Item
1. Financial Statements
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
The
accompanying notes are an integral part of the consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Common Stock Par Value
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings (Losses)
|
|
|
Treasury Stock
|
|
|
Total
Stockholders’ Equity
|
|
Balance at June 30, 2021
|
|
$
|
1,074,333
|
|
|
$
|
7,669,579
|
|
|
$
|
868,367
|
|
|
$
|
(346,001
|
)
|
|
$
|
9,266,278
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
708,828
|
|
|
|
-
|
|
|
|
708,828
|
|
Issuance of stock through options exercised
|
|
|
11,450
|
|
|
|
140,282
|
|
|
|
|
|
|
|
|
|
|
|
151,732
|
|
Stock based compensation
|
|
|
-
|
|
|
|
22,568
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,568
|
|
Balance at September 30, 2021
|
|
$
|
1,085,783
|
|
|
$
|
7,832,429
|
|
|
$
|
1,577,195
|
|
|
$
|
(346,001
|
)
|
|
$
|
10,149,406
|
|
|
|
Common Stock Par Value
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Treasury Stock
|
|
|
Total
Stockholders’ Equity
|
|
Balance at April 1, 2020
|
|
$
|
1,053,583
|
|
|
$
|
7,339,351
|
|
|
$
|
317,429
|
|
|
$
|
(346,001
|
)
|
|
$
|
8,364,362
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(341,640
|
)
|
|
|
-
|
|
|
|
(341,640
|
)
|
Issuance of stock through options exercised
|
|
|
750
|
|
|
|
8,685
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,435
|
|
Stock based compensation
|
|
|
-
|
|
|
|
27,948
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,948
|
|
Balance at September 30, 2020
|
|
$
|
1,054,333
|
|
|
$
|
7,375,984
|
|
|
$
|
(24,211
|
)
|
|
$
|
(346,001
|
)
|
|
$
|
8,060,105
|
|
|
|
Common Stock Par Value
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Treasury Stock
|
|
|
Total
Stockholders’ Equity
|
|
Balance at June 30, 2020
|
|
$
|
1,053,583
|
|
|
$
|
7,353,356
|
|
|
$
|
17,759
|
|
|
$
|
(346,001
|
)
|
|
$
|
8,078,697
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(41,970
|
)
|
|
|
-
|
|
|
|
(41,970
|
)
|
Issuance of stock through options exercised
|
|
|
750
|
|
|
|
8,685
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,435
|
|
Stock based compensation
|
|
|
-
|
|
|
|
13,943
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,943
|
|
Balance at September 30, 2020
|
|
$
|
1,054,333
|
|
|
$
|
7,375,984
|
|
|
$
|
(24,211
|
)
|
|
$
|
(346,001
|
)
|
|
$
|
8,060,105
|
|
SHARE ACTIVITY
|
|
|
|
|
Common stock shares, issued:
|
|
|
|
|
Balance at April 1, 2021
|
|
|
2,143,666
|
|
Issued
|
|
|
27,900
|
|
Balance at September 30, 2021
|
|
|
2,171,566
|
|
|
|
|
|
|
Common stock shares, held in treasury:
|
|
|
|
|
Balance at April 1, 2021
|
|
|
(67,000
|
)
|
Acquisitions
|
|
|
-
|
|
Balance at September 30, 2021
|
|
|
(67,000
|
)
|
Common stock shares, outstanding at September 30, 2021
|
|
|
2,104,566
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Six Months Ended September 30,
(Unaudited)
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Operations
Mexco
Energy Corporation (a Colorado corporation) and its wholly owned subsidiaries, Forman Energy Corporation (a New York corporation), Southwest
Texas Disposal Corporation (a Texas corporation) and TBO Oil & Gas, LLC (a Texas limited liability company) (collectively, the “Company”)
are engaged in the exploration, development and production of natural gas, crude oil, condensate and natural gas liquids (“NGLs”).
Most of the Company’s oil and gas interests are centered in the West Texas and Southeastern New Mexico; however, the Company owns
producing properties and undeveloped acreage in fourteen states. All of the Company’s oil and gas interests are operated by others.
2.
Basis of Presentation and Significant Accounting Policies
Principles
of Consolidation. The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned subsidiaries.
All significant intercompany balances and transactions associated with the consolidated operations have been eliminated.
Estimates
and Assumptions. In preparing consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”),
management is required to make informed judgments, estimates and assumptions that affect the reported amounts of assets and liabilities
as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. In addition,
significant estimates are used in determining proved oil and gas reserves. Although management believes its estimates and assumptions
are reasonable, actual results may differ materially from those estimates. The estimate of the Company’s oil and natural gas reserves,
which is used to compute depreciation, depletion, amortization and impairment of oil and gas properties, is the most significant of the
estimates and assumptions that affect these reported results.
Interim
Financial Statements. In
the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position of the Company as of September 30, 2021, and the results of its
operations and cash flows for the interim periods ended September 30, 2021 and 2020. The consolidated financial statements as of September
30, 2021 and for the three and six month periods ended September 30, 2021 and 2020 are unaudited. The consolidated balance sheet as of
March 31, 2021 was derived from the audited balance sheet filed in the Company’s 2021 annual report on Form 10-K filed with the
Securities and Exchange Commission (“SEC”). The results of operations for the periods presented are not necessarily indicative
of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note 2
of the “Notes to Consolidated Financial Statements” in the Form 10-K. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. However, the disclosures herein are
adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K.
Investments.
The Company accounts for investments of less than 1% in limited liability companies at cost. The Company has no control of the limited
liability companies. The cost of the investment is recorded as an asset on the consolidated balance sheets and when income from the investment
is received, it is immediately recognized on the consolidated statements of operations.
Derivative
Financial Instruments. The Company’s derivative financial instruments are used to manage commodity price risk attributable
to expected oil and gas production. While there is risk the financial benefit of rising oil and gas prices may not be captured, the Company
believes the benefits of stable and predictable cash flows outweigh the potential risks.
The
Company accounts for derivative financial instruments using fair value accounting and recognizes gains and losses in earnings during
the period in which they occur. Unsettled derivative instruments are recorded in the accompanying consolidated balance sheets as either
a current or non-current asset or a liability measured at its fair value. The Company only offsets derivative assets and liabilities
for arrangements with the same counterparty when right of offset exists. Derivative assets and liabilities with different counterparties
are recorded gross in the consolidated balance sheets. Derivative contract settlements are reflected in operating activities in the accompanying
consolidated statements of cash flows.
As
of September 30, 2021, the Company had no derivative contracts. During the six months ended September 30, 2020, the Company entered into
a series of crude oil put option contracts. All of these such contracts expired in July and August 2020.
3.
Asset Retirement Obligations
The
Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and equipment,
and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is initially
incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by
increasing the carrying amount of the related long-lived asset. The liability is accreted each period until the liability is settled
or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying
amount of our oil and natural gas properties. The ARO is included on the consolidated balance sheets with the current portion being included
in the accounts payable and other accrued expenses.
The
following table provides a rollforward of the AROs for the first six months of fiscal 2022:
Schedule of Rollforward of Asset Retirement Obligations
Carrying amount of asset retirement obligations as of April 1, 2021
|
|
$
|
728,797
|
|
Liabilities incurred
|
|
|
7,472
|
|
Liabilities settled
|
|
|
(3,672
|
)
|
Accretion expense
|
|
|
14,303
|
|
Carrying amount of asset retirement obligations as of September 30, 2021
|
|
|
746,900
|
|
Less: Current portion
|
|
|
15,000
|
|
Non-Current asset retirement obligation
|
|
$
|
731,900
|
|
4.
Long Term Debt
Long-term
debt on the Consolidated Balance Sheets consisted of the following as of the dates indicated:
Schedule of Long-Term Debt
|
|
September 30, 2021
|
|
|
March 31,
2021
|
|
Credit facility
|
|
$
|
-
|
|
|
$
|
1,180,000
|
|
Unamortized debt issuance costs(1)
|
|
|
-
|
|
|
|
(25,051
|
)
|
Total long-term debt, net
|
|
$
|
-
|
|
|
$
|
1,154,949
|
|
|
(1)
|
For
the current period, since the Company has no long term debt outstanding, unamortized debt issuance costs in the amount of $18,789
are included in Other noncurrent assets.
|
For
the current period, since the Company has no long term debt outstanding, unamortized debt issuance costs are included in Other
noncurrent assets.
On
December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”),
which provided for a credit facility of $1,000,000 with a maturity date of December 28, 2021. The Agreement has no monthly commitment
reduction and a borrowing base to be evaluated annually.
On
February 28, 2020, the Agreement was amended to increase the credit facility to $2,500,000, extend the maturity date to March 28, 2023
and increase the borrowing base to $1,500,000.
Under
the Agreement, interest on the facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal plus one-half
of one percent (0.5%) floating daily. Interest on the outstanding amount under the Agreement is payable monthly. In addition, the Company
will pay an unused commitment fee in an amount equal to one-half of one percent (0.5%) times the daily average of the unadvanced amount
of the commitment. The unused commitment fee is payable quarterly in arrears on the last day of each calendar quarter. As of September
30, 2021, there was $1,500,000 available for borrowing by the Company on the facility.
No
principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2023. Upon closing with
WTNB on the original Agreement, the Company paid a .5% loan origination fee in the amount of $5,000 plus legal and recording expenses
totaling $34,532, which were deferred over the life of the credit facility. Upon closing the amendment to the Agreement, the Company
paid a .1% loan origination fee of $2,500 and an extension fee of $3,125 plus legal and recording expenses totaling $12,266, which were
also deferred over the life of the credit facility.
Amounts
borrowed under the Agreement are collateralized by the common stock of the Company’s wholly owned subsidiaries and substantially
all of the Company’s oil and gas properties.
The
Agreement contains customary covenants for credit facilities of this type including limitations on change in control, disposition of
assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement and requires
senior debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratios (Senior Debt/EBITDA) less
than or equal to 4.00 to 1.00 measured with respect to the four trailing quarters and minimum interest coverage ratios (EBITDA/Interest
Expense) of 2.00 to 1.00 for each quarter.
In
addition, this Agreement prohibits the Company from paying cash dividends on its common stock without written permission of WTNB. The
Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior WTNB approval.
There
was no balance outstanding on the line of credit as of September 30, 2021. The following table is a summary of activity on the WTNB line
of credit for the six months ended September 30, 2021:
Summary of Line of Credit Activity
|
|
Principal
|
|
Balance at April 1, 2021:
|
|
$
|
1,180,000
|
|
Borrowings
|
|
|
275,000
|
|
Repayments
|
|
|
(1,455,000
|
)
|
Balance at September 30, 2021:
|
|
$
|
-
|
|
5.
Leases
The
Company leases approximately 4,160 rentable square feet of office space from an unaffiliated third party for our corporate office located
in Midland, Texas. This includes 1,112 square feet of office space shared with and reimbursed by our majority shareholder. The lease
does not include an option to renew and is a 36 month lease that expired in May 2021. In June 2020, in exchange for a reduction in rent
for the months of June and July 2020, the Company agreed to a 2-month extension to its current lease agreement at the regular monthly
rate extending its current lease expiration date to July 2021. In June 2021, the Company agreed to extend its current lease at a flat
(unescalated) rate for 36 months. The amended lease now expires on July 31, 2024.
The
Company determines an arrangement is a lease at inception. Operating leases are recorded in operating lease right-of-use asset, operating
lease liability, current, and operating lease liability, long-term on the consolidated balance sheets.
Operating
lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement
date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate,
the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value
of lease payments. The incremental borrowing rate used at adoption was 3.75%. Significant judgement is required when determining the
incremental borrowing rate. Rent expense for lease payments is recognized on a straight-line basis over the lease term.
The
balance sheets classification of lease assets and liabilities was as follows:
Schedule of Operating Lease Assets and Liabilities
|
|
September 30, 2021
|
|
Assets
|
|
|
|
|
Operating lease right-of-use asset, beginning balance
|
|
$
|
20,861
|
|
Current period amortization
|
|
|
(29,550
|
)
|
Lease amendment
|
|
|
165,007
|
|
Total operating lease right-of-use asset
|
|
$
|
156,318
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating lease liability, current
|
|
$
|
53,288
|
|
Operating lease liability, long term
|
|
|
103,030
|
|
Total lease liabilities
|
|
$
|
156,318
|
|
Future
minimum lease payments as of September 30, 2021 under non-cancellable operating leases are as follows:
Schedule of Future Minimum Lease Payments
|
|
Lease Obligation
|
|
Fiscal Year Ended March 31, 2022
|
|
|
29,120
|
|
Fiscal Year Ended March 31, 2023
|
|
|
58,240
|
|
Fiscal Year Ended March 31, 2024
|
|
|
58,240
|
|
Fiscal Year Ended March 31, 2025
|
|
|
19,413
|
|
Total lease payments
|
|
$
|
165,013
|
|
Less: imputed interest
|
|
|
(8,695
|
)
|
Operating lease liability
|
|
|
156,318
|
|
Less: operating lease liability, current
|
|
|
(53,288
|
)
|
Operating lease liability, long term
|
|
$
|
103,030
|
|
Net
cash paid for our operating lease for the six months ended September 30, 2021 and 2020 was $20,903 and $21,693, respectively. Rent expense,
less sublease income of $10,768 and $9,459, respectively, is included in general and administrative expenses.
6.
Stock-based Compensation
The
Company recognized stock-based compensation expense of $22,568 and $13,943 in general and administrative expense in the Consolidated
Statements of Operations for the three months ended September 30, 2021 and 2020, respectively. Stock-based compensation expense recognized
for the six months ended September 30, 2021 and 2020 was $36,433 and $27,948, respectively. The total cost related to non-vested awards
not yet recognized at September 30, 2021 totals $265,248 which is expected to be recognized over a weighted average of 2.82 years.
During
the six months ended September 30, 2021, the Compensation Committee of the Board of Directors approved and the Company granted 31,000
stock options exercisable at $8.51
per share with an estimated fair value of
$187,550. During the six months ended September 30, 2020, no
stock options were granted. These options are
exercisable at a price not less than the fair market value of the stock at the date of grant, have an exercise period of ten
years and generally vest over four
years.
Included
in the following table is a summary of the grant-date fair value of stock options granted and the related assumptions used in the Binomial
models for stock options granted during the six months ended September 30, 2021 and 2020. All such amounts represent the weighted average
amounts.
Summary of Grant-date Fair Value of Stock Options Granted and Assumptions Used Binomial Models
|
|
Six Months Ended
|
|
|
|
September 30
|
|
|
|
2021
|
|
|
2020
|
|
Grant-date fair value
|
|
$
|
6.05
|
|
|
|
-
|
|
Volatility factor
|
|
|
65.38
|
%
|
|
|
-
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
0.92
|
%
|
|
|
-
|
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
-
|
|
The
following table is a summary of activity of stock options for the six months ended September 30, 2021:
Summary of Activity of Stock Options
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contract Life in Years
|
|
|
Intrinsic Value
|
|
Outstanding at April 1, 2021
|
|
|
156,000
|
|
|
$
|
5.28
|
|
|
|
5.53
|
|
|
$
|
555,100
|
|
Granted
|
|
|
31,000
|
|
|
|
8.51
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(27,900
|
)
|
|
|
6.63
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
159,100
|
|
|
$
|
5.67
|
|
|
|
6.50
|
|
|
$
|
752,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2021
|
|
|
87,350
|
|
|
$
|
5.56
|
|
|
|
4.59
|
|
|
$
|
422,362
|
|
Exercisable at September 30, 2021
|
|
|
87,350
|
|
|
$
|
5.56
|
|
|
|
4.59
|
|
|
$
|
422,362
|
|
During
the six months ended September 30, 2021, stock options covering 27,900 shares were exercised with a total intrinsic value of $104,473.
The Company received proceeds of $185,732 from these exercises. During the six months ended September 30, 2020, stock options covering
1,500 shares were exercised with a total intrinsic value of $135. The Company received proceeds of $9,435 from these exercises.
There
were no stock options forfeited or expired during the six months ended September 30, 2021 and 2020. No forfeiture rate is assumed for
stock options granted to directors or employees due to the forfeiture rate history of these types of awards.
Outstanding
options at September 30, 2021 expire between April 2023 and July 2031 and have exercise prices ranging from $3.34 to $8.51.
7.
Income Taxes
A
valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some
or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding
our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine
whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both
actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business
economics of our industry.
Based
on the material write-downs of the carrying value of our oil and natural gas properties during fiscal 2016, we are in a net deferred
tax asset position as of September 30, 2021. Our deferred tax asset is $1,045,531 as of September 30, 2021 with a valuation amount of
$1,045,531. We believe it is more likely than not that these deferred tax assets will not be realized. Management assesses the available
positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax
assets. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income
are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight
is given to subjective evidence such as expected future growth.
8.
Related Party Transactions
Related
party transactions for the Company relate to shared office expenditures in addition to administrative and operating expenses paid on
behalf of the principal stockholder. The total billed to and reimbursed by the stockholder for the quarters ended September 30, 2021
and 2020 was $10,288 and $8,219, respectively. The total billed to and reimbursed by the stockholder for the six months ended September
30, 2021 and 2020 was $23,056 and $18,321, respectively. The principal stockholder pays for his share of the lease amount for the shared
office space directly to the lessor. Amounts paid by the principal stockholder directly to the lessor for the three months ending September
30, 2021 and 2020 were $3,944 and $3,846, respectively. Amounts paid by the principal stockholder directly to the lessor for the six
months ending September 30, 2021 and 2020 were $7,988 and $7,649, respectively.
