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 June 30, 2018

 

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]

(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 [X]

 

The number of shares outstanding of the registrant’s common stock, $0.50 par value, as of August 10, 2018 was 2,040,166.

 

 

 

 
 

 

MEXCO ENERGY CORPORATION

 

    Table of Contents  
       
      Page
PART I. FINANCIAL INFORMATION  
   
  Item 1. Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and March 31, 2018 3
       
   

Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2018 and June 30, 2017

4
       
    Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the three months ended June 30, 2018 5
       
   

Consolidated Statements of Cash Flows (Unaudited) for the three months ended June 30, 2018 and June 30, 2017

6
       
    Notes to Consolidated Financial Statements (Unaudited) 7
       
  Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
       
  Item 4. Controls and Procedures 13
       
PART II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 14
       
  Item 1A. Risk Factors 14
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
       
  Item 3. Defaults upon Senior Securities 14
       
  Item 4. Mine Safety Disclosures 14
       
  Item 5. Other Information 14
       
  Item 6. Exhibits 14
       
SIGNATURