MEXCO ENERGY CORP - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
[Ö]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended September 30, 2008
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period
from to
Commission
File No. 0-6994
MEXCO
ENERGY CORPORATION
(Exact
name of registrant as specified in its charter)
|
Colorado
|
84-0627918
|
|
(State
or other jurisdiction of
|
(IRS
Employer
|
|
incorporation
or organization)
|
Identification
Number)
|
|
214 West Texas Avenue, Suite
1101
|
79701
|
|
Midland, Texas
|
(Zip
code)
|
|
(Address of principal executive
offices)
|
(432)
682-1119
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. YES [Ö] NO
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act. (Check one):
|
Large Accelerated Filer
[ ]
|
Accelerated
Filer [ ]
|
|
Non-Accelerated Filer
[ ]
|
Smaller
reporting company [√]
|
|
(Do not check
if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES [ ] NO
[Ö]
The
number of shares outstanding of the registrant’s common stock, par value $.50
per share, as of November 10, 2008 was 1,874,866.
Page
1
MEXCO
ENERGY CORPORATION
Table of
Contents
PART I. FINANCIAL
INFORMATION
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Page
|
|||
|
Item
1.
|
Consolidated
Balance Sheets as of September 30, 2008
(Unaudited)
and March 31, 2008
|
3
|
|
|
Consolidated
Statements of Operations (Unaudited) for
the
three months and six months ended September 30, 2008
and
September 30, 2007
|
4
|
||
|
Consolidated
Statements of Changes in Stockholders’ Equity
(Unaudited)
as of September 30, 2008
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5
|
||
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Consolidated
Statements of Cash Flows (Unaudited) for
the
six months ended September 30, 2008 and September 30, 2007
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6
|
||
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Notes
to Consolidated Financial Statements (Unaudited)
|
7
|
||
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Item
2.
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Management's
Discussion and Analysis of Financial Condition
and
Results of Operations
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10
|
|
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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12
|
|
|
Item
4.
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Controls
and Procedures
|
13
|
|
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PART II. OTHER
INFORMATION
|
14
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||
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Item
1.
|
Legal Proceedings | ||
|
Item
1A.
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Risk Factors | ||
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Item
4.
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Submission of Matters to a Vote of Security Holders | ||
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Item
5.
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Other Information | ||
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Item
6.
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Exhibits | ||
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SIGNATURES
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15
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||
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EXHIBITS
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|||
Page
2
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
September
30, 2008
|
March
31, 2008
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash
equivalents
|
$ | 220,239 | $ | 303,617 | ||||
|
Accounts
receivable:
|
||||||||
|
Oil and gas sales
|
867,441 | 758,459 | ||||||
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Trade
|
474,449 | 102,403 | ||||||
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Related parties
|
42,446 | 12,659 | ||||||
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Prepaid costs and
expenses
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51,304 | 22,062 | ||||||
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Total current
assets
|
1,655,879 | 1,199,200 | ||||||
|
Investment in GazTex,
LLC
|
-- | 20,509 | ||||||
|
Property and equipment, at
cost
|
||||||||
|
Oil and gas properties, using the
full cost method
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24,805,130 | 23,941,483 | ||||||
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Other
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61,362 | 61,362 | ||||||
| 24,866,492 | 24,002,845 | |||||||
|
Less accumulated depreciation,
depletion and amortization
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12,499,702 | 12,019,895 | ||||||
|
Property and equipment,
net
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12,366,790 | 11,982,950 | ||||||
| $ | 14,022,669 | $ | 13,202,659 | |||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts payable and accrued
expenses
|
$ | 726,505 | $ | 571,526 | ||||
|
Long-term debt
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950,000 | 2,600,000 | ||||||
|
Asset retirement
obligation
|
409,552 | 374,789 | ||||||
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Deferred income tax
liability
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1,236,139 | 1,196,280 | ||||||
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Stockholders’
equity
|
||||||||
|
Preferred stock - $1.00 par
value;
|
||||||||
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10,000,000 shares authorized;
none outstanding
|
-- | -- | ||||||
|
Common stock - $0.50 par value;
40,000,000 shares authorized;
|
||||||||
|
1,958,866 and 1,841,366 shares
issued;
|
||||||||
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1,874,866 and 1,757,366 shares
outstanding as of
|
||||||||
|
September 30 and March 31, 2008,
respectively
|
979,433 | 920,683 | ||||||
|
Additional paid-in
capital
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5,513,024 | 4,381,269 | ||||||
|
Retained earnings
|
4,634,633 | 3,584,729 | ||||||
|
Treasury stock, at cost (84,000
shares)
|
(426,617 | ) | (426,617 | ) | ||||
|
Total
stockholders’ equity
|
10,700,473 | 8,460,064 | ||||||
| $ | 14,022,669 | $ | 13,202,659 | |||||
The
accompanying notes are an integral part of
the
consolidated financial statements.
