011
Sales of natural gas and crude oil	$	28,235,413		$	19,684,132		$	18,083,210
Gains (losses) realized on commodity derivatives		(524	)		228,557			639,380
Gains (losses) on ineffectiveness of cash flow hedges		-			712,681			273,786
Gains (losses) unrealized on non-qualifying commodity/derivatives		(231,886	)		544,237			(41,939	)
Amortized gains from benefit of sold qualified options		72,600			128,512			-
Amortized losses from cost of purchased nonqualified oil calls		-			(16,004	)		-
Total sales of natural gas and crude oil	$	28,075,603		$	21,282,115		$	18,954,437

A reconciliation of the components of accumulated other comprehensive income (loss) in the Consolidated Statements of Changes in Equity is presented below:

	2013						2012						2011
	Before tax			After tax			Before tax			After tax			Before tax			After tax
Balance, beginning of period	$	437,140		$	268,841		$	(111,628	)	$	(68,651	)	$	864,190		$	531,477
Net change in fair value		-			-			1,075,885			661,668			(1,071,796	)		(659,155	)
Gains reclassified to income		-			-			(398,604	)		(245,141	)		(198,885	)		(122,314	)
Proceeds from sale of commodity hedging instruments		-			-			-			-			294,863			181,341
Amortized gains from benefit of sold qualified options realized in income		(72,600	)		(44,649	)		(128,513	)		(79,035	)		-			-
Other reclassifications due to expired contracts previously subject to hedge accounting rules		(301,499	)		(185,422	)		-			-			-			-
Balance, end of period	$	63,041		$	38,770		$	437,140		$	268,841		$	(111,628	)	$	(68,651	)

F-30

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE I – SERIES A AND SERIES B PREFERRED STOCK

The Company is authorized to issue up to 50,000 shares of Series A Preferred Stock, par value $0.01 per share. During July 2011, the Company issued 14,605 shares of Series A Preferred Stock in connection with a private placement, realizing gross proceeds of $14,605,000 offset by offering expenses of $1,271,396 resulting in net proceeds of $13,333,604. The stated value and issue price of the Series A Preferred Stock is $1,000.00 per share and each share is convertible into one share of YEI’s common stock. The Series A Preferred Stock pays a cumulative dividend on a semi-annual basis of $30.00 per share out of funds legally available (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock and subject to increase as further described below) as declared by the Board of Directors. These dividends are cumulative from the date of issuance, whether or not such dividends are declared, and are payable semi-annually, when and as declared by the Board of Directors, on June 30 and December 31 in each year. At the election of the Board of Directors, the dividends on the Series A Preferred Stock may be paid in additional shares of Series A Preferred Stock. Since the Required Event, as defined below, had not occurred by September 30, 2013, the semi-annual dividend rate on the Series A Preferred Stock increased, commencing on October 1, 2013, to a semi-annual rate of $60.00. Further, since the Required Event had not occurred by December 31, 2012, March 31, 2013 or June 30, 2013, then on each date the Series A Conversion Price then in effect decreased by an amount such that the Series A Preferred Stockholders increased their aggregate ownership in the Company by one percent. The “Required Event”, or “Liquidity Event”, means the conversion of the Series A Preferred Stock to common stock and registration of these shares under the Securities Act of 1933, as amended, and the listing on a national securities exchange, quoted on the OTC Bulletin Board or quoted on the Pink Sheets. At December 31, 2012, the Company had not met the requirements of the Required Event and, as a result, the conversion rate to common stock for shares of Series A Preferred Stock changed from one to one to a conversion rate of one share of Series A Preferred Stock to 1.067579 shares of common stock, effectively providing a one percent increase in equity ownership in the Company to the Series A Preferred Stock stockholders. During 2013, the Company did not meet the requirements of the Required Event and, as a result of the required adjustments in the conversion rate at March 31, 2013 and June 30 2013, the conversion rate of one share of Series A Preferred Stock increased to 1.207101257 shares of common stock.

Unless prohibited by Delaware law governing distributions to stockholders, if the Required Event has not occurred on or before June 30, 2016, the Company shall offer to purchase all shares of the Series A Preferred Stock then outstanding at a price per share equal to the greater of (A) the Series A original issue price per share, plus any accrued but unpaid dividends, whether or not declared, together with any other dividends declared but unpaid, and (B) the fair market value of a single share of Series A Preferred Stock as determined by a third party appraiser.

The Company is authorized to issue up to 35,000 shares of Series B Preferred Stock, par value $0.01 per share. During July and August 2012, the Company issued 18,590 shares of Series B Preferred Stock in a private placement, realizing gross proceeds of $18,590,000 offset by offering expenses of $1,406,295, resulting in net proceeds of $17,183,705. The stated value and issue price of the Series B Preferred Stock was $1,000.00 per share, and each share is convertible into 0.508185 shares of common stock. The Series B Preferred Stock pays a cumulative dividend on a semi-annual basis of $30.00 per share out of funds legally available, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization. Such dividend shall be cumulative from the date of issuance of the Series B Preferred Stock, whether or not such dividends are declared, and shall be payable semi-annually, when and as declared by the Board of Directors, on June 30 and December 31 in each year. At the election of the Board of Directors, the dividends on the Series B Preferred Stock may be paid in additional shares of Series B Preferred Stock. Unless prohibited by Delaware law governing distributions to stockholders, if the Required Event, as defined above, has not occurred by June 30, 2017, the Company shall offer to purchase all shares of the Series B Preferred Stock then outstanding, so long as no shares of the Series A Preferred Stock remain to be converted. If shares of the Series A Preferred Stock remain outstanding, then the conversion date for the Series B Preferred Stock will be extended for so long as any shares of Series A Preferred Stock have not been converted or the Company has not funded in full the offer to purchase pursuant to a Required Event.

F-31

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE I – SERIES A AND SERIES B PREFERRED STOCK – Continued

Upon any liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Stock then outstanding will be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment may be made to the holders of the Series B Preferred Stock, an amount per share equal to the greater of (i) the original issue price, plus accrued but unpaid dividends or (ii) such amount per share as would have been payable had all shares of the Series A Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution or winding up. After the payment of all preferential amounts required to be paid to the holder of shares of Series A Preferred Stock, the holders of Series B Preferred Stock will be entitled to be paid out of the assets of the Company legally available for distribution to its stockholders, an amount per share equal to the greater of (i) the original issue price, plus any accrued but unpaid dividends thereon or (ii) such amount per share as would have been payable had all shares of Series B Preferred Stock been converted into Common Stock pursuant to such liquidation, dissolution or winding up.

The Series A and Series B Preferred Stock is presented on the Company’s balance sheet between Other Noncurrent Liabilities and Equity (the mezzanine section) since it has characteristics of both debt and equity. The carrying amount on the Company’s balance sheets represents the net proceeds increased by accretion of stock issue costs less the value at time of origination of the embedded conversion feature as described in Note J – Preferred Stock Derivative Liability. The accretion of issue costs increases the Preferred Stock by amortizing the costs to equity through the trigger date for the Company’s repurchase of such shares, June 2016 for Series A Preferred Stock and June 2017 for Series B Preferred Stock.

NOTE J – PREFERRED STOCK DERIVATIVE LIABILITY

The Company issued Series A Preferred Stock in July 2011 and Series B Preferred Stock in July and August 2012 with certain embedded anti-dilution provisions (embodied weighted average ratchet or reset provisions) which provide for conversion price adjustments (“down-round protection”) should additional shares of common or preferred stock be issued by the Company at a lower valuation than the valuation used at the time the Series A or Series B Preferred Stock was issued. In addition, the Series A and Series B Preferred Stock provides that the Company is obligated to repurchase these shares should the Required Event not occur by June 20, 2016 in the case of the Series A Preferred Stock and June 30, 2017 in the case of the Series B Preferred Stock. The down-round provision and the ability to “put” the stock back to the Company have the features of an option or derivative. The provisions of Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, require the Company to bifurcate the embedded derivative from the carrying value of the Series A and Series B Preferred Stock and record it on the Company’s balance sheet as a derivative liability, at fair value. Accordingly, at each reporting date, the Company must mark the derivative liability to estimated fair value, with the resulting changes being recognized in earnings. Management has elected to determine the fair value of this derivative using a Monte Carlo option pricing model with Level 3 inputs (see the Fair Value section of Note B – Summary of Significant Accounting Policies for Level 3 Valuation Techniques). The assumptions used are reviewed on a quarterly basis and are subject to change based primarily on Management’s assessment of the probability of various events. Accordingly, changes to these assessments could materially affect the valuation. After the initial valuation, changes in fair value are made with the increase or decrease flowing to the Consolidated Statements of Operations as “Change in fair value of preferred stock derivative liability”. Upon issuance of the Series A Preferred Stock in July 2011, the fair value of the associated derivative was $89.86 per share of Series A Preferred Stock, or an aggregate of $1,312,405. The December 31, 2013 and 2012 fair value of the Series A derivative was $2,581.00 and $1,565.00, respectively, per share of Series A Preferred Stock, or an aggregate of $40,361,678 and $22,856,825, respectively. Upon issuance of the Series B Preferred Stock in July and August 2012, the fair value of the associated derivative was $55.00 for July and $52.79 for August per share of Series B Preferred Stock, or an aggregate of $1,016,715. The December 31, 2013 and 2012 fair value of the Series B derivative was $556.00 and $117.00, respectively, per share of Series B Preferred Stock, or an aggregate of $10,928,736 and $2,175,030, respectively. At December 31, 2013, the level 3 inputs to the Monte Carlo option pricing model were an assumed valuation market value of equity of $266.5 million based on a discount to net asset value, resulting in a value per share on a fully diluted and as-converted bases of $3,099. The evaluation assumed a likely reverse merger or initial public offering with a probability of 25% in the second quarter, 60% in the third quarter and 20% in the fourth quarter of 2014, with some sale or other exit of the Company soon after 2014 if not completed in 2014. The volatility was assumed to be 36.55% and was derived from implied volatilities of a number of public companies (tickers: AXAS, CRK, CRZO, GDP, PQ, SFY, and WRES) adjusted for relatively lower amount of debt in Yuma at year-end 2013.

F-32

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE K – PAYMENT OF PREFERRED DIVIDENDS IN KIND

On June 30, 2013 and December 31, 2013, the Company elected to pay the semi-annual dividends to the preferred stockholders in additional preferred shares (in kind), with cash payments being made in lieu of any fractional shares. The following shares and cash payments were issued to the existing preferred stockholders as of the record dates:

	June 30, 2013				December 31, 2013
	Additional				Additional
	preferred		Cash		preferred		Cash
	shares		payments		shares		payments
Series A Preferred Stock		403	$	35,150		630	$	45,360
Series B Preferred Stock		533	$	24,700		533	$	40,690

F-33

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE K – PAYMENT OF PREFERRED DIVIDENDS IN KIND – Continued

The payment in kind to preferred stockholders was recorded at fair value using the valuation of the common stock performed by an outside consulting firm as further described in Note G – Fair Value Measurements, at the preferred conversion rate to common stock as of June 30, 2013 and December 31, 2013. Components of the total fair value of $5,412,281 for the preferred stock dividends consist of:

	June 30, 2013				December 31, 2013
	Additional				Additional
	preferred		Dividends		preferred		Dividends
	shares		in kind		shares		in kind
Series A Preferred Stock		403	$	1,431,938		630	$	2,347,583
Series B Preferred Stock		533	$	796,607		533	$	836,153

YEI issued the above additional preferred shares to each class of preferred stock. The outstanding shares after the preferred dividend in kind are as follows:

	Preferred		Preferred		Preferred		Preferred
	shares		stock		stock		shares
	outstanding		dividend		dividend		outstanding
	prior to		June 30,		December 31,		at December 31,
	dividend		2013		2013		2013
Series A Preferred Stock		14,605		403		630		15,638
Series B Preferred Stock		18,590		533		533		19,656

NOTE L – STOCK AWARDS AND THEIR TREATMENT

Under the terms of the 2011 Stock Option Plan (See Note O – Stockholders’ Equity), on April 1, 2013, the Company issued 1,278 Restricted Stock Awards (“RSA’s”) to employees that vest one-third immediately, one-third at December 31, 2013 and one-third at December 31, 2014 subject to the successful completion of a Liquidity Event and any underwriter lock-up period. Should an employee leave the Company, any unvested RSA’s are forfeited.

On April 1, 2013, the Company granted 236 RSA’s to employees in lieu of cash awards for 2012 under the Annual Incentive Plan (see Note R – Employee Benefit Plans) that vest immediately at the completion of a Liquidity Event and any underwriter lock-up period, but no later than June 30, 2016. These RSA’s are not forfeited should the employee leave the Company and have therefore been recorded at the same per share valuation determined in conjunction with the valuation of the derivative liability as of March 31, 2013. These rewards are equity-based and compensation expense is calculated as the number of shares awarded multiplied by the value calculated for each share by the outside valuation consultant as of the date of issue. Once the value has been recorded, it does not change in subsequent periods.

F-34

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE L – STOCK AWARDS AND THEIR TREATMENT – Continued

On April 1, 2013, the Company granted 33 RSA’s to the then non-employee members of the Board of Directors with a vesting schedule of one-third immediately, one-third at December 31, 2013 and one-third at December 31, 2014 subject to the completion of a Liquidity Event and any underwriter lock-up period. Should a Director leave the Board, any unvested shares are forfeited.

On April 1, 2013, the Company granted 225 RSA’s to Mr. Volk, a Board member, and long-term advisor to the Company. The vesting period for this award is one-third immediately, one-third at December 31, 2013 and one-third at December 31, 2014 subject to the completion of a Liquidity Event and any underwriter lock-up period. Should Mr. Volk leave the Board, any unvested shares are forfeited.

On June 1, 2013, the Company issued 1,173 RSA’s to employees that vest one-third at December 31, 2013, one-third at December 31, 2014 and one-third at December 31, 2015 subject to the successful completion of a Liquidity Event and any underwriter lock-up period. Should an employee leave the Company, any unvested shares are forfeited.

A Liquidity Event shall occur upon the closing of an initial public offering raising gross proceeds of at least $40 million or a sale of YEI’s common stock under the Securities Act of 1933, and the listing on a national securities exchange, quoted on the OTC Bulletin Board or quoted on the Pink Sheets.

A summary of the status of the RSA’s and changes during 2013 is presented below.

	Number of			Weighted
	unvested			average
	RSA			grant-date
	shares			fair value
Unvested shares as of January 1, 2013		-
Granted on April 1, 2013		1,278		$2,062 per share
Granted on April 1, 2013		236		$2,062 per share
Granted on April 1, 2013		33		$2,062 per share
Granted on April 1, 2013		225		$2,062 per share
Granted on June 1, 2013		1,173		$3,289 per share
Vested		-
Forfeited		(206	)	$2,670 per share
Unvested shares as of December 31, 2013		2,739		$2,542 per share

On April 1, 2013, the Company granted 163 Restricted Stock Units or “RSU’s”. In order to vest, an employee must have continuous service with the Company from time of issue through April 1, 2016, the Vesting Date. The shares may be settled in cash and do not require the eventual issuance of common stock (although it is an election available to the Company); consequently, the rewards are liability based and the booked valuation will change as the market value for common stock (as determined by an outside consulting firm) changes. Compensation expense will be recognized over the three-year vesting period.

F-35

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE L – STOCK AWARDS AND THEIR TREATMENT – Continued

A summary of the status of the unvested shares of RSU’s and changes during 2013 is presented below.

	Number of			Weighted
	unvested			average
	RSU			grant-date
	shares			fair value
Unvested shares as of January 1, 2013		-
Granted on April 1, 2013		163		$2,062 per share
Vested		-
Forfeited		(5	)	$2,062 per share
Unvested shares as of December 31, 2013		158		$2,062 per share

NOTE M – EARNINGS PER COMMON SHARE

Earnings per common share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Potential common stock equivalents are determined using the “if converted” method.

Potentially dilutive securities for the computation of diluted weighted average shares are as follows:

	Twelve months ended
	December 31,
	2013		2012		2011
Series A Convertible Preferred Stock		17,119		14,608		7,312
Series B Convertible Preferred Stock		9,585		4,050		-
Restricted Stock Awards		1,940		-		-
Restricted Stock Units		121		-		-
		28,765		18,658		7,312

The Company excludes stock options and other stock-based awards whose effect would be anti-dilutive from the calculation. For the years ended December 31, 2013, 2012 and 2011, adjusted earnings were losses, therefore common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive.

F-36

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE N – DEBT AND CHANGE IN BANKING LINE AND AGENT BANK

	December 31,			December 31,
	2013			2012
Variable rate revolving credit facility payable to Société Générale and OneWest Bank, FSB, maturing May 20, 2017, with possible  acceleration (see below), secured by oil and natural gas reserves held by Yuma Exploration and Production Company, Inc. and guaranteed by YEI.	$	31,215,000		$	-
Variable rate revolving credit facility payable to Union Bank, N.A. and Amegy Bank National Association, maturing August 10, 2015, secured by oil and natural gas reserves held by Yuma Exploration and Production Company, Inc. and guaranteed by YEI.		-			17,875,000
Installment loan due February 28, 2014, originating from the financing of insurance premiums at 4.29% interest rate.		178,027			-
Installment loan due March 1, 2013, originating from the financing of insurance premiums at 3.24% interest rate.		-			183,601
		31,393,027			18,058,601
Less:  Current portion		(178,027	)		(183,601	)
Total long-term debt	$	31,215,000		$	17,875,000

On August 10, 2011, Exploration entered into a $125 million syndicated senior credit facility with Amegy Bank National Association (“Amegy”) as Administrative Agent. The facility was for four years, with a maturity of August 10, 2015. The maximum available under the revolving credit facility is determined by a formula based on the discounted value of the producing and non-producing crude oil and natural gas reserves (the borrowing base). Interest on the facility accrued at Yuma’s option based on prime as published by the Wall Street Journal, or a rate based on London Interbank Offering Rate (“LIBOR”).

The prime and LIBOR base rates were increased by the following margins:

				LIBOR
Borrowing base utilization	Prime margin			margin
Utilization > 75%		1.25	%		3.50	%
50% < utilization < 75%		1.00	%		3.25	%
25% < utilization < 50%		0.75	%		3.00	%
Utilization < 25%		0.50	%		2.75	%

F-37

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE N – DEBT AND CHANGE IN BANKING LINE AND AGENT BANK – Continued

On September 24, 2012, the credit facility was amended whereby Union Bank N. A. (Union) came in as a participant at 64% (Amegy reduced to 35%) and took over from Amegy as Administrative Agent. Amegy, however, has remained Yuma’s bank for regular operational banking functions. The amendment changed the interest rate margins as follows:

				LIBOR
Borrowing base utilization	Prime margin			margin
Utilization > 90%		2.00	%		3.00	%
75% < utilization < 90%		1.75	%		2.75	%
50% < utilization < 75%		1.50	%		2.50	%
Utilization < 50%		1.25	%		2.25	%

On February 13, 2013, the credit facility was further amended to bring SocGen in as a new participant and as a replacement for Union as the Administrative Agent, and to remove Amegy from the syndication (although still remaining Yuma’s bank for operations). The participation allocation became 68.75% for SocGen and 31.25% for Union. The new interest rate margins are as follows:

				LIBOR
Borrowing base utilization	Prime margin			margin
Utilization > 90%		2.25	%		3.25	%
75% < utilization < 90%		2.00	%		3.00	%
50% < utilization < 75%		1.75	%		2.75	%
25% < utilization < 50%		1.50	%		2.50	%
Utilization < 25%		1.25	%		2.25	%

On May 20, 2013, a third amendment to the credit agreement brought in OneWest Bank, FSB (“OneWest”) to replace Union with new participation equal for SocGen and OneWest at 50/50. With the new amendment, the credit agreement now matures May 20, 2017; provided, however, that if the Series A Preferred Stock is not terminated or the redemption date of that series is not extended past May 20, 2018, and changed on or prior to January 1, 2016, the maturity date of the credit agreement accelerates to no later than April 30, 2016.

On September 27, 2013, the Borrowing Base Redetermination Agreement and Assignment brought in View Point Bank, N.A. (“View Point”) as a third lender in the credit agreement. Participating percentages are now 37.5% for SocGen, 37.5% for OneWest and 25% for View Point.

F-38

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE N – DEBT AND CHANGE IN BANKING LINE AND AGENT BANK – Continued

Costs paid to SocGen to bring them into the syndicate include a $150,000 arrangement fee, an $88,000 upfront fee, and $87,598 in attorney fees. Costs paid to replace Union with OneWest were a $50,000 arrangement fee and a $216,000 upfront fee and $37,061 in attorney fees. On September 27, 2013, Yuma paid SocGen a $24,000 redetermination fee whereby the borrowing base was increased $4 million to $40 million. Attorney fees for the redetermination were $4,080. All these costs are being amortized over the life of the loan. SocGen was also paid an annual administrative fee of $25,000 to be amortized over the year. The unamortized Amegy and Union costs of $123,925 and $189,727 were written off immediately upon their exit from the syndicate. SocGen also required all commodity hedges be moved from BP to SocGen and charged a fee of $175,000 for the novation. This fee was fully expensed.

Cash paid for interest year ended December 31, 2013 to Union as administrator was $74,839 and to SocGen as administrator was $870,718. All the interest paid to Union was prime-based at 4.75%. On June 14, 2013, $5,000,000 of outstanding debt was converted to LIBOR and on July 15, another $15,000,000 was converted to LIBOR. Except for a brief period (November 15th to December 5th) when only $5,000,000 was in LIBOR, Yuma has kept $20,000,000 in LIBOR. Yuma’s all-in rates for LIBOR have ranged from 2.92% to 3.21% per annum. SocGen interest rates for prime-based debt have primarily been 5% with two short periods (46 days and 8 days) at 5.25% per annum.

Cash paid to Union as the Administrative Agent for both participating banks for interest during 2012 was $201,731 and was prime-based. Costs to amend the credit agreement in 2012 paid to Union to bring them in with Amegy were $150,000 for upfront facility fees and $88,916 for attorneys and other professional fees. The Union start-up fees were being amortized along with the Amegy fees until the original maturity date.

During 2012 until September 24, 2012 while Amegy was the lone participating bank, Yuma elected the LIBOR option on a portion of the revolver starting January 23, 2012 through May 23, 2012. LIBOR-based debt started at $2 million and went to $12 million on February 21, 2012 for one day and was $10 million from the next day, February 22, 2012, through May 23, 2012. LIBOR-based rates for Yuma during this period ranged from 3.2789% to 3.7789% per annum. Otherwise, interest was prime based at 3.75% to 4.5% per annum for 2012 up until the credit facility was amended to bring in Union as a participating bank and new Administrative Agent. Cash paid to Amegy during 2012 up until that date was $428,259 prime-based and $97,269 LIBOR-based.

The terms of the loan agreement require Exploration to meet a specific current ratio, interest coverage ratio, and a funded debt to EBITDA ratio. In addition, the facility requires the guarantee of YEI. Exploration was in compliance with the loan covenants as of December 31, 2013.

F-39

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE N – DEBT AND CHANGE IN BANKING LINE AND AGENT BANK – Continued

Cash paid to loan administrators for commitment fees consists of the following:

	Year ended		Year ended
	December 31,		December 31,
	2013		2012
SocGen	$	52,431	$	-
Union		3,679		16,452
Amegy		-		52,994
	$	56,110	$	69,446

Aggregate principal payments based on Yuma’s current borrowings as of December 31, 2013 for the next five years are shown below:

2014	$	178,027
2015		-
2016		-
2017		31,215,000
2018		-

NOTE O – STOCKHOLDERS’ EQUITY

1. Common Stock

The Company is authorized to issue up to 130,000 shares of common stock, par value $0.01. With the issuance of the Series A Preferred Stock, each then-outstanding share of common stock (1,141 shares) was converted into 47.3269 shares of common stock (54,000 total shares). The holders of common stock are entitled to one vote for each share of common stock, except as otherwise required by law; holders of common stock are not entitled to vote on any amendment to the Certificate of Incorporation that relates solely to the terms of the Preferred Stock. So long as any shares of Series A or Series B Preferred Stock are outstanding, no dividends may be declared or paid or set apart for payment and no other distribution may be declared or made or set apart for payment, in each case except for certain property distributions as defined in the Certificate of Incorporation, and detailed in Note F – Related Party Transactions.

2. 2011 Stock Option Plan

Effective June 21, 2011, the Company adopted the 2011 Stock Option Plan (“Stock Plan”). The Stock Plan provides, among other things, for the granting of up to 6,000 shares of common stock as awards to key employees, officers, directors, and consultants of the Company by the Board of Directors. An award may take the form of stock options, stock appreciation rights (“SARS”), or restricted stock.

F-40

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE P – INCOME TAXES

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of property and equipment for financial reporting versus income tax reporting. The deferred taxes represent the future tax return consequences of those differences that will either be taxable or deductible when the differences in the basis of assets and liabilities reverse.

The Company recognizes and measures income tax benefits that are more likely than not to be sustained on eventual examination or settlement. Deferred tax assets are recorded to the extent the Company believes these assets will more likely than not be realized.

The Company does not have any unrecognized tax benefits for the years 2013 and 2012. In addition, the Company does not anticipate any unrecognized tax benefits during the next twelve months from the report date, April 24, 2014.

The Company did not incur any income tax deficiencies during 2011, 2012, and 2013, and therefore had no interest or penalties assessed during the years ended December 31, 2011, 2012, and 2013.

The tax years of the Company that remain subject to examination by the Internal Revenue Service and other tax authorities are 2010, 2011, 2012, and 2013.

The Company follows the liability and asset approach in accounting for income and state franchise taxes as required by the provisions of FASB concerning accounting for income taxes. Deferred tax liabilities and assets are determined using the tax rates for the period in which those accounts are expected to be paid or received.

Provisions for income taxes are composed of the following for the years ended December 31, 2013, 2012 and 2011:

	December 31,		December 31,		December 31,
	2013		2012		2011
Continuing operations:
Current income taxes:
Federal	$	-	$	-	$	-
State		-		-		-
Total		-		-		-
Deferred income taxes (benefit):
Federal		2,705,688		2,744,068		769,573
State		374,584		354,241		83,923
Total		3,080,272		3,098,309		853,496
Total taxes (benefit) on income	$	3,080,272	$	3,098,309	$	853,496

F-41

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE P – INCOME TAXES – Continued

Deferred tax liabilities (assets) that are recognized for the estimated future tax effects attributable to temporary differences and carryforwards at year-end are as follows:

	December 31,			December 31,
	2013			2012
Current:
Deferred tax asset (stock based compensation)	$	146,964		$	-
Noncurrent:
Deferred tax liability (hedges)	$	24,262		$	168,297
Deferred tax liability from excess of book basis over tax basis of certain assets including property, plant and equipment		23,116,582			16,307,945
		23,140,844			16,476,242
Stock based compensation		(27,079	)		-
Alternative minimum tax credit carryforwards		(121,686	)		(121,686	)
Net operating loss carryforwards		(9,831,874	)		(6,277,264	)
Deferred tax asset		(9,980,639	)		(6,398,950	)
Net deferred tax liability	$	13,160,205		$	10,077,292

The deferred tax assets at December 31, 2013 and 2012 of $9,980,639 and $6,398,950, respectively, consist of deductible temporary differences related to operating loss carryforwards, unrealized losses from oil and gas hedges, and tax credit carryforwards and stock based compensation generated by the consolidated group:

Year NOL	NOL		Year of
generated	remaining		expiration
2013	$	9,472,693	2034
2012		8,082,421	2033
2011		5,511,938	2032
2009		4,844,318	2030
2007		1,095,474	2028
2002		3,050,662	2023
Total	$	32,057,506

The tax provisions differ from the amounts that would be calculated by using federal statutory rates of 35 percent to calculate income taxes because (i) no tax benefit has been recognized for nondeductible operating expenses; (ii) the Companies are subject to various state income taxes; and (iii) the tax provisions consider the effect of graduated rates.

F-42

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE P – INCOME TAXES – Continued

When the Company believes that it is more likely than not that a net operating loss or credit carryforward may expire unused, it establishes a valuation allowance against the loss or credit. No valuation allowance has been established as of December 31, 2013 or 2012. Income taxes are allocated among the companies in the consolidated group on the basis of the tax effect each company contributed to income taxes for the years 2013 and 2012.

NOTE Q – CONTINGENCIES

1. Certain Legal Proceedings

From time to time, the Company is party to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, the Company is not currently a party to any proceeding that it believes, if determined in a manner adverse to the Company, could have a potential material adverse effect on the Company’s financial condition, results of operations, or cash flows.

2. Environmental Remediation Contingencies

As of December 31, 2013 and 2012, there were no known environmental or other regulatory matters related to the Company’s operations that were reasonably expected to result in a material liability to the Company. The Company’s operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection.

Yuma has been named as one of 97 defendants in a matter entitled Board of Commissioners of the Southeast Louisiana Flood Protection Authority – East, Individually and As the Board Governing the Orleans Levee District, the Lake Borgne Basin Levee District, and the East Jefferson Levee District v. Tennessee Gas Pipeline Company, LLC, et al., Civil District Court for the Parish of Orleans, State of Louisiana, No. 13-6911, Division “J” - 5, now removed as Civil Action No. 13-5410, before the United Stated District Court, Eastern District of Louisiana. Plaintiff filed the suit on July 24, 2013 seeking damages and injunctive relief arising out of defendants’ drilling, exploration, and production activities from the early 1900s to the present day in coastal areas east of the Mississippi River in Southeast Louisiana.

The suit alleges that defendants’ activities have caused “removal, erosion, and submergence” of coastal lands resulting in significant reduction or loss of the protection such lands afforded against hurricanes and tropical storms. Plaintiff alleges that it now faces increased costs to maintain and operate the man-made hurricane protection system and may reach the point where that system no longer adequately protects populated areas.

Plaintiff lists hundreds of wells, pipelines, and dredging events as possible sources of the alleged land loss. Yuma is named in association with 11 wells, four rights-of-way, and one dredging permit. The suit does not specify any deficiency or harm caused by any individual activity or facility.

Although the suit references various federal statutes as sources of standards of care, plaintiff claims that all causes of action arise under state law: negligence, strict liability, natural servitude of drain, public nuisance, private nuisance, and as third-party beneficiary under breach of contract.

F-43

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Q – CONTINGENCIES – Continued

The lawsuit is in its early stages. No broad activity is expected until after the federal court decides whether to remand the matter to state court. The court retaining jurisdiction will then set a scheduling order under which preliminary motions will be heard, likely over the next several months. Potential motions to dismiss are numerous, including, challenges to plaintiff’s right to bring suit, no cause of action, and improper parties. At this time, the Company cannot predict the outcome of this case and, in Management’s opinion, assess any potential liability; therefore no liability has been recorded on the Company’s books.

NOTE R – EMPLOYEE BENEFIT PLANS

The Company has a defined contribution 401(k) plan (the “Plan”) for its qualified employees. Employees may contribute any amount of their compensation to the Plan, subject to certain Internal Revenue Service annual limits and certain limitations for employees classified as high income. The Plan provides for discretionary matching contributions by the Company, and the Company currently provides a match for non-highly compensated employees only at a rate of 100 percent of each employee’s contribution up to 4 percent of the employee’s base salary. The Company contributed $33,412 and $32,120 under this policy for 2013 and 2012, respectively.

The Company provides medical, dental, and life insurance coverage for both employees and dependents, along with long-term disability and accidental death and dismemberment coverage for employees only. The Company pays the full cost of coverage for all insurance benefits except medical. The Company’s contribution toward medical coverage is 85 percent for the employee portion of the premium, and a variable percentage of the dependent portion, depending on employee compensation levels.

The Company offers paid vacations to employees in time increments determined by longevity and individual employment contracts. The Company policy provides a limited carry forward of vacation time not taken during the year. The Company recorded an accrued liability for compensated absences of $123,406 and $118,201 for 2013 and 2012, respectively.

The Company maintains employment contracts with members of its exploration staff and with certain key employees of the Company. As of December 31, 2013, future employment contract salary commitments were $1,562,833, excluding automatic renewals, evergreen and month-to-month provisions, and potential Annual Incentive Plan awards as described below.

The Company adopted a Stock Plan as described in Note O – Stockholders’ Equity.

During December 2011, the Company adopted an employee Annual Incentive Plan (“AIP”). Under the AIP, the Board of Directors establishes certain performance metrics by which Management is to be measured annually. These metrics are changed each year and awards of either restricted stock, cash, or some combination of both may be made to members of the Company’s management team. The Board will meet during 2014 to evaluate the Company’s management team and determine any awards that may be due for 2013 (see Note X – Subsequent Events). To the extent compensation costs relate to employees directly involved in exploration and development activities, such amounts are capitalized to oil and natural gas properties. Amounts not capitalized to oil and natural gas properties are recognized as general and administrative expense.

F-44

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE S – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, CONCENTRATIONS OF CREDIT RISK, AND CONCENTRATIONS IN GEOLOGIC PROVINCES

1. Off-Balance Sheet Risk

The Company does not consider itself to have any material financial instruments with off-balance sheet risks.

2. Concentrations of Credit Risk

The Company maintains cash deposits with banks that at times exceed applicable insurance limits. The Company reduces its exposure to credit risk by maintaining such deposits with high quality financial institutions. The Company has not experienced any losses in such accounts.

Substantially all of Exploration’s accounts receivable result from oil and natural gas sales, joint interest billings and prospect sales to oil and gas industry partners. This concentration of customers, joint interest owners and oil and gas industry partners may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic and other conditions. Such receivables are generally not collateralized; however, certain crude oil purchasers have been required to provide letters of guaranty from their parent companies.

3. Concentrations in Geologic Provinces

The Company has a significant portion of its crude oil production and associated infrastructure concentrated in St. Bernard Parish, Louisiana. These properties are in state waters and as such, have exposure to named windstorms. The Company carries appropriate property coverage limits, but does not carry business interruption coverage for the potential lost production. The Company has changed its strategic direction to onshore geological provinces with little or no hurricane exposure.

