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MEXCO ENERGY CORP - Quarter Report: 2019 December (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2019

 

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. 1-31785

 

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)
     
415 West Wall Street, Suite 475    
Midland, Texas   79701
(Address of principal executive offices)   (Zip code)

 

(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 [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] 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.

 

  Large Accelerated Filer [  ]   Accelerated Filer [  ]
       
  Non-Accelerated Filer [  ]   Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]

 

The number of shares outstanding of the registrant’s common stock, par value $.50 per share, as of February 12, 2020 was 2,040,166.

 

 

 

   
 

 

MEXCO ENERGY CORPORATION AND SUBSIDIARIES

 

Table of Contents  
  Page
PART I. FINANCIAL INFORMATION  
       
  Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and March 31, 2019 3
       
    Consolidated Statements of Operations (Unaudited) for the three months and nine months ended December 31, 2019 and December 31, 2018 4
       
   

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the three and nine months ended December 31, 2019 and December 31, 2018

5
       
    Consolidated Statements of Cash Flows (Unaudited) for the nine months ended December 31, 2019 and December 31, 2018 6
       
    Notes to Consolidated Financial Statements (Unaudited) 7
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
       
  Item 4. Controls and Procedures 16
       
PART II. OTHER INFORMATION  
       
  Item 1. Legal Proceedings 17
       
  Item 1A. Risk Factors 17
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
       
  Item 3. Defaults upon Senior Securities 17
       
  Item 4. Mine Safety Disclosures 17
       
  Item 5. Other Information 17
       
  Item 6. Exhibits 17
       
SIGNATURES 18
     
CERTIFICATIONS  

 

 2 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2019   March 31, 2019 
   (Unaudited)     
ASSETS        
Current assets          
Cash and cash equivalents  $63,295   $128,252 
Accounts receivable:          
Oil and natural gas sales   395,251    349,600 
Trade   13,976    - 
Note receivable   -    30,421 
Prepaid costs and expenses   17,395    53,735 
Total current assets   489,917    562,008 
Property and equipment, at cost          
Oil and gas properties, using the full cost method   36,889,224    35,907,677 
Other   115,280    113,043 
Accumulated depreciation, depletion and amortization   (27,904,180)   (27,255,451)
Property and equipment, net   9,100,324    8,765,269 
Investment – cost basis   100,000    - 
Operating lease, right-of-use asset   92,444    - 
Other noncurrent assets   15    122,407 
Total assets  $9,782,700   $9,449,684 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $100,065   $166,113 
Operating lease liability, current   65,461    - 
Total current liabilities   165,526    166,113 
Long-term liabilites          
Long-term debt   486,250    - 
Operating lease liability, long-term   27,456    - 
Asset retirement obligations   751,333    854,034 
Total long-term liabilities   1,265,039    854,034 
Total liabilities   1,430,565    1,020,147 
           
Commitments and contingencies          
           
Stockholders’ equity          
Preferred stock - $1.00 par value; 10,000,000 shares authorized; none outstanding   -    - 
Common stock - $0.50 par value; 40,000,000 shares authorized; 2,107,166 shares issued and 2,040,166 shares outstanding as of December 31, 2019 and March 31, 2019, respectively   1,053,583    1,053,583 
Additional paid-in capital   7,329,423    7,305,048 
Retained earnings   315,130    416,907 
Treasury stock, at cost – (67,000 shares)   (346,001)   (346,001)
Total stockholders’ equity   8,352,135    8,429,537 
Total liabilities and stockholders’ equity  $9,782,700   $9,449,684 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 3 
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   December 31   December 31 
   2019   2018   2019   2018 
Operating revenue:                    
Oil sales  $643,141   $452,695   $1,762,663   $1,517,989 
Natural gas sales   123,082    187,448    321,004    558,753 
Other   3,555    4,173    11,586    31,093 
Total operating revenues   769,778    644,316    2,095,253    2,107,835 
                     
Operating expenses:                    
Production   249,921    211,788    698,358    721,301 
Accretion of asset retirement obligation   6,961    9,464    20,298    16,870 
Depreciation, depletion, and amortization   228,762    196,206    648,729    617,864 
General and administrative   239,346    234,987    805,701    710,194 
Total operating expenses   724,990    652,445    2,173,086    2,066,229 
                     