Page
3
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
Three
Months Ended
September
30
|
Six Months
Ended
September
30
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Operating
revenue:
|
||||||||||||||||
|
Oil and gas sales
|
$ | 1,595,209 | $ | 839,947 | $ | 3,267,797 | $ | 1,690,092 | ||||||||
|
Other
|
6,597 | 1,161 | 13,330 | 1,334 | ||||||||||||
|
Total operating
revenues
|
1,601,806 | 841,108 | 3,281,127 | 1,691,426 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Production
|
357,753 | 467,336 | 692,741 | 800,386 | ||||||||||||
|
Accretion of asset retirement
obligation
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7,266 | 6,713 | 14,204 | 13,324 | ||||||||||||
|
Depreciation,
depletion, and amortization
|
240,962 | 183,797 | 479,807 | 356,681 | ||||||||||||
|
General and
administrative
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199,239 | 178,918 | 480,900 | 448,543 | ||||||||||||
|
Total operating
expenses
|
805,220 | 836,764 | 1,667,652 | 1,618,934 | ||||||||||||
|
Income
from operations
|
796,586 | 4,344 | 1,613,475 | 72,492 | ||||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest income
|
671 | 1,747 | 1,007 | 2,085 | ||||||||||||
|
Interest expense
|
(19,854 | ) | (20,345 | ) | (53,589 | ) | (35,694 | ) | ||||||||
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Net other expense
|
(19,183 | ) | (18,598 | ) | (52,582 | ) | (33,609 | ) | ||||||||
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Income
(loss) before income taxes
|
777,403 | (14,254 | ) | 1,560,893 | 38,883 | |||||||||||
|
Income
tax expense (benefit):
|
||||||||||||||||
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Current
|
257,562 | -- | 471,130 | -- | ||||||||||||
|
Deferred
|
8,726 | (5,498 | ) | 39,859 | 12,834 | |||||||||||
| 266,288 | (5,498 | ) | 510,989 | 12,834 | ||||||||||||
|
Net
income (loss)
|
$ | 511,115 | $ | (8,756 | ) | $ | 1,049,904 | $ | 26,049 | |||||||
|
Earnings
per common share:
|
||||||||||||||||
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Basic:
|
$ | 0.27 | $ | -- | $ | 0.58 | $ | 0.01 | ||||||||
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Diluted:
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$ | 0.26 | $ | -- | $ | 0.55 | $ | 0.01 | ||||||||
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Weighted
average common shares outstanding:
|
||||||||||||||||
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Basic:
|
1,873,127 | 1,772,268 | 1,817,962 | 1,774,526 | ||||||||||||
|
Diluted:
|
1,975,453 | 1,772,268 | 1,922,568 | 1,786,397 | ||||||||||||
The
accompanying notes are an integral part of
the
consolidated financial statements.
Page
4
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
Additional
Paid-In
Capital
|
Total
Stockholders’
Equity
|
|||||||||||||||||||
|
Common
Stock
Par Value
|
Treasury
Stock
|
Retained
Earnings
|
||||||||||||||||||
|
Balance
at March 31, 2008
|
$ | 920,683 | $ | (426,617 | ) | $ | 4,381,269 | $ | 3,584,729 | $ | 8,460,064 | |||||||||
|
Net income
|
-- | -- | -- | 538,789 | 538,789 | |||||||||||||||
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Issuance of stock
through
|
||||||||||||||||||||
|
options
exercised
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53,750 | -- | 593,178 | -- | 646,928 | |||||||||||||||
|
Excess tax benefits
from
|
||||||||||||||||||||
|
stock based
compensation
|
213,568 | 213,568 | ||||||||||||||||||
|
Stock based
compensation
|
-- | -- | 19,445 | -- | 19,445 | |||||||||||||||
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Balance
at June 30, 2008
|
$ | 974,433 | $ | (426,617 | ) | $ | 5,207,460 | $ | 4,123,518 | $ | 9,878,794 | |||||||||
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Net income
|
-- | -- | -- | 511,115 | 511,115 | |||||||||||||||
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Issuance of stock
through
|
||||||||||||||||||||
|
options
exercised
|
5,000 | -- | 35,000 | -- | 40,000 | |||||||||||||||
|
Excess tax benefits
from
|
||||||||||||||||||||
|
stock based
compensation
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257,562 | 257,562 | ||||||||||||||||||
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Stock based
compensation
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-- | -- | 13,002 | -- | 13,002 | |||||||||||||||
|
Balance
at September 30, 2008
|
$ | 979,433 | $ | (426,617 | ) | $ | 5,513,024 | $ | 4,634,633 | $ | 10,700,473 | |||||||||
SHARE
ACTIVITY
|
Common
stock shares, issued:
|
||||
|
Balance at March 31,
2008
|
1,841,366 | |||
|
Issued
|
107,500 | |||
|
Balance at June 30,
2008
|
1,948,866 | |||
|
Issued
|
10,000 | |||
|
Balance at September 30,
2008
|
1,958,866 | |||
|
Common
stock shares, held in treasury:
|
||||
|
Balance at March 31,
2008
|
(84,000 | ) | ||
|
Acquisitions
|
-- | |||
|
Balance at June 30,
2008
|
(84,000 | ) | ||
|
Acquisitions
|
-- | |||
|
Balance at September 30,
2008
|
(84,000 | ) | ||
|
Common
stock shares, outstanding
|
||||
|
at September 30,
2008
|
1,874,866 | |||
The
accompanying notes are an integral part of
the
consolidated financial statements.
Page
5
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF
CASH FLOWSFor the
Six Months Ended September 30,
(Unaudited)
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
|
$ | 1,049,904 | $ | 26,049 | ||||
|
Adjustments to reconcile net
income to net cash
|
||||||||
|
provided by operating
activities:
|
||||||||
|
Increase in deferred tax
liabilities
|
39,859 | 12,834 | ||||||
|
Excess tax benefit from share
based payment arrangement
|
(471,130 | ) | -- | |||||
|
Stock-based
compensation
|
32,447 | 52,516 | ||||||
|
Depreciation, depletion and
amortization
|
479,807 | 356,681 | ||||||
|
Accretion of asset retirement
obligations
|
14,204 | 13,324 | ||||||
|
Loss in subsidiary of
OBTX, LLC
|
1,809 | -- | ||||||
|
Changes in assets and
liabilities:
|
||||||||
|
Increase in accounts
receivable
|
(510,815 | ) | (2,024 | ) | ||||
|
(Increase) decrease in prepaid
expenses
|
(29,242 | ) | 9,896 | |||||
|
Increase in income taxes
payable
|
471,130 | -- | ||||||
|
Increase in accounts payable and
accrued expenses
|
543,091 | 121,380 | ||||||
|
Net cash provided by operating
activities
|
1,621,064 | 590,656 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Additions to oil and gas
properties
|
(1,231,574 | ) | (866,749 | ) | ||||
|
Proceeds from investment in
GazTex, LLC
|
18,700 | -- | ||||||
|
Proceeds from sale of oil and gas
properties and equipment
|
374 | 10,800 | ||||||
|
Net cash used in investing
activities
|
(1,212,500 | ) | (855,949 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Acquisition of treasury
stock
|
-- | (51,422 | ) | |||||
|
Proceeds from exercise of stock
options
|
686,928 | 4,000 | ||||||
|
Reduction of long-term
debt
|
(2,025,000 | ) | (50,000 | ) | ||||
|
Proceeds from long-term
debt
|
375,000 | 400,000 | ||||||
|
Excess tax benefit from share
based payment arrangement
|
471,130 | -- | ||||||
|
Net cash (used in) provided by
financing activities
|
(491,942 | ) | 302,578 | |||||
|
Net
(decrease) increase in cash and cash equivalents
|
(83,378 | ) | 37,285 | |||||
|
Cash
and cash equivalents at beginning of period
|
303,617 | 72,537 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 220,239 | $ | 109,822 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash paid for
interest
|
$ | 60,794 | $ | 33,902 | ||||
|
Income taxes paid
|
$ | -- | $ | -- | ||||
|
Non-cash
investing and financing activities:
|
||||||||
|
Asset retirement
obligations
|
$ | 21,183 | $ | 12,469 | ||||
The
accompanying notes are an integral part of
the
consolidated financial statements.
Page
6
MEXCO
ENERGY CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature
of Operations
Mexco
Energy Corporation (a Colorado corporation), its wholly owned subsidiaries,
Forman Energy Corporation (a New York corporation) and OBTX, LLC (a Delaware
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”). Although most of the Company’s oil
and gas interests are centered in West Texas, the Company owns producing
properties and undeveloped acreage in ten states. Although most of
the Company’s oil and gas interests are operated by others, the Company operates
several properties in which it owns an interest.
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, 2008, and the results of its operations and cash flows for the
interim periods ended September 30, 2008 and 2007. 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 A of the “Notes to Consolidated
Financial Statements” in the Company’s annual report on Form 10-K filed with the
Securities and Exchange Commission (“SEC”). 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 financial
statements be read in conjunction with the financial statements and notes
thereto included in the Form 10-K.
2. Summary
of 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 financial statements in conformity
with accounting principles generally accepted in the United States of America,
management is required to make informed judgments and estimates 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. Although management believes its estimates and
assumptions are reasonable, actual results may differ materially from those
estimates. Significant estimates affecting these financial statements
include the estimated quantities of proved oil and gas reserves, the related
present value of estimated future net cash flows and the future development,
dismantlement and abandonment costs.
Stock-based
Compensation. The Company recognized compensation expense of
$13,002 and $33,387 in general and administrative expense in the Consolidated
Statements of Operations for the three months ended September 30, 2008 and 2007,
respectively. Compensation expense recognized for the six months
ended September 30, 2008 and 2007 was $32,447 and $52,516,
respectively.
The
following table is a summary of activity of stock options for the six months
ended September 30, 2008:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
Per Share
|
Weighted
Average
Contract
Life
in Years
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding at March 31,
2008
|
290,000 | $ | 6.06 | 3.30 | $ | (535,750 | ) | |||||||||
|
Granted
|
-- | -- | ||||||||||||||
|
Exercised
|
117,500 | 5.85 | ||||||||||||||
|
Forfeited or
Expired
|
20,000 | 7.75 | ||||||||||||||
|
Outstanding at September 30,
2008
|
152,500 | $ | 6.00 | 3.81 | $ | 1,679,303 | ||||||||||
|
Vested at September 30,
2008
|
112,500 | $ | 6.07 | 3.52 | $ | 1,231,253 | ||||||||||
|
Exercisable at September 30,
2008
|
112,500 | $ | 6.07 | 3.52 | $ | 1,231,253 | ||||||||||
There
were no stock options granted during the six months ended September 30, 2008 and
2007.
Page
7
During
the six months ended September 30, 2008, employees and directors exercised
options on a total of 117,500 shares at exercise prices between $4.00 and $8.24
per share. The Company received proceeds of $686,928 from these
exercises. The total intrinsic value of the exercised options was
$4,177,440. No tax deduction is recorded when options are
awarded. Of these exercised options, 44,500 shares resulted in a
disqualifying disposition and a tax benefit for the Company of $471,130 for the
six months ended September 30, 2008. The Company issued new shares of
common stock to settle these option exercises.
No
forfeiture rate is assumed for stock options granted to directors or employees
due to the forfeiture rate history for these types of awards. On
April 2, 2008, 20,000 stock options expired because they were not exercised
prior to the end of their ten-year term.
Outstanding
options at September 30, 2008 expire between September 2009 and July 2014 and
have exercise prices ranging from $4.00 to $8.24.
The total
cost related to non-vested awards not yet recognized at September 30, 2008
totals approximately $59,965 which is expected to be recognized over a weighted
average of 2.7 years.
Asset Retirement
Obligations. The Company’s asset retirement obligations relate
to the plugging of wells, the removal of facilities and equipment, and site
restoration on oil and gas properties. SFAS No. 143 requires the fair
value of a liability for an asset retirement obligation to be recorded in the
period in which it is incurred with a corresponding increase in the carrying
amount of the related long-lived asset.
The
following table provides a rollforward of the asset retirement obligations for
the first six months of fiscal 2009:
|
Carrying amount of asset
retirement obligations as of April 1, 2008
|
$ | 424,789 | ||
|
Liabilities
incurred
|
21,183 | |||
|
Liabilities
settled
|
(624 | ) | ||
|
Accretion expense
|
14,204 | |||
|
Carrying amount of asset
retirement obligations as of September 30, 2008
|
459,552 | |||
|
Less: Current
portion
|
50,000 | |||
|
Non-Current asset retirement
obligation
|
$ | 409,552 |
The asset
retirement obligation is included on the consolidated balance sheets with the
current portion being included in the accounts payable and other accrued
expenses.
Related Party
Transactions. A Family Limited Partnership of Thomas Craddick,
a member of the board of directors and Company employee, received from the
Company a finder’s fee in kind, equal to 2.5% of the mineral interest purchased
Newark East Field in Johnson County, Texas. Mr. Craddick invested his
personal funds in a working interest (5.0% before payout and 3.75% after payout)
in the Company’s well in Ward County, Texas. As of September 30,
2008, Mr. Craddick owed $30,651 for his share of the expenses on this well,
which was subsequently paid on October 1, 2008.
On April
1, 2007, Jeff Smith, a member of the board of directors through September 11,
2008 and a geological consultant, entered into an agreement with the Company to
provide geological consulting services for a fee of approximately $10,000 per
month plus expenses. The Company incurred charges from Mr. Smith for
services rendered under this agreement of approximately $29,370 and $59,370 for
the three and six months ended September 30, 2008, respectively. As
of September 30, 2008, there were outstanding invoices of $11,870 payable to Mr.
Smith. Also as part of this agreement, Mr. Smith received from
the Company a 0.25% overriding interest in each of the two wells in Loving
County, Texas, a 1.0% overriding interest in the well in Ward County, Texas and
a .5% overriding interest in the well in Reeves County,
Texas. Royalties paid to Mr. Smith from the Reeves County well were
$2,924 for the six months ended September 30, 2008. Mr. Smith
invested his personal funds in a working interest (2.5% before payout and 1.875%
after payout) in the Company’s wells in Reeves County, Texas and Ward County,
Texas. As of September 30, 2008, Mr. Smith owed $11,795 for his share
of the expenses on these wells.
Income Per Common
Share. Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing net
income by the weighted average number of common shares and dilutive potential
common shares (stock options) outstanding during the period. The
following is a reconciliation of the number of shares used in the calculation of
basic income per share and diluted income per share for the three and six month
periods ended September 30, 2008 and 2007.
Page
8
|
Three
Months Ended
September
30
|
Six
Months Ended
September
30
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Weighted average common
shares
|
||||||||||||||||
|
outstanding -
basic
|
1,873,127 | 1,772,268 | 1,817,962 | 1,774,526 | ||||||||||||
|
Effect of the assumed exercise
of
|
||||||||||||||||
|
dilutive stock
options
|
102,326 | -- | 104,606 | 11,871 | ||||||||||||
|
Weighted average common
share
|
||||||||||||||||
|
outstanding -
dilutive
|
1,975,453 | 1,772,268 | 1,922,568 | 1,786,397 | ||||||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.27 | $ | -- | $ | 0.58 | $ | 0.01 | ||||||||
|
Diluted
|
$ | 0.26 | $ | -- | $ | 0.55 | $ | 0.01 | ||||||||
For the
three month and six month periods ended September 30, 2008, no potential common
shares relating to stock options were excluded in the computation of diluted net
income per share. For the three month and six month periods ended
September 30, 2007, potential common shares of 274,000 and 224,000,
respectively, relating to stock options, were excluded in the computation of
diluted net income per share because the options were
anti-dilutive. The September 30, 2007 anti-dilutive stock options had
a weighted average exercise price of $6.75.