NOTE T – OTHER DISCLOSURES

1. Other Income (Expense)

	December 31,			December 31,			December 31,
	2013			2012			2011
Louisiana sales tax settlement	$	(44,149	)	$	-		$	-
Louisiana Mineral Board audit		(23,686	)		-			-
Write off of liabilities net of assets		-			-			265,656
Private equity expenses		-			-			(96,810	)
Other		(5,118	)		(1,039	)		(2,550	)
Total	$	(72,953	)	$	(1,039	)	$	166,296

F-45

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE T – OTHER DISCLOSURES – Continued

2. Other Receivables

	December 31,		December 31,
	2013		2012
Debit balances for trade payables	$	163,802	$	-
Blowout insurance premium adjustment		162,075		-
Refund from PPI for duplicate charges		89,544		89,544
Cash flow hedge settlement		-		44,064
Parish sales tax refund		-		14,375
Other		2,429		3,555
Total	$	417,850	$	151,538

3. Prepayments

	December 31,		December 31,
	2013		2012
Insurance	$	209,415	$	185,890
Exploration and drilling costs		187,145		1,015,904
Software maintenance agreements		14,099		78,092
Other subscriptions		13,560		4,282
Software licenses		8,593		5,819
Geological well database subscription		-		12,375
Other		1,179		1,179
Total	$	433,991	$	1,303,541

4. Other Current Deferred Charges

	December 31,		December 31,
	2013		2012
Loan fees	$	162,416	$	133,893
Primary office space rent		-		12,554
Total	$	162,416	$	146,447

F-46

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE T – OTHER DISCLOSURES – Continued

5. Other Noncurrent Assets

	December 31,		December 31,
	2013		2012
Deferred offering costs	$	1,257,160	$	-
Loan fees		384,953		211,997
Security deposits on leased office and storage spaces		7,300		7,300
Total	$	1,649,413	$	219,297

6. Other Accrued Liabilities

	December 31,		December 31,
	2013		2012
Salaries and bonuses	$	184,072	$	427,478
Severance taxes		170,531		4,045
Accounting and audit		158,368		118,648
Vacation		123,406		118,201
Pre-initial public offering expenses		259,223		-
Sales and use tax		98,818		30,683
Fees for commodity hedging advisor		62,631		-
Interest expense		46,946		2,460
Commodity hedge settlement		21,463		-
Louisiana sales tax audit (contested)		-		217,721
Louisiana Mineral Board audit (contested)		-		56,158
Franchise taxes		-		1,523
Other		1,825		1,532
Total	$	1,127,283	$	978,449

7. Other Noncurrent Deferred Credits

	December 31,		December 31,
	2013		2012
Fees for commodity hedging advisor	$	69,998	$	-
Primary office space rent		-		11,761
Total	$	69,998	$	11,761

F-47

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE U – SALES TO MAJOR CUSTOMERS

Yuma generally sells crude oil and natural gas to numerous customers on a month-to-month basis. In 2013, four customers accounted for approximately 78 percent of unaffiliated oil and gas sales. In 2012, four customers accounted for approximately 79 percent of unaffiliated oil and gas sales, and in 2011, approximately 65 percent of unaffiliated oil and gas sales were made to three customers.

NOTE V – LEASES

Yuma leases its primary office space of 15,180 square feet for $26,565 per month, plus $50 per month for each employee or contractor parking space. The lease term, as amended on July 30, 2010, expires on December 31, 2017. On November 1, 2012, the monthly rent reduced to $21,821 on a triple-net basis, and then escalates by 1.45 percent for the period November 1, 2013 through October 31, 2014. The lease then escalates by approximately 2.8 percent each year thereafter

Yuma currently leases approximately 2,000 square feet of office space at an off-site location as a storage facility. The current lease was effective December 28, 2004, and expired on January 31, 2012. The Company extended this lease for two additional years at the same terms. The lease called for a security deposit of $1,300, and monthly rent of $1,455 commencing on February 1, 2012.

Aggregate rental expense for 2013, 2012 and 2011 was $534,275, $378,192 and $367,212, respectively. As of December 31, 2013, future minimum rentals under all noncancellable operating leases are as follows:

2014	$	523,521
2015		531,083
2016		520,762
2017		525,492
2018		2,197

NOTE W – DISCONTINUED OPERATIONS

Texas Southeastern Gas Gathering Company (“TSEGG”) was a wholly owned subsidiary of YEI and operated approximately 76 miles of gathering lines in Louisiana. On March 12, 2010, TSEGG closed on the sale of its pipeline assets located in Cameron, Iberville, Plaquemine and St. Bernard Parishes, Louisiana, for total proceeds of $7.5 million. The sale was effective January 1, 2010, and resulted in the recognition of a gain on the sale of $3,957,057 after estimated taxes of $2,633,524. Accordingly, the Company’s financial statements have been prepared with the net assets and liabilities, results of operations, and cash flows of this entity displayed separately as “discontinued operations.”

F-48

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE W – DISCONTINUED OPERATIONS – Continued

The terms of the sale call for an “Earn Out” calculation for each of the successive five years whereby the Company can earn $100,000, $250,000, or $500,000 if the revenues from the pipeline assets surpass certain prescribed hurdles. The total maximum “Earn Out” payments for the five years may not exceed $2.5 million. For 2013, 2012 and 2011, the revenues did not surpass any of the hurdles necessary to generate an “Earn Out” payment to TSEGG. Prior to the dissolution of TSEGG, the rights under the “Earn Out” provision were assigned to the Company’s CEO (see Note F – Related Party Transactions).

A summary of the results of operations of the discontinued company follows:

	December 31,		December 31,		December 31,
	2013		2012		2011
Results of operations:
Gas transportation revenue	$	-	$	-	$	-
Operations and maintenance		-		-		-
General and administrative		-		-		(110,211	)
Depreciation and amortization		-		-		-
Income (loss) from operations		-		-		(110,211	)
Gain on sale of pipeline assets		-		-		-
Other income (expense)		-		-		(8,755	)
Net income (loss) before taxes		-		-		(118,966	)
Income tax expense (benefit)		-		-		(100,928	)
Income from discontinued operations	$	-	$	-	$	(18,038	)

TSEGG was formally dissolved as of December 31, 2011. Subsequent to the dissolution, there are no reported current or noncurrent liabilities of discontinued operations for 2013 or 2012, and no income from discontinued operations in 2013 or 2012.

NOTE X – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through April 24, 2014, the date these financial statements were available to be issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements, except as noted below or already recognized or disclosed.

1. Agreement and Plan of Merger and Reorganization with Pyramid Oil Company

On February 6, 2014, Pyramid Oil Company (“Pyramid”) and Yuma jointly announced a definitive merger agreement (the “merger agreement”) for an all-stock transaction. The transaction is subject to the approval of the stockholders of Yuma’s common stock and each class of Preferred Stock, and the stockholders of Pyramid.

F-49

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE X – SUBSEQUENT EVENTS – Continued

As part of the merger, Pyramid will reincorporate as a Delaware corporation and change its name to Yuma Energy, Inc. Under the terms of the merger agreement, Pyramid will issue an aggregate of 66,336,701 shares of newly issued Pyramid common stock, subject to certain adjustments, to Yuma stockholders, resulting in former Yuma stockholders owning approximately 93 percent of the post-merger company. The transaction is expected to qualify as a tax-deferred reorganization under Section 368(a) of the Internal Revenue Code. Pyramid common stock is traded on the NYSE MKT under the symbol “PDO”. Upon closing, all Yuma executive officers and directors will assume the same roles with the combined company. The transaction is expected to close mid-2014.