9.
Income (loss) Per Common Share
The
Company’s basic net income (loss) per share has been computed based on the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share assumes the exercise of all stock options having exercise prices less than the
average market price of the common stock during the period using the treasury stock method and is computed by dividing net income (loss)
by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In
periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares, because
their inclusion would be anti-dilutive.
The
following is a reconciliation of the number of shares used in the calculation of basic and diluted net loss per share for the three and
six month periods ended September 30, 2021 and 2020.
Schedule of Reconciliation of Basic and Diluted Net Income (loss) Per Share
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$
|
708,828
|
|
|
$
|
(41,970
|
)
|
|
$
|
1,103,834
|
|
|
$
|
(341,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted avg. shares outstanding – basic
|
|
|
2,091,417
|
|
|
|
2,040,941
|
|
|
|
2,084,127
|
|
|
|
2,040,553
|
|
Effect of assumed exercise of dilutive stock options
|
|
|
52,326
|
|
|
|
-
|
|
|
|
47,762
|
|
|
|
-
|
|
Weighted avg. shares outstanding – dilutive
|
|
|
2,143,743
|
|
|
|
2,040,941
|
|
|
|
2,131,889
|
|
|
|
2,040,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.53
|
|
|
$
|
(0.17
|
)
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.52
|
|
|
$
|
(0.17
|
)
|
For
the three and six months ended September 30, 2021, 31,000 shares relating to stock options were excluded from the computation of diluted
net income because their inclusion would be anti-dilutive. Due to a net loss for the for the three and six months ended September 30,
2020, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
10.
Subsequent Events
On
October 4, 2021, stock options covering 16,100 shares were exercised with a total intrinsic value of $128,615. The Company received proceeds
of $103,928 from these exercises.
On
October 5, 2021, stock options covering 1,000 shares were exercised with a total intrinsic value of $8,138. The Company received proceeds
of $5,980 from these exercises.
On
October 22, 2021, the Company expended $84,600 for the completion of four wells in Lea County, NM.
On
October 27, 2021, the Company expended $126,000 for the drilling of four wells in Lea County, NM.
On
November 1, 2021, the Company had cash on hand of approximately $335,000.
The
Company completed a review and analysis of all events that occurred after the consolidated balance sheet date to determine if any such
events must be reported and has determined that there are no other subsequent events to be disclosed.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless
the context otherwise requires, references to the “Company”, “Mexco”, “we”, “us” or “our”
mean Mexco Energy Corporation and its consolidated subsidiaries.
Cautionary
Statements Regarding Forward-Looking Statements. Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Forward-looking statements include statements regarding our plans, beliefs or current expectations and may be signified
by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”,
“anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict”
and other similar expressions. Forward-looking statements appear throughout this Form 10-Q with respect to, among other things: profitability;
planned capital expenditures; estimates of oil and gas production; future project dates; estimates of future oil and gas prices; estimates
of oil and gas reserves; our future financial condition or results of operations; and our business strategy and other plans and objectives
for future operations. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to
differ materially from those contained in any forward-looking statement.
While
we have made assumptions that we believe are reasonable, the assumptions that support our forward-looking statements are based upon information
that is currently available and is subject to change. All forward-looking statements in this Form 10-Q are qualified in their entirety
by the cautionary statement contained in this section. We do not undertake to update, revise or correct any of the forward-looking information.
It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included
in the Form 10-K.
Liquidity
and Capital Resources. Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash
generated by operating activities, bank borrowings, sales of non-core properties and issuance of common stock. Our primary financial
resource is our base of oil and gas reserves. We have pledged our producing oil and gas properties to secure our credit facility. We
do not have any delivery commitments to provide a fixed and determinable quantity of its oil and gas under any existing contract or agreement.
Our
long term strategy is on increasing profit margins while concentrating on obtaining reserves with low cost operations by acquiring and
developing oil and gas properties with potential for long-lived production. We focus our efforts on the acquisition of royalties and
working interests and non-operated properties in areas with significant development potential.
At
September 30, 2021, we had working capital of $744,882 compared to working capital of $618,960 at March 31, 2021, an increase of $125,922
for the reasons set forth below.
Cash
Flows
Changes
in the net funds provided by or (used in) each of our operating, investing and financing activities are set forth in the table below:
|
|
For the Six Months Ended September 30,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
% Difference
|
|
Net cash provided by operating activities
|
|
|
1,584,816
|
|
|
|
164,237
|
|
|
|
865
|
%
|
Net cash used in investing activities
|
|
|
(554,787
|
)
|
|
|
(593,949
|
)
|
|
|
(7
|
)%
|
Net cash (used in) provided by financing activities
|
|
|
(994,268
|
)
|
|
|
458,009
|
|
|
|
(317
|
)%
|
Cash
Flow Provided by Operating Activities. Cash flow from operating activities is primarily derived from the production of our crude
oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset
account balances. Cash flow provided by our operating activities for the six months ended September 30, 2021 was $1,584,816 in comparison
to $164,237 for the six months ended September 30, 2020. This increase of $1,420,579 in our cash flow operating activities consisted
of an increase in our non-cash expenses of $92,505; an increase in our accounts receivable of $102,786; and, an increase in our net income
for the current six months of $1,445,474 compared to a net loss the same six month period of the prior year. Variations in cash flow
from operating activities may impact our level of exploration and development expenditures.
Our
expenditures in operating activities consist primarily of non-operated lease expenses and production expenses. Our expenses also consist
of employee compensation, accounting, insurance and other general and administrative expenses that we have incurred in order to address
normal and necessary business activities of a public company in the crude oil and natural gas production industry.
Cash
Flow Used in Investing Activities. Cash flow from investing activities is derived from changes in oil and gas property balances.
For the six months ended September 30, 2021, we had net cash of $554,787 used for additions to oil and gas properties compared to $593,949
for the six months ended September 30, 2020.
Cash
Flow Provided by Financing Activities. Cash flow from financing activities is derived from our changes in long-term debt and in equity
account balances. Cash flow used in our financing activities was $994,268 for the six months ended September 30, 2021 compared to cash
flow provided by our financing activities of $458,009 for the six months ended September 30, 2020. During the six months ended September
30, 2021 and 2020, we received advances of $275,000 and $605,000, respectively, from our credit facility. During the six months ended
September 30, 2021 and 2020, we made payments of $1,455,000 and $225,000, respectively, on the credit facility. For the six months ended
September 30, 2021 and 2020, we received proceeds of $185,732 and $9,435, respectively, from the exercise of employee and director stock
options. For the six months ended September 30, 2020, we received $68,574 under the paycheck protection program (PPP).
Accordingly,
net cash increased $35,761, leaving cash and cash equivalents on hand of $93,574 as of September 30, 2021.
Oil
and Natural Gas Property Development
New
Participations in Fiscal 2022. The Company currently plans to participate in the drilling and completion of 39 horizontal wells at
an estimated aggregate cost of approximately $1,000,000 for the fiscal year ending March 31, 2022. All of these horizontal wells are
in the Delaware Basin located in the western portion of the Permian Basin in Lea and Eddy Counties, New Mexico and Reeves County, Texas.
During
the six months ended September 30, 2021, Mexco expended approximately $180,000 to participate in the drilling and completion of four
horizontal wells in the Lower Wolfcamp Shale of the Delaware Basin in Eddy County, New Mexico. Mexco’s working interest in these
wells is .44%.
Also
during the six months ended September 30, 2021, Mexco expended $31,500 for its share to participate in the drilling and completion of
two horizontal wells in the 3rd Bone Spring Sand formation of the Delaware Basin located in the western portion of the Permian
Basin in Lea County, New Mexico. These wells were completed in August 2021 with initial average production rates of 1,294 barrels of
oil, 3,345 barrels of water and 3,124,000 cubic feet of gas per day, or, 1,815 barrels of oil equivalent per day. Mexco’s working
interest in these wells is .1%.
In
September 2021, Mexco expended approximately $43,000 to participate in the drilling of three horizontal wells in the 2nd Bone
Spring formation and two horizontal wells in the 3rd Bone Spring formation of the Delaware Basin located in the western portion
of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in these wells is an average of approximately .22%.
In
August 2021, Mexco expended approximately $28,000 to participate in the drilling of two horizontal wells in the Wolfcamp Sand formation
of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in
these wells is .37%. Subsequently, in October 2021, Mexco expended approximately $42,000 for the completion of these wells.
In
August 2021, Mexco expended approximately $52,000 to participate in the drilling of two horizontal wells in the Bone Spring formation
of the Delaware Basin located in the western portion of the Permian Basin in Reeves County, Texas. Mexco working interest in these wells
is approximately .6%. These wells have been drilled and are planned to be completed in November 2021.
In
May 2021, Mexco expended approximately $28,000 to participate in the drilling of two horizontal wells in the Wolfcamp Sand formation
of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in
these wells is .37%. Subsequently, in October 2021, Mexco expended approximately $42,000 for the completion of these wells.
Also,
during the quarter ended June 30, 2021, Mexco participated in the drilling and completion of two horizontal wells in the Wolfcamp formation
of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico with aggregate costs of approximately
$88,000. These wells were completed at the end of June 2021 with initial average production rates of 1,184 barrels of oil, 4,380 barrels
of water and 1,818,000 cubic feet of gas per day, or 1,444 barrels of oil equivalent per day. Mexco’s working interest in these
wells is .56%.
Completion
of Wells Drilled in Fiscal 2021. The Company expended approximately $165,000 for the additional completion costs of 12 horizontal
wells located in Eddy and Lea Counties, New Mexico that the Company participated in drilling during fiscal 2021.
The
Company participated in the completion of two horizontal wells in the Wolfcamp formation of the Delaware Basin located in the western
portion of the Permian Basin in Lea County, New Mexico with aggregate costs of approximately $108,000. These wells were completed at
the end of June 2021 and beginning of July 2021 with initial average production rates of 1,046 barrels of oil, 3,214 barrels of water
and 2,146,000 cubic feet of gas per day, or 1,403 barrels of oil equivalent per day. Mexco’s working interest in these wells is
1.2%.
The
Company participated in the completion of two horizontal wells in the Wolfcamp formation of the Delaware Basin located in the western
portion of the Permian Basin in Lea County, New Mexico with aggregate costs of approximately $55,000. These wells were completed at the
end of June 2021 with initial average production rates of 774 barrels of oil, 2,648 barrels of water and 973,000 cubic feet of gas per
day, or 913 barrels of oil equivalent per day. Mexco’s working interest in these wells is .56%.
We
are participating in other projects and are reviewing projects in which we may participate. The cost of such projects would be funded,
to the extent possible, from existing cash balances and cash flow from operations. The remainder may be funded through borrowings on
the credit facility and, if appropriate, sales of non-core properties.
Crude
oil and natural gas generally remained volatile during the last year. The volatility of the energy markets makes it extremely difficult
to predict future oil and natural gas price movements with any certainty. For example, in the last twelve months, the NYMEX West Texas
Intermediate (“WTI”) posted price for crude oil has ranged from a low of $31.75 per bbl in October 2020 to a high of $71.43
per bbl in September 2021. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $1.41 per
MMBtu in October 2020 to a high of $23.86 per MMBtu in February 2021.
On
September 30, 2021, the WTI posted price for crude oil as $71.01 and the Henry Hub spot price for natural gas was $5.58 per MMBtu. See
Results of Operations below for realized prices.
Contractual
Obligations. We have no off-balance sheet debt or unrecorded obligations and have not guaranteed the debt of any other party. The
following table summarizes our future payments we are obligated to make based on agreements in place as of September 30, 2021:
|
|
Payments due in:
|
|
|
|
Total
|
|
|
less than 1 year
|
|
|
1 - 3 years
|
|
|
over 3 years
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases (1)
|
|
$
|
165,013
|
|
|
$
|
50,421
|
|
|
$
|
114,593
|
|
|
$
|
-
|
|
|
(1)
|
The
lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a 38 month lease agreement
effective May 15, 2018 and extended another 36 months to July 31, 2024. Of this total obligation for the remainder of the lease,
our majority shareholder will pay $13,481 less than 1 year and $30,640 1-3 years for his portion of the shared office space.
|
Results
of Operations – Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020. There was net income
of $708,828 for the quarter ended September 30, 2021 compared to a net loss of $41,970 for the quarter ended September 30, 2020. This
was a result of an increase in oil and gas prices and an increase in oil and gas production partially offset by an increase in operating
expenses that is further explained below.
Oil
and gas sales. Revenue from oil and gas sales was $1,541,171 for the second quarter of fiscal 2022, a 145% increase from $629,964
for the same period of fiscal 2021. This resulted from an increase in oil and gas prices as well as an increase in oil and gas production.
|
|
2021
|
|
|
2020
|
|
|
% Difference
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,133,134
|
|
|
$
|
504,957
|
|
|
|
124.4
|
%
|
Volume (bbls)
|
|
|
16,277
|
|
|
|
13,143
|
|
|
|
23.8
|
%
|
Average Price (per bbl)
|
|
$
|
69.62
|
|
|
$
|
38.42
|
|
|
|
81.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
408,037
|
|
|
$
|
125,007
|
|
|
|
226.4
|
%
|
Volume (mcf)
|
|
|
92,607
|
|
|
|
88,890
|
|
|
|
4.2
|
%
|
Average Price (per mcf)
|
|
$
|
4.41
|
|
|
$
|
1.41
|
|
|
|
212.8
|
%
|
Production
and exploration. Production costs were $335,588 for the second quarter of fiscal 2022, a 55% increase from $217,117 for the same
period of fiscal 2021. This is primarily the result of an increase in production taxes and marketing charges as a result of the increase
in oil and gas revenues.