Income Taxes. The
Company recognizes deferred tax assets and liabilities for future tax
consequences of temporary differences between the carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates applicable to the years in which those
differences are expected to be settled. The effect on deferred tax
assets and liabilities of a change in tax rates under SFAS No. 109 is recognized
in net income in the period that includes the enactment date. For the
three and six months ending September 30, 2008, current income tax is $257,562
and $471,130 and deferred income tax is $8,726 and $39,859, resulting in an
effective tax rate of 34% and 33%, respectively. There was
no current income tax expense for the three and six months ending September 30,
2007. There was a deferred income tax benefit of $5,498 for the three months
ended September 30, 2007 and a deferred income tax expense of $12,834 for the
six months ended September 30, 2007 which resulted in an effective tax rate of
33%.
Effective
April 1, 2007, we adopted the provisions of Financial Accounting Standards
Bulletin ("FASB") Interpretation No, 48, Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the
financial statement recognition and disclosure requirements for uncertain tax
positions taken or expected to be taken in a tax return. For the six months
ending September 30,2008, the amount of unrecognized tax benefits was $563,000.
For the six months ending September 30, 2007, there were no unrecognized tax
benefits. Any interest and penalties related to income tax are recorded as
interest expense and general and administrative expense,
respectively.
Investment in GazTex,
LLC. The Company’s long-term asset consisted of an investment
in GazTex, LLC, a Russian company owned 50% by OBTX, LLC, accounted for by the
equity method. OBTX, LLC is a Delaware limited liability company in
which from January 16, 2007, Mexco owned 100% of the interest. In May
2008, the Company dissolved GazTex, LLC and received the initial cash investment
less related fees and expenses for a net amount of $18,700.
Long Term
Liabilities. Long term liabilities consist of a revolving
credit agreement with Bank of America, N.A. (“Bank”), which provides for a
credit facility of $5,000,000 with no monthly commitment
reductions. The borrowing base is evaluated annually, on or about
September 1. Amounts borrowed under this agreement are collateralized
by the common stock of one of the Company’s wholly owned subsidiaries and all of
the Company’s oil and gas properties. In September
2008, the borrowing base was redetermined and set at
$4,900,000 bearing interest at prime rate per annum with a maturity date of
October 31, 2009. Two letters of credit for $50,000 each, in lieu of
a plugging bond covering the properties we operate, are outstanding under the
facility, one with the Texas Railroad Commission and one with the State of New
Mexico. Interest under this agreement is payable monthly at prime
rate (5.0% and 7.75% at September 30, 2008 and 2007,
respectively). The balance outstanding on the line of credit as of
September 30, 2008 was $950,000.
Subsequent Events.
On October 16, 2008, we purchased interests in approximately 143 mineral
acres amounting to an approximate 10% net royalty in three gas wells located in
Johnson County, Texas for approximately $1.275 million. This property contains
three (3) development wells in the Newark East (Barnett Shale) Field which
have been drilled and are being
prepared for production. Approximately 28 of the 143 acres are outside of the
drilling and spacing unit for these three wells and are also available for
further development.
Recent Accounting
Pronouncements. Effective April 1, 2008, the Company
implemented Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for its
measurement and expands disclosures about fair value
measurements. The Company elected to implement this Statement with
the one-year deferral permitted by FASB Staff Position (“FSP”) 157-2 for
nonfinancial assets and nonfinancial liabilities measured at fair value, except
those that are recognized or disclosed on a recurring basis (at least
annually). The deferral applies to nonfinancial assets and
liabilities measured at fair value in a business combination; impaired
properties, plants and equipment; intangible assets and goodwill; and initial
recognition of asset retirement obligations and restructuring costs for which
the Company uses fair value. Management does not expect any
significant impact to the consolidated financial statements when SFAS 157 for
these assets and liabilities is implemented.
Page
9
In October 2008, the FASB issued FSP FAS
157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active.
FSP FAS 157-3 clarifies
the application of FASB statement No. 157, Fair Value
Measurements, in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. This FSP is effective upon issuance and will not
have a material impact on our financial position, results of operations or cash
flows.
In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, which has been established by the FASB as a
framework for entities to identify the sources of accounting principles and for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with US
GAAP. SFAS No. 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board’s (“PCAOB”)
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting
Principles. Accordingly, the Company will adopt
SFAS No. 162 within the required period. The Company does
not expect that the adoption of this Standard will have an impact on the
financial statements.
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 can be identified with words and
phrases such as “believe,” “expect,” “anticipate,” “should,” “estimate,”
“foresee” or other words and phrases of similar
meaning. 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, estimates of future oil and
gas prices; estimates of oil and gas reserves; future financial condition or
results of operations; and 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
the 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.
Liquidity and Capital
Resources. Historically, we have funded our operations,
acquisitions, exploration and development expenditures from cash generated by
operating activities, bank borrowings and issuance of common
stock. Our primary financial resource is our base of oil and gas
reserves. We pledge our producing oil and gas properties to secure
our revolving line of credit.
Our long
term strategy is on increasing profit margins while concentrating on obtaining
reserves with low cost operations by acquiring and developing primarily gas
properties and secondarily oil properties with potential for long-lived
production.