2. Deferred Offering Costs

As a result of the merger agreement with Pyramid Oil Company, the expenses of approximately $1.3 million incurred by the Company in exploring several alternative options to go public will be written off during the first quarter of 2014.

3. Annual Incentive Plan Awards for 2013 and Restricted Stock Awards

During the March 6, 2014 meeting of the Board of Directors, the AIP awards for performance in 2013 were evaluated and approved. Participants will be offered the choice of cash, restricted stock, or a combination of cash and restricted stock. No shares of restricted stock will vest until the Company has a Liquidity Event.

During the March 6, 2014 meeting, the Board also awarded 22 shares of restricted stock to two non-employee members of the Board and awarded 237 shares of restricted stock to two employees. All of these awards have three year vesting schedules and all are subject to the occurrence of a Liquidity Event prior to vesting.

F-50

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)

1. Costs Incurred

Costs incurred in oil and natural gas property acquisition, exploration and development activities, all of which are conducted within the continental United States, are summarized below:

	December 31,			December 31,			December 31,
	2013			2012			2011
Property acquisition costs - unproved	$	3,865,932		$	17,025,756		$	4,815,285
Property acquisition costs - proved		8,539,134			1,800,385			(186,273	)
Sales proceeds - unproved		(679,266	)		(1,386,649	)		-
Sales proceeds - proved		(718,000	)		-			-
Exploration costs		2,504,087			4,931,623			2,090,462
Development costs		11,910,179			7,699,903			3,922,267
Capitalized asset retirements costs		5,795,400			173,432			283,509
Total costs incurred	$	31,217,466		$	30,244,450		$	10,925,250

The Company sells oil and natural gas prospects. The gains or losses from these sales are recorded as adjustments to the full cost pool under U.S. Securities and Exchange Commission (“SEC”) guidelines. Prospect profits were $50,346, $234,105 and $-0- for 2013, 2012 and 2011, respectively.

F-51

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED) – Continued

2. Capitalized Costs Relating to Oil and Gas Producing Activities

The following table illustrates the total amount of capitalized costs relating to natural gas and crude oil producing activities and the total amount of related accumulated depreciation, depletion and amortization:

	December 31,			December 31,
	2013			2012
Oil and gas properties, full cost method:
Not subject to amortization:
Prospect inventory	$	14,587,986		$	12,845,654
Property acquisition costs - unproved		8,202,369			7,511,033
Well development costs - unproved		1,249,718			949,638
Subject to amortization:
Property acquisition costs - proved		36,999,813			28,832,235
Well development costs - proved		56,460,276			49,657,267
Capitalized costs - unsuccessful		50,849,905			43,132,174
Capitalized asset retirement costs		8,565,199			2,769,799
Total capitalized costs		176,915,266			145,697,800
Less accumulated depreciation, depletion and amortization		(84,438,840	)		(72,510,968	)
Net capitalized costs	$	92,476,426		$	73,186,832

3. Reserves

Proved natural gas and oil reserves are those quantities of natural gas and oil, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. Based on reserve reporting rules, the price is calculated using the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period (if the first day of the month occurs on a weekend or holiday, the previous business day is used), unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. A project to extract hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. The area of the reservoir considered as proved includes: (i) the area identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible natural gas or oil on the basis of available geosciences and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geosciences, engineering or performance data and reliable technology establish a lower contact with reasonable certainty. Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated natural gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geosciences, engineering or performance data and reliable technology establish the higher contact with reasonable certainty.

F-52

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED) – Continued

Developed natural gas and oil reserves are reserves of any category that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.

The information below on our natural gas and oil reserves is presented in accordance with regulations prescribed be the SEC, with guidelines established by the Society of Petroleum Engineers’ Petroleum Resource Management System, as in effect as of the date of such estimates. The Company’s reserve estimates are generally based upon extrapolation of historical production trends, analogy to similar properties and volumetric calculations. Accordingly, these estimates will change as future information becomes available and as commodity prices change. Such changes could be material and could occur in the near term.

The Company does not prepare engineering estimates of proved oil and natural gas reserve quantities for all wells. The Company only prepares engineering studies of estimated oil and natural gas quantities on a consolidated basis. The Company has a quantity of interests that, individually, are immaterial and are excluded from prepared engineering studies. Accounting sales volumes and receipts differ from amounts prepared by internal engineers and included in the following tables.

F-53

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED) – Continued

	2013			2012			2011
Barrels of oil:
Proved developed and undeveloped reserves:
Beginning of year		6,164,340			1,484,550			1,224,683
Revisions of previous estimates		(861,854	)		(132,352	)		122,335
Purchases of oil and gas properties		6,481,816			4,777,048			12,780
Extensions and discoveries		92,152			225,063			236,583
Sale of oil and gas properties		-			-			-
Production		(201,473	)		(154,186	)		(110,124	)
End of year		11,614,811			6,200,123			1,486,257
Proved developed reserves - January 1,		1,130,465			1,123,623			981,391
Proved developed reserves - December 31,		1,607,229			1,130,465			1,123,623
Proved undeveloped reserves - January 1,		5,033,875			360,922			243,292
Proved undeveloped reserves - December 31,		10,007,582			5,033,875			360,922

	2013			2012			2011
Barrels of natural gas liquids:
Proved developed and undeveloped reserves:
Beginning of year		1,575,624			354,875			-
Revisions of previous estimates		(280,800	)		-			-
Purchases of oil and gas properties		1,477,784			1,199,186			-
Extensions and discoveries		-			-			354,873
Sale of oil and gas properties		-			-			-
Production		(65,629	)		(14,220	)		(1,705	)
End of year		2,706,979			1,539,841			353,168
Proved developed reserves - January 1,		343,550			112,379			-
Proved developed reserves - December 31,		492,472			343,550			112,379
Proved undeveloped reserves - January 1,		1,232,074			242,501			-
Proved undeveloped reserves - December 31,		2,274,677			1,232,074			242,501

F-54

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED) – Continued

	2013			2012			2011
Thousands of cubic feet of natural gas
Proved developed and undeveloped reserves:
Beginning of year		31,071,137			17,020,496			10,831,934
Revisions of previous estimates		(8,281,139	)		(463,712	)		(2,802,945	)
Purchases of oil and gas properties		16,495,803			12,931,203			5,626
Extensions and discoveries		362,806			2,163,825			9,463,335
Sale of oil and gas properties		-			-			-
Production		(1,276,238	)		(580,675	)		(477,454	)
End of year		38,372,369			31,071,137			17,020,496
Proved developed reserves - January 1,		10,156,754			5,287,966			2,403,165
Proved developed reserves - December 31,		10,316,516			10,156,754			5,287,966
Proved undeveloped reserves - January 1,		20,914,383			11,732,530			8,428,769
Proved undeveloped reserves - December 31,		28,055,853			20,914,383			11,732,530

Revisions to previously estimates reserves for both natural gas and crude oil were primarily caused by (i) commodity price reductions causing wells to reach their economic limits sooner thus producing fewer reserves and causing some proved undeveloped locations to become uneconomic; (ii) downward revisions to the La Posada field Broussard #2 well when the well was recompleted up hole in the “B” sand; and, (iii) a downward revision in the DS&B #119 well due to well performance.