Operating income (loss)   44,788    (8,129)   (77,833)   41,606 
                     
Other income (expenses):                    
Interest income   611    4    1,110    87 
Interest expense   (10,203)   (4,951)   (25,054)   (18,318)
Net other expense   (9,592)   (4,947)   (23,944)   (18,231)
                     
Income (loss) before income taxes   35,196    (13,076)   (101,777)   23,375 
                     
Net income (loss)  $35,196   $(13,076)  $(101,777)  $23,375 
                     
Income (loss) per common share:                    
Basic:  $0.02   $(0.01)  $(0.05)  $0.01 
Diluted:  $0.02   $(0.01)  $(0.05)  $0.01 
                     
Weighted average common shares outstanding:                    
Basic:   2,040,166    2,040,166    2,040,166    2,039,165 
Diluted:   2,040,166    2,040,166    2,040,166    2,039,165 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 4 
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

   Common Stock Par Value   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Total Stockholders’ Equity 
Balance at April 1, 2019  $1,053,583   $7,305,048   $416,907   $(346,001)  $8,429,537 
Net loss   -    -    (101,777)   -    (101,777)
Stock based compensation   -    24,375    -    -    24,375 
Balance at December 31, 2019  $1,053,583   $7,329,423   $315,130   $(346,001)  $8,352,135 

 

   Common Stock Par Value   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Total Stockholders’ Equity 
Balance at September 30, 2019  $1,053,583   $7,321,298   $279,934   $(346,001)  $8,308,814 
Net income   -    -    35,196    -    35,196 
Stock based compensation   -    8,125    -    -    8,125 
Balance at December 31, 2019  $1,053,583   $7,329,423   $315,130   $(346,001)  $8,352,135 

 

   Common Stock Par Value   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Total Stockholders’ Equity 
Balance at April 1, 2018  $1,052,133   $7,265,601   $429,853   $(346,001)  $8,401,586 
Net income   -    -    23,375    -    23,375 
Issuance of stock through options exercised   1,450    16,791    -    -    18,241 
Stock based compensation   -    14,552    -    -    14,552 
Balance at December 31, 2018  $1,053,583   $7,296,944   $453,228   $(346,001)  $8,457,754 

 

   Common Stock Par Value   Additional Paid-In Capital   Retained Earnings   Treasury Stock   Total Stockholders’ Equity 
Balance at September 30, 2018  $1,053,583   $7,288,840   $466,304   $(346,001)  $8,462,726 
Net loss   -    -    (13,076)   -    (13,076)
Stock based compensation   -    8,104    -    -    8,104 
Balance at December 31, 2018  $1,053,583   $7,296,944   $453,228   $(346,001)  $8,457,754 
                          
SHARE ACTIVITY                         
Common stock shares, issued:                         
Balance at April 1, 2019        2,107,166                
Issued        -                
Balance at Dec. 31, 2019        2,107,166                
                          
Common stock shares, held in treasury:                         
Balance at April 1, 2019        (67,000)               
Acquisitions        -                
Balance at Dec. 31, 2019        (67,000)               
                          
Common stock shares, outstanding at December 31, 2019        2,040,166                

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 5 
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended December 31,

(Unaudited)

 

   2019   2018 
Cash flows from operating activities:          
Net (loss) income  $(101,777)  $23,375 
Adjustments to reconcile net (loss) income to net cash  provided by operating activities:          
Stock-based compensation   24,375    14,552 
Depreciation, depletion and amortization   648,729    617,864 
Accretion of asset retirement obligations   20,298    16,870 
Amortization of debt issuance costs   10,781    - 
Changes in operating assets and liabilities:          
(Increase) decrease in accounts receivable   (59,627)   476,505 
Decrease in right-of-use asset   48,941    - 
Decrease in prepaid expenses   36,340    26,236 
Decrease (increase) in other assets   30,421    (4,729)
Decrease in accounts payable and accrued expenses   (54,375)   (347,945)
Settlement of asset retirement obligations   (12,054)   (2,227)
Decrease in operating lease liability   (48,468)   - 
Net cash provided by operating activities   543,584    820,501 
           
Cash flows from investing activities:          
Additions to oil and gas properties   (1,100,437)   (632,033)
Additions to other property and equipment   (2,237)   - 
Investment – cost basis   (100,000)   - 
Proceeds from sale of oil and gas properties and equipment   79,133    111,226 
Net cash used in investing activities   (1,123,541)   (520,807)
           
Cash flows from financing activities:          
Proceeds from exercise of stock options   -    18,241 
Proceeds from long-term debt   705,000    - 
Debt issuance costs   -    (5,000)
Reduction of long-term debt   (190,000)   (700,000)
Net cash provided by (used in) financing activities   515,000    (686,759)
           
Net decrease in cash and cash equivalents   (64,957)   (387,065)
           
Cash and cash equivalents at beginning of period   128,252    492,610 
           
Cash and cash equivalents at end of period  $63,295   $105,545 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $14,047   $21,120 
           
Non-cash investing and financing activities:          
Asset retirement obligations  $15,475   $5,092 
Operating lease – right of use asset and associated liabilities  $141,385    - 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 6 
 

 

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 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 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 December 31, 2019, and the results of its operations and cash flows for the interim periods ended December 31, 2019 and 2018. The consolidated financial statements as of December 31, 2019 and for the three and nine month periods ended December 31, 2019 and 2018 are unaudited. The consolidated balance sheet as of March 31, 2019 was derived from the audited balance sheet filed in the Company’s 2019 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 financial statements be read in conjunction with the 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 using the cost method.

 

Recently Adopted Accounting Pronouncements. In February 2016, the FASB issued ASU 2016-02, Topic 842 Leases and subsequent amendments to the initial guidance: ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term greater than one year. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company has determined that it has only one operating lease, which is an office lease. The Company adopted Topic 842 on April 1, 2019 using the modified retrospective approach and the impact of the adoption resulted in the recognition of a ROU asset and liability on the Company’s consolidated balance sheets of $141,385. The current portion of the operating lease liability is included in Total current liabilities and the noncurrent portion of the operating lease liability is included in Total long-term liabilities on the Company’s consolidated balance sheets. Prior periods have not been adjusted. See Note 6 – Leases for additional discussion.

 

 7 
 

 

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 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 in 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 nine months of fiscal 2020:

 

Carrying amount of asset retirement obligations as of April 1, 2019  $861,534 
Liabilities incurred   15,475 
Liabilities settled   (138,474)
Accretion expense   20,298 
Carrying amount of asset retirement obligations as of December 31, 2019   758,833 
Less: Current portion   7,500 
Non-Current asset retirement obligation  $751,333 

 

4. Stock-based Compensation

 

The Company recognized stock-based compensation expense of $8,125 and $8,104 in general and administrative expense in the Consolidated Statements of Operations for the three months ended December 31, 2019 and 2018, respectively. Stock-based compensation expense recognized for the nine months ended December 31, 2019 and 2018 was $24,375 and $14,552, respectively. The total cost related to non-vested awards not yet recognized at December 31, 2019 totals approximately $87,636 which is expected to be recognized over a weighted average of 2.70 years.

 

During the nine months ended December 31, 2019, no stock options were granted. During the nine months ended December 31, 2018, the Compensation Committee of the Board of Directors approved and the Company granted 40,000 stock options exercisable at $4.84 per share. 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 nine months ended December 31, 2019 and 2018. All such amounts represent the weighted average amounts.

 

   Nine Months Ended 
   December 31 
   2019   2018 
Grant-date fair value   -   $3.25 
Volatility factor   -    55.26%
Dividend yield   -    - 
Risk-free interest rate   -    2.91%
Expected term (in years)   -    6.25 

 

 8 
 

 

The following table is a summary of activity of stock options for the nine months ended December 31, 2019:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contract Life in Years 
Outstanding at April 1, 2019   185,700   $6.18    4.68 
Granted   -    -      
Exercised   -    -      
Forfeited or Expired   -    -      
Outstanding at December 31, 2019   185,700   $6.18    3.93 
                
Vested at December 31, 2019   155,700   $6.44    3.01 
Exercisable at December 31, 2019   155,700   $6.44    3.01 

 

During the nine months ended December 30, 2019, no stock options were exercised. During the nine months ended December 31, 2018, stock options covering 2,900 shares were exercised with a total intrinsic value of $6,575. The Company received proceeds of $18,241 from these exercises.

 

No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history of these types of awards. There were no stock options forfeited or expired during the nine months ended December 31, 2019 and 2018.

 

Outstanding options at December 31, 2019 expire between August 2020 and September 2028 and have exercise prices ranging from $4.84 to $7.00.

 

5. Long Term Debt

 

Long-term debt on the Consolidated Balance Sheets consisted of the following as of the dates indicated:

 

   December 31, 2019   March 31, 2019 
Credit facility  $515,000    - 
Unamortized debt issuance costs   (28,750)   - 
Total long-term debt  $486,250    - 

 

The Company has a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”) which provided for a credit facility of $1,000,000. The Agreement has no monthly commitment reduction and a borrowing base to be evaluated annually.

 

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 (.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 (.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 December 31, 2019, there was $485,000 available on the facility.

 

No principal payments are anticipated to be required through the maturity date of the credit facility, December 28, 2021. Upon closing with WTNB on the 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.

 

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 fiscal quarters and minimum interest coverage ratios (EBITDA/Interest Expense) of 2.00 to 1.00 for each quarter. The Company is in compliance with all covenants as of December 31, 2019 and believes it will remain in compliance for the next fiscal year.

 

In addition, the Agreement prohibits the Company from paying cash dividends on its common stock without prior written permission of WTNB. The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices.

 

 9 
 

 

The balance outstanding on the line of credit as of December 31, 2019 was $515,000. The following table is a summary of activity on the WTNB line of credit for the nine months ended December 31, 2019:

 

   Principal 
Balance at April 1, 2019:  $- 
Borrowings   705,000 
Repayments   (190,000)
Balance at December 31, 2019:  $515,000 

 

Subsequently, on January 9, 2020, the Company borrowed $335,000 on the WTNB line of credit; on January 16, 2020, made a payment of $115,000; and on February 10, 2020, borrowed $60,000 on the WTNB line of credit, leaving a balance of $795,000.

 

The Company also maintains a Certificate of Deposit Account at WTNB to collateralize one outstanding letter of credit for $25,000 in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operated.

 

6. Leases

 

The Company leases approximately 4,160 rentable square feet of office space from an unaffiliated third party for the corporate office located in Midland, Texas. This includes 1,021 square feet of office space shared with and reimbursed by the majority shareholder. The lease is a 36-month lease that expires in May 2021 and does not include an option to renew.

 

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 6.0%. Significant judgement is required when determining the incremental borrowing rate. The Company chose not to discount because the difference is not significant. 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:

 

   December 31, 2019 
Assets     
Operating lease right-of-use asset, beginning balance  $141,385 
Current period amortization   (48,941)
Total operating lease right-of-use asset  $92,444 
      
Liabilities     
Operating lease liability, current  $65,461 
Operating lease liability, long term   27,456 
Total lease liabilities  $92,917 

 

 10 
 

 

Future minimum lease payments as of December 31, 2019 under non-cancellable operating leases are as follows:

 

   Lease Obligation 
Fiscal Year Ended March 31, 2020  $16,214 
Fiscal Year Ended March 31, 2021   65,721 
Fiscal Year Ended March 31, 2022   10,982 
Total lease payments  $92,917 
Less: imputed interest   - 
Operating lease liability   92,917 
Less: operating lease liability, current   (65,461)
Operating lease liability, long term  $27,456 

 

Net cash paid for our operating lease for the nine months ended December 31, 2019 and 2018 was $35,300 and $31,992, respectively. Rent expense, less sublease income of $13,167 and $10,680, respectively, is included in general and administrative expenses.

 

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 December 31, 2019. Our deferred tax asset is $1,352,437 as of December 31, 2019 with a valuation amount of $1,352,437. 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 future expected 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 three months ended December 31, 2019 and 2018 was $12,289 and $12,487, respectively. The total billed to and reimbursed by the stockholder for the nine months ended December 31, 2019 and 2018 was $32,232 and $39,508, 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 December 31, 2019 and 2018 were $3,981 and $3,917, respectively. Amounts paid by the principal stockholder directly to the lessor for the nine months ending December 31, 2019 and 2018 were $11,900 and $10,680, 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.

 

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The following is a reconciliation of the number of shares used in the calculation of basic and diluted net income (loss) per share for the three and nine month periods ended December 31, 2019 and 2018:

 

   Three Months Ended   Nine Months Ended 
   December 31   December 31 
   2019   2018   2019   2018 
Net income (loss)  $35,196   $(13,076)  $(101,777)  $23,375 
                     
Shares outstanding:                    
Weighted avg. shares outstanding – basic   2,040,166    2,040,166    2,040,166    2,039,165 
Effect of assumed exercise of dilutive stock options   -    -    -    - 
Weighted avg. shares outstanding – dilutive   2,040,166    2,040,166    2,040,166    2,039,165 
                     
Income (loss) per common share:                    
Basic  $0.02   $(0.01)  $(0.05)  $0.01 
Diluted  $0.02   $(0.01)  $(0.05)  $0.01 

 

For the three months ended December 31, 2019, 185,700 potential common shares relating to stock options were excluded in the computation of diluted net income per share because the price of the options was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $6.18 at December 31, 2019. Due to a net loss for the three months ended December 31, 2018, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

Due to a net loss for the nine months ended December 31, 2019, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. For the nine months ended December 31, 2018, 185,700 potential common shares relating to stock options were excluded in the computation of diluted net income per share because the price of the options was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $6.18 at December 31, 2018.

 

10. Subsequent Events

 

In January 2020, the Company made another $25,000 payment towards its $250,000 commitment in a limited liability company. To date, $125,000 has been funded including this payment.

 

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.

 

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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 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. It is suggested that these financial statements be read in conjunction with the 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 revolving line of credit. 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.

 

Due to the current commodity price environment, we are applying financial discipline to all aspects of our business. In order to meet obligations, we may continue to sell non-core assets.

 

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.

 

For the first nine months of fiscal 2020, cash flow from operations was $543,584, a 34% decrease when compared to the corresponding period of fiscal 2019 primarily as a result of a decrease in natural gas revenues primarily due to a 43% decrease in natural gas price offset by an increase in oil sales as well as an increase in accounts receivable compared to a decrease in accounts receivable during fiscal 2019. Net cash of $515,000 was received from the line of credit, net cash of $1,023,541 was used for additions to oil and gas properties, and cash of $100,000 was used for an investment at cost basis. Accordingly, net cash decreased $64,957, leaving cash and cash equivalents on hand of $63,295 as of December 31, 2019.

 

At December 31, 2019, we had working capital of $324,391 compared to working capital of $395,895 at March 31, 2019, a decrease of $71,504 primarily due to a decrease in cash resulting from property development as described below.

 

Oil and Natural Gas Property Development. In addition to an indeterminate number of wells to be drilled by other operators on Mexco’s royalty interests, the Company currently plans to participate in the drilling and completion of approximately 50 horizontal wells at an estimated aggregate cost of approximately $1,500,000 for the fiscal year ending March 31, 2020. The operators of these wells include Concho Resources, Inc., Devon Energy, Marathon Oil Company, Mewbourne Oil Company, and others.

 

During the first nine months of fiscal 2020, Mexco participated with various percentage interests in the drilling and completion of the first 36 of these horizontal wells in the Delaware Basin located in the western portion of the Permian Basin in Eddy and Lea Counties, New Mexico with aggregate costs of approximately $850,000.

 

Subsequently, in January 2020, Mexco expended an additional $348,000 for participation in the completion of four of these wells and the drilling and completion of an additional 2 wells. In February 2020, Mexco expended another $47,250 for the drilling of 2 more wells. Thus, for the 40 wells to date, the total expended is approximately $1,200,000.

 

Also, during the first quarter of fiscal 2020, Mexco expended $186,000 for the completion of 4 wells in which the Company participated in drilling during fiscal 2019. These wells began producing in June 2019.

 

During the first nine months of fiscal 2020, Mexco also participated in the drilling and completion of 6 vertical wells in Winkler County, Texas at an aggregate cost of approximately $20,000.

 

In April 2019, the Company made a less than 1% cost basis investment commitment in a limited liability company amounting to $250,000 of which $100,000 has been funded through December 31, 2019. This amount is classified as an investment at cost basis on the Company’s consolidated balance sheets less any payments received. The limited liability company is capitalized at approximately $50 million to purchase royalty interests consisting of minerals located in the state of Ohio with 144 gross wells of which 136 are Utica gas wells and 8 are Marcellus oil wells either producing, drilling or in process. Subsequently, in January 2020, the Company made an additional $25,000 payment towards its commitment.

 

In June 2019, the Company received $30,894 in payment for a promissory note in connection with the settlement of a lawsuit from September 2016.

 

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.

 

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Crude oil and natural gas prices 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 $42.75 per bbl in January 2019 to a high of $62.75 per bbl in April 2019. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $1.75 per MMBtu in December 2019 to a high of $4.25 per MMBtu in March 2019. On December 31, 2019 the WTI posted price for crude oil was $57.50 per bbl and the Henry Hub spot price for natural gas was $2.09 per MMBtu. See Results of Operations below for realized prices which are substantially below the Henry Hub Spot Market Price.

 

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 December 31, 2019:

 

   Payments due in: 
   Total   less than 1 year   1 - 3 years   over 3 years 
Contractual obligations:                    
Secured bank line of credit (1)  $515,000   $-   $515,000   $- 
Leases (2)  $92,917   $65,461   $27,456   $- 

 

 

(1)

These amounts represent the balances outstanding under the bank line of credit. This repayment assumes that interest will be paid on a monthly basis, no additional funds will be drawn and does not include estimated interest of $27,038 less than 1 year, and $27,038 1-3 years.
     
  (2) The lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a three-year lease agreement effective May 15, 2018. Of this total obligation for the remainder of the lease, our majority shareholder will pay $16,073 less than 1 year and $6,741 1-3 years for his portion of the shared office space.

 

Results of Operations – Three Months Ended December 31, 2019 and 2018. For the quarter ended December 31, 2019, there was net income of $35,196 compared to a net loss of $13,076 for the quarter ended December 31, 2018 as 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 $766,223 for the third quarter of fiscal 2020, a 20% increase from $640,143 for the same period of fiscal 2019. This resulted from an increase in oil and gas production volumes and an increase in oil prices partially offset by a decrease in gas prices.

 

   2019   2018   % Difference 
Oil:               
Revenue  $643,141   $452,695    42.1%
Volume (bbls)   11,503    9,210    25.9%
Average Price (per bbl)  $55.91   $49.15    13.8%
                
Gas:               
Revenue  $123,082   $187,448    (34.3%)
Volume (mcf)   76,583    72,334    5.9%
Average Price (per mcf)  $1.61   $2.59    (37.8%)

 

Production and exploration. Production costs were $249,921 for the third quarter of fiscal 2020, an 18% increase from $211,788 for the same period of fiscal 2019. This is primarily the result of an increase in lease operating expenses on new wells in which we participated and increased production.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $228,762 for the third quarter of fiscal 2020, an 17% increase from $196,206 for the same period of fiscal 2019, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves from natural decline. This is partially offset by a decrease in the full cost pool amortization base primarily due to a decrease in future development costs.

 

General and administrative expenses. General and administrative expenses were $239,346 for the third quarter of fiscal 2020, a 2% increase from $234,987 for the same period of fiscal 2019. This was primarily due to an increase in accounting fees partially offset by a decrease in legal fees.

 

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Interest expense. Interest expense was $10,203 for the third quarter of fiscal 2020, a 106% increase from $4,951 for the same period of fiscal 2019, due to an increase in borrowings partially offset by a decrease in interest rate.

 

Income taxes. There was no income tax expense for the quarter ended December 31, 2019 and the quarter ended December 31, 2018. The effective tax rate for the three months ended December 31, 2019 and December 31, 2018 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 – Nine Months Ended December 31, 2019 and 2018. For the nine months ended December 31, 2019, there was a net loss of $101,777 compared to net income $23,375 for the nine months ended December 31, 2018. This was a result of an increase in operating expenses and a decrease in operating revenues that is further explained below.

 

Oil and gas sales. Revenue from oil and gas sales was $2,083,667 for the nine months ended December 31, 2019, a .3% increase from $2,076,742 for the same period of fiscal 2019. This resulted from an increase in oil and gas production volumes partially offset by a decrease in oil and gas prices.

 

   2019   2018   % Difference 
Oil:               
Revenue  $1,762,663   $1,517,989    16.1%
Volume (bbls)   32,206    27,090    18.9%
Average Price (per bbl)  $54.73   $56.04    (2.3%)
                
Gas:               
Revenue  $321,004   $558,753    (42.5%)
Volume (mcf)   221,116    219,204    0.9%
Average Price (per mcf)  $1.45   $2.55    (43.1%)

 

Production and exploration. Production costs were $698,358 for the nine months ended December 31, 2019, a 3% decrease from $721,301 for the nine months ended December 31, 2018. This is primarily the result of a decrease in expenses due to repairs, maintenance and workovers on our operated properties and our working interest properties in Oklahoma and Louisiana during the nine-month period of fiscal 2019 partially offset by an increase in lease operating expenses on new wells in which we participated.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $648,729 for the nine months ended December 31, 2019, a 5% increase from $617,864 for the nine months ended December 31, 2018, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves from natural decline. This is partially offset by a decrease in the full cost pool amortization base primarily due to a decrease in future development costs.

 

General and administrative expenses. General and administrative expenses were $805,701 for the nine months ended December 31, 2019, a 13% increase from $710,194 for the nine months ended December 31, 2018. This was primarily due to an increase in accounting fees, engineering fees and contract services partially offset by a decrease in shareholder and proxy services.

 

Interest expense. Interest expense was $25,054 for the nine months ended December 31, 2019, a 37% increase from $18,318 for the nine months ended December 31, 2018 due to an increase in borrowings partially offset by an decrease in interest rate.

 

Income taxes. There was no income tax for the nine months ended December 31, 2019 and for the nine months ended December 31, 2018. The effective tax rate for the nine months ended December 31, 2019 and December 31, 2018 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The primary sources of market risk for us include fluctuations in commodity prices and interest rates. All of our financial instruments are for purposes other than trading.

 

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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 December 31, 2019, our largest credit risk associated with any single purchaser was $220,707 or 56% of our total oil and gas receivables. We have not experienced any significant credit losses.

 

Energy Price Risk. Our most significant market risk is the pricing for natural gas and crude oil. Our financial condition, results of operations, and capital resources 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.

 

Prices for natural gas were adversely affected by temporary pipeline capacity constraints primarily in the Permian Basin. This limitation has been currently alleviated by commencement of operations of a new 42-inch natural gas pipeline capable of transporting 2 Bcf per day to the Gulf Coast which began in September 2019. We cannot predict future disruptions to, capacity constraints in or other limitations on the pipeline systems.

 

Factors that can cause price fluctuations include the level of global demand for petroleum products, foreign and domestic 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. Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity of proved reserves. Any reduction in reserves, including reductions due to price fluctuations, can reduce the borrowing base under our credit facility and adversely affect the amount of cash flow available for capital expenditures and our ability to obtain additional capital for our acquisition, exploration and development activities. In addition, a noncash write-down of our oil and gas properties could be required under full cost accounting rules if prices declined significantly, even if it is only for a short period of time. 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. If the average oil price had increased or decreased by ten dollars per barrel for the first nine months of fiscal 2020, pretax income or loss would have changed by $322,060. If the average gas price had increased or decreased by one dollar per mcf for the first nine months of fiscal 2020, pretax income or loss would have changed by $221,116.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure 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 reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e). Based on such evaluation, such officers concluded that, as of December 31, 2019, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting. No changes in our internal control over financial reporting occurred during the nine months ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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 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 2019 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits  
     
  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

 

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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: February 12, 2020 /s/ Nicholas C. Taylor
  Nicholas C. Taylor
  Chairman of the Board and Chief Executive Officer

 

Dated: February 12, 2020 /s/ Tamala L. McComic
  Tamala L. McComic
  President, Chief Financial Officer, Treasurer and Assistant Secretary

 

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