For the
first six months of fiscal 2009, cash flow from operations was $1,621,064
compared to $590,656 for the first six months of fiscal 2008. This
increase was primarily due to an increase in cash provided by oil and gas
sales. Cash of $1,231,574 was used for additions to oil and gas properties
and $1,650,000 for net reduction in long term debt. Accordingly, net
cash decreased $83,378.
During
the third quarter of fiscal 2008, we acted as operator and drilled an
exploratory well in Loving County, Texas which has been completed. We
have acquired right-of-way and are preparing to build a pipeline to enable
production and sales of natural gas from this well. Our share of the
costs incurred for this project through October 2008 for our 31.25% working
interest is approximately $440,000.
On June
6, 2008 we purchased mineral and royalty interests contained in an aggregate of
522 acres with royalties varying from .126% to .385% in 6 producing natural gas
wells and 5 proven undeveloped well locations in the Newark East (Barnett-Shale)
Field of Tarrant County, Texas for approximately $429,000. There are
an additional 6 potential drill sites on this acreage.
Effective
July 1, 2008, we purchased a well in Loving County, Texas currently producing
from the Lower Cherry Canyon section. We are acting as operator and
have re-entered the well to test two other pay horizons. Our share of
the costs for our 31.25% working interest through October 2008 is approximately
$81,000.
In
September 2008, we committed to participate in the drilling of a development
well in Limestone County, Texas. This well has been drilled and is in
the process of completion. Costs incurred for this project through
October 9, 2008 are approximately $22,000.
Page
10
In
September 2008, we acted as operator and re-entered a well in Ward County, Texas
to an approximate depth of 14,000 feet to test the upper and lower Pennsylvanian
intervals. Costs incurred for this project through October 2008 for
our 25.5% working interest are approximately $72,000. We
also own a 2% overriding royalty interest in this well.
On
October 16, 2008, we purchased interests in approximately 143 mineral acres
amounting to an approximate 10% net royalty in three gas wells located in
Johnson County, Texas for approximately $1.275 million. This property
contains three (3) development wells in the Newark East (Barnett Shale) Field
which have been drilled and are being prepared for
production. Approximately 28 of the 143 acres are outside of the
drilling and spacing unit for these three wells and are also available for
further development. A director and employee of the Company received
a finder’s fee of 2.5% of the mineral interest purchased in lieu of a cash
payment as disclosed on Form 8-K dated October 15, 2008.
We
continue to focus our efforts on the acquisition of royalties in areas with
significant development potential.
We are
participating in several other projects and are reviewing several other 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.
At
September 30, 2008, we had working capital of approximately $929,374 compared to
working capital of $627,674 at March 31, 2008, an increase of
$301,700. This was mainly as a result of an increase in accounts
receivable partially offset by an increase in accounts payable and accrued
expenses.
Crude oil
and natural gas prices have fluctuated significantly in recent years. There
have been substantial decreases in recent months. Fluctuations in price
have a significant impact on our financial condition and
liquidity. However, management is of the opinion that cash flow from
operations and funds available from financing will be sufficient to provide
adequate liquidity for the current fiscal year.
We have a
revolving credit agreement with Bank of America, N.A. (“Bank”), which provides
for a credit facility of $5,000,000, subject to a borrowing base
determination. In September 2008, the borrowing base was redetermined
and increased to $4,900,000 with no monthly commitment
reductions. The borrowing base is evaluated annually, on or about
September 1. Amounts borrowed under this agreement are collateralized
by the common stock of one of our wholly owned subsidiaries and all of our oil
and gas properties. Two letters of credit for $50,000 each, in lieu
of a plugging bond covering the properties we operate, are outstanding under the
facility, one with the Texas Railroad commission and one with the State of New
Mexico. Interest under this agreement is payable monthly at prime
rate (5.0% and 7.75% at September 30, 2008 and 2007,
respectively). This agreement generally restricts our ability to
transfer assets or control of the Company, incur debt, extend credit, change the
nature of our business, substantially change management personnel or pay cash
dividends. The balance outstanding under this agreement as of
September 30, 2008 was $950,000 and $1,750,000 as of November 7,
2008.
Results of Operations – Three Months
Ended September 30, 2008 and 2007. Net income increased
from a net loss of $8,756 for the quarter ended September 30, 2007 to a net
profit of $511,115 for the quarter ended September 30, 2008, an increase of
$519,871 as a result of an increase in oil and gas sales.
Oil and gas
sales. Revenue from oil and gas sales increased from $839,947
for the second quarter of fiscal 2008 to $1,595,209 for the same period of
fiscal 2009. This increase of 90% or $755,262 resulted from an
increase in oil and gas prices and production. Revenues from oil and
gas royalty interests accounted for approximately 36% of our total revenues for
the second quarter of fiscal 2009 compared to 23% for the second quarter of
fiscal 2008. Average gas prices increased from $5.97 per mcf for
the second quarter of fiscal 2008 to $8.78 per mcf for the same period of
fiscal 2009. Average oil prices also increased from $70.53 per bbl for the
second quarter of fiscal 2008 to $116.07 for the same period of fiscal
2009. Oil and gas production quantities were 4,441 barrels (“bbls”) and
88,266 thousand cubic feet (“mcf”) for the second quarter of fiscal 2008 and
4,606 bbls and 120,856 mcf for the same period of fiscal 2009, an increase of 4%
in oil production and 37% in gas production.
Production and
exploration. Production costs decreased 23% from $467,336 for the
second quarter of fiscal 2008 to $357,753 for the same period of
fiscal 2009. This was the result of an approximate 82% decrease in repairs and
maintenance to operated wells in the El Cinco field partially offset by an
increase in production taxes due to increased revenues.
Depreciation, depletion and
amortization. Depreciation, depletion and amortization expense
increased 31%, from $183,797 for the second quarter of fiscal 2008 to
$240,962 for the same period of fiscal 2009, primarily due to an increase to the
full cost pool amortization base and an increase in production.
Page
11
General and administrative
expenses. General and administrative expenses increased 11%
from $178,918 for the second quarter of fiscal 2008 to $199,239 for
the same period of fiscal 2009. This was due to an increase in salaries,
consulting services and fees.
Interest
expense. Interest expense decreased 2% from $20,345 for the
second quarter of fiscal 2008 to $19,854 for the same period of fiscal
2009, due to a decrease in the interest rate, partially offset by increased
borrowings.
Results of Operations – Six Months
Ended September 30, 2008 and 2007. Net income increased from $26,049
for the six months ended September 30, 2007 to $1,049,904 for the same period of
fiscal 2009, an increase of $1,023,855 or 3930%.
Oil and gas
sales. Revenue from oil and gas sales increased from $1,690,092 for
the six months ended September 30, 2007 to $3,267,797 for the same period of
fiscal 2009. This increase of 93%, or $1,577,705, resulted from an increase in
oil and gas prices and gas production. Revenues from oil and gas
royalty interests accounted for approximately 37% of our total revenues for the
six months ended September 30, 2008 compared to 24% for the same period of
fiscal 2008. Average gas prices increased from $6.35 per mcf for the
first six months ended September 30, 2007 to $9.24 per mcf for the same period
of fiscal 2009. Average oil prices also increased from $64.95 per bbl
for the first six months of fiscal 2008 to $117.25 for the same period of fiscal
2009. Oil and gas production quantities were 8,833 bbls and 175,805
mcf for the first six months ended September 30, 2007 and 8,713 bbls and
243,143 mcf for the same period of fiscal 2009, an increase of 38% in gas
production and a decrease of 1% in oil production.
Production and
exploration. Production costs decreased 13% from $800,386 for
the first six months ended September 30, 2007 to $692,741 for the same period of
fiscal 2009. This was the result of an approximate 81% decrease in
repairs and maintenance to operated wells in the El Cinco field partially offset
by an increase in production taxes due to increased revenues.
Depreciation, depletion and
amortization. Depreciation, depletion and amortization expense
increased 35%, from $356,681 for the first six months ended September 30,
2007 to $479,807 for the same period of fiscal 2009 primarily due to an increase
to the full cost pool amortization base and an increase in
production.
General and administrative
expenses. General and administrative expenses increased 7%
from $448,543 for the first six months ended September 30, 2007 to $480,900 for
the same period of fiscal 2009. This was due to an increase in salary
expense, consulting services and fees.
Interest
expense. Interest expense increased 50% from $35,694 for
the first six months ended September 30, 2007 to $53,589 for the same
period of fiscal 2009 due to an increase in borrowings, partially offset by a
decrease in interest rates.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
The
primary sources of market risk for us include fluctuations in commodity prices
and interest rate fluctuations. At September 30, 2008, we had not
entered into any hedge arrangements, commodity swap agreements, commodity
futures, options or other similar agreements relating to crude oil and natural
gas.
Interest Rate
Risk. At September 30, 2008 we had an outstanding loan balance
of $950,000 under our $5.0 million revolving credit agreement, which bears
interest at the prime rate, which varies from time to time. If the
interest rate on our bank debt increases or decreases by one percentage point,
our annual pretax income would change by $9,500 based on the outstanding balance
at September 30, 2008.
Credit Risk. Credit
risk is the risk of loss as a result of nonperformance by other parties of their
contractual obligations. Our primary credit risk is related to oil and gas
production sold to various purchasers and the receivables are generally not
collateralized. At September 30, 2008, our largest credit risk
associated with any single purchaser was $188,620. We are also exposed to
credit risk in the event of nonperformance from any of our working interest
partners. At September 30, 2008, our largest credit risk associated
with any working interest partner was $42,759. We have not experienced any
significant credit losses.
Volatility of Oil and Gas
Prices. Our revenues, operating results and future rate of
growth are highly dependent upon the prevailing market prices of, and demand
for, oil and natural gas. Prices for oil and natural gas fluctuate
widely. We cannot predict future oil and natural gas prices with any
certainty. Historically, the markets for oil and gas have been
volatile, and they are likely to continue to be volatile. Factors
that can cause price fluctuations include the level of global demand for
petroleum products, foreign supply of oil and gas, the establishment of and
compliance with production quotas by oil-exporting countries, weather
conditions, the price and availability of alternative fuels and overall
political and economic conditions in oil producing countries. Declines in oil
and natural gas prices will materially adversely affect our financial condition,
liquidity, ability to obtain financing and operating results.
Page
12
Changes
in oil and gas prices impact both estimated future net revenue and the estimated
quantity proved reserves. Any reduction in reserves, including
reductions due to price fluctuations, can reduce the borrowing base under our
revolving credit facility and adversely affect the amount of cash flow available
for capital expenditures and our ability to obtain additional capital for our
exploration and development activities. In addition, we may have
ceiling test writedowns when prices decline. Lower prices may also
reduce the amount of crude oil and natural gas that can be produced
economically. Thus, we may experience material increases or decreases
in reserve quantities solely as a result of price changes and not as a result of
drilling or well performance.
Similarly,
any improvements in oil and gas prices can have a favorable impact on our
financial condition, results of operations and capital resources. Oil
and natural gas prices do not necessarily fluctuate in direct relationship to
each other. Our financial results are more sensitive to movements in
natural gas prices than oil prices because most of our production and reserves
are natural gas. If the average oil price had increased or decreased
by one dollar per barrel for the first six months of fiscal 2009, our pretax
income would have changed by $8,713. If the average gas price had increased or
decreased by ten cents per mcf for the first six months of fiscal 2009, our
pretax income would have changed by $24,314.
Item
4. Controls and Procedures
We
maintain disclosure controls and procedures to ensure that the information we
must disclose in our filings with the SEC is recorded, processed, summarized and
reported on a timely basis. At the end of the period covered by this
report, our principal executive officer and principal financial officer have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rules 13a-15(e) and
15d-15(e). Based on such evaluation, such officers have concluded
that, as of September 30, 2008, our disclosure controls and
procedures were effective in timely alerting them to material information
relating to us (and our consolidated subsidiaries) required to be included in
our periodic SEC filings.
No
changes in the Company’s internal control over financial reporting occurred
during the quarter ended September 30, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Page
13
PART II –
OTHER INFORMATION
Item
1. Legal
Proceedings
We may,
from time to time, be involved in litigation and claims arising out of our
operations in the normal course of business. We are currently a party
to a lawsuit that is being filed against the drilling company of a well in which
we have a working interest of approximately 6.5%. We are not aware of
any legal or governmental proceedings against us, or contemplated to be brought
against us, under various environmental protection statutes or other regulations
to which we are subject.
Item
1A. Risk
Factors
There
have been no material changes to the information previously disclosed in Item
1A. “Risk Factors” in our 2008 Annual Report on Form 10-K, except to add that
worldwide credit markets have experienced considerable difficulty in recent
months. Thus, Mexco expects future increased costs of and restricted ability to
obtain financing.
Item
4. Submission of Matters to a
Vote of Security Holders
Our annual meeting was held on
September 11, 2008. Following are the two proposals voted on at the
meeting andthe results of each:
Proposal #1 was the election of the
following directors:
|
Votes For:
|
Votes Withheld:
|
||
|
Thomas R.
Craddick
|
1,435,205
|
33,898
|
|
|
Thomas Graham,
Jr.
|
1,449,322
|
19,781
|
|
|
Arden R. Grover
|
1,450,777
|
18,326
|
|
|
Jack D. Ladd
|
1,450,777
|
18,326
|
|
|
Nicholas C.
Taylor
|
1,449,644
|
19,459
|
Proposal
#2 was to ratify the selection of Grant Thornton, LLP as independent registered
public accounting firm for the Company for the fiscal year ended March 31,
2009. Votes for were 1,445,419, votes against were 9,382 and votes
abstained were 14,302.
Item
5. Other
Information
The Board
of Directors of the Company amended Article II and Article X of the Company's
By-laws (the "By-laws"), effective as of November 15, 2008, to revise the date
of the annual meeting of shareholders to the second Thursday in September from
the previously designated second Tuesday in July; and to allow for the issuance
of uncertificated shares thereby allowing the Company to participate in the
Direct Registration System, which is currently administered by The Depository
Trust Company. The Direct Registration System allows investors to
have securities registered in their names without the issuance of physical
certificates and allows investors to electronically transfer securities to
broker-dealers in order to effect transactions without the risks and delays
associated with transferring physical certificates. The Article X
amendment to the By-laws also provides that each registered stockholder shall be
entitled to a stock certificate upon written request to the transfer agent or
registrar of the Company.
The full
text of the By-laws, as amended, is filed as Exhibit 3.1 to this Form 10-Q, and
amended Articles II and X thereof is incorporated herein by
reference.
Item
6. Exhibits
|
3.1
|
Amended
and Restated Bylaws of the Mexco Energy Corporation
|
|
|
31.1
|
Certification
of the Chief Executive Officer of Mexco Energy
Corporation
|
|
|
31.2
|
Certification
of the Chief Financial Officer of Mexco Energy
Corporation
|
|
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer of Mexco Energy
Corporation pursuant to 18 U.S.C.
§1350
|
Page
14
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
MEXCO ENERGY CORPORATION
(Registrant)
Dated:
November 13,
2008 /s/ Nicholas C.
Taylor
Nicholas C. Taylor
President
Dated:
November 13,
2008 /s/Tamala L.
McComic
Tamala L. McComic
Vice President, Treasurer and
Assistant Secretary
Page 15