Depreciation,
depletion and amortization. Depreciation, depletion and amortization expense was $280,060 for the second quarter of fiscal 2022,
a 19% increase from $236,134 for the same period of fiscal 2021, primarily due to an increase in oil and gas production and a decrease
in oil and gas reserves partially offset by a decrease in the full cost pool amortization base.
General
and administrative expenses. General and administrative expenses were $214,242 for the second quarter of fiscal 2022, an 11% increase
from $192,360 for the same period of fiscal 2021. This was primarily due to an increase in office and rent expenses and employee stock
option compensation expense.
Interest
expense. Interest expense was $7,530 for the second quarter of fiscal 2022, a 44% decrease from $13,515 for the same period of fiscal
2021, due to a decrease in borrowings.
Income
taxes. There was no income tax expense for the three months ended September 30, 2021 and for the three months ended September 30,
2020. The effective tax rate for the three months ended September 30, 2021 and September 30, 2020 was 0%. We are in a net deferred tax
asset position and believe it is more likely than not that these deferred tax assets will not be realized.
Results
of Operations – Six Months Ended September 30, 2021 Compared to Six Months Ended September 30, 2020. For the six months ended
September 30, 2021, there was net income of $1,103,834 compared to a net loss of $341,640 for the six months ended September 30, 2020.
This was a result of an increase in operating revenues partially offset by an increase in operating expenses that is further explained
below.
Oil
and gas sales. Revenue from oil and gas sales was $2,796,736 for the six months ended September 30, 2021, a 181% increase from $994,143
for the same period of fiscal 2021. This resulted from an increase in oil and gas prices as well as an increase in oil and gas production.
|
|
2021
|
|
|
2020
|
|
|
% Difference
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,120,237
|
|
|
$
|
787,327
|
|
|
|
169.3
|
%
|
Volume (bbls)
|
|
|
31,715
|
|
|
|
24,677
|
|
|
|
28.5
|
%
|
Average Price (per bbl)
|
|
$
|
66.85
|
|
|
$
|
31.91
|
|
|
|
109.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
676,499
|
|
|
$
|
206,816
|
|
|
|
227.1
|
%
|
Volume (mcf)
|
|
|
182,670
|
|
|
|
168,406
|
|
|
|
8.5
|
%
|
Average Price (per mcf)
|
|
$
|
3.70
|
|
|
$
|
1.23
|
|
|
|
200.8
|
%
|
Production
and exploration. Production costs were $612,575 for the six months ended September 30, 2021, a 58% increase from $388,783 for the
six months ended September 30, 2020. This increase is primarily the result of an increase in production taxes as a result of the increase
in oil and gas revenues and an increase in lease operating expenses over last year due to numerous wells being shut-in during the month
of May 2020 as well as cost cutting measures being implemented by the operators because of the depressed oil and gas prices during the
pandemic.
Depreciation,
depletion and amortization. Depreciation, depletion and amortization expense was $544,380 for the six months ended September 30,
2021, an 18% increase from $460,239 for the six months ended September 30, 2020, primarily due to an increase in oil and gas production
and a decrease of oil and gas reserves partially offset by a decrease in the full cost pool amortization base.
General
and administrative expenses. General and administrative expenses were $522,409 for the six months ended September 30, 2021, an 18%
increase from $441,238 for the six months ended September 30, 2020. This was primarily due to an increase in bonuses and director’s
fees which were significantly reduced last year due to the pandemic and an increase in accounting fees.
Interest
expense. Interest expense was $20,249 for the six months ended September 30, 2021, an 18% decrease from $24,570 for the same period
fiscal 2021 due to a decrease in borrowings.
Income
taxes. There was no income tax expense for the six months ended September 30, 2021 and for the six months ended September 30, 2020.
The effective tax rate for the six months ended September 30, 2021 and September 30, 2020 was 0%. We are in a net deferred tax asset
position and believe it is more likely than not that these deferred tax assets will not be realized.