F-55

Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED) – Continued

4. Internal Controls Over Reserve and Future Net Revenue Estimation

The Company’s principal engineer, who is primarily responsible for overseeing the preparation of proved reserve estimates and future net revenues, has over 14 years of experience in the oil and gas industry. His experience includes detailed evaluation of reserves and future net reserves for acquisitions, divestments, bank financing, long range planning, portfolio optimization, strategy and end of year financial reports. He has a B.S. in Petroleum Engineering from Texas A&M University, M.S. in Finance from University of Houston, and MBA from Rice University. He is a member of the Society of Petroleum Engineers (the “SPE”). The procedures and methods used by the principal engineer in preparing internal estimates of proved reserves and future net cash flows are approved by the SPE’s Petroleum Resource Management System (“PMRS”) with no risks applied.

At December 31, 2012 and 2011, Pressler Petroleum Consultants (“Pressler”) performed an independent engineering evaluation using the same guidelines established by PMRS to obtain an independent estimate of the proved reserves and future net revenues. During 2013, Yuma changed outside engineering firms for the evaluation of its reserves. Yuma hired Netherland, Sewell & Associates, Inc. (“NSAI”) to evaluate its reserve portfolio, replacing Pressler Petroleum Consultants. At December 31, 2013, NSAI performed an independent engineering evaluation using the same guidelines established by PMRS to obtain an independent estimate of the proved reserves and future net revenues.

5. Third Party Procedures and Methods Review

The review consisted of 22 fields which included the Company’s major assets in the United States and encompassed approximately 95 percent of Yuma’s proved reserves and future net cash flows as of December 31, 2013, 2012 and 2011. The principal engineer presented the outside engineering firm with an overview of the data, methods and assumptions used in estimating reserves and future net revenues for each field. The data presented included pertinent seismic information, geologic maps, well logs, production tests, material balance calculations, well performance data, operating expenses and other relevant economic criteria.

6. Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

The following information has been developed utilizing procedures from the FASB concerning disclosures about oil and gas producing activities, and based on natural gas and crude oil reserve and production volumes estimated by the Company’s engineering staff. It can be used for some comparisons, but should not be the only method used to evaluate the Company or its performance. Further, the information in the following table may not represent realistic assessments of future cash flows, nor should the standardized measure of discounted future net cash flows be viewed as representative of the current value of the Company.

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Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED) – Continued

The Company believes that the following factors should be taken into account when reviewing the following information:

● Future costs and selling prices will probably differ from those required to be used in these calculations;

● Due to future market conditions and governmental regulations, actual rates of production in future years may vary significantly from the rate of production assumed in the calculations;

● A 10 percent discount rate may not be reasonable as a measure of the relative risk inherent in realizing future net oil and gas revenues; and

● Future net revenues may be subject to different rates of income taxation.

The standardized measure of discounted future net cash flows relating to the Company’s ownership interests in proved crude oil and natural gas reserves as of year-end is shown for Exploration for 2013, 2012 and 2011.

	December 31,			December 31,			December 31,
	2013			2012			2011
Future cash inflows	$	1,450,469,000		$	823,280,251		$	252,662,388
Future oil and natural gas operating expenses		(334,883,800	)		(151,140,007	)		(51,468,360	)
Future development costs		(424,256,900	)		(209,618,885	)		(13,306,206	)
Future income tax expenses		(163,704,120	)		(111,946,653	)		(45,117,996	)
Future net cash flows		527,624,180			350,574,706			142,769,826
10% annual discount for estimating timing of cash flows		(202,270,201	)		(139,021,820	)		(57,685,959	)
Standardized measure of discounted future net cash flows	$	325,353,979		$	211,552,886		$	85,083,867

Estimates of future net cash flows from proved reserves of gas, oil, and condensate for 2013, 2012 and 2011 are computed using the average first-day-of-the-month price during the 12-month period including the impact of cash flow hedges for 2012 and 2011 only. Since the Company discontinued cash flow hedge accounting as of January 1, 2013, the impact of cash flow hedges are excluded as of that date. Prices used in computing year-end future cash flows were $96.94, $94.04 and $96.04 for crude oil and $3.67, $2.93 and $4.04 for natural gas for 2013, 2012 and 2011, respectively.

The ceiling test for many companies following the full cost method of accounting for oil and natural gas properties, including Yuma, could be negatively impacted by prolonged unfavorable crude oil and natural gas prices. Future operating expenses and development costs are computed primarily by the Company’s petroleum engineer by estimating the expenditures to be incurred in developing and producing the Company’s proved oil and natural gas reserves at the end of the year, based on the year-end costs and assuming continuation of existing economic conditions.

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Yuma Energy, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE Y – SUPPLEMENTARY INFORMATION ON OIL AND NATURAL GAS EXPLORATION,DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED) – Continued

Future income taxes are based on year-end statutory rates, adjusted for tax basis and applicable tax credits. A discount factor of ten percent was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair market value of the Company’s oil and natural gas properties. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.

7. Change in Standardized Measure

Changes in the standardized measure of future net cash flows relating to proved oil and natural gas reserves for Exploration are summarized below:

	December 31,			December 31,			December 31,
	2013			2012			2011
Changes due to current year operation:
Sales of oil and natural gas, net of oil and natural gas operating expenses	$	(17,255,824	)	$	(13,250,556	)	$	(12,877,813	)
Extensions and discoveries		37,750,617			40,013,415			50,163,527
Purchases of oil and gas properties		215,427,459			177,412,984			17,132,467
Development costs incurred during the period that reduced future development costs		100,500			5,432,652			-
Changes due to revisions in standardized variables:
Prices and operating expenses		(30,773,529	)		(37,028,314	)		20,364,851
Income taxes		(38,340,467	)		(40,922,146	)		(14,624,083	)
Estimated future development costs		32,430,504			(5,173,677	)		(794,080	)
Quantities		(107,070,514	)		(12,905,019	)		(19,926,711	)
Sale of reserves in place		-			-			-
Accretion of discount		27,910,664			11,055,659			5,083,613
Production rates, timing and other		(6,378,317	)		1,834,021			(1,475,127	)
Net change		113,801,093			126,469,019			43,046,644
Beginning of year		211,552,886			85,083,867			42,037,223
End of year	$	325,353,979		$	211,552,886		$	85,083,867

Sales of oil and natural gas, net of oil and natural gas operating expenses, are based on historical pretax results. Sales of oil and natural gas properties, extensions and discoveries, purchases of minerals in place and the changes due to revisions in standardized variables are reported on a pretax discounted basis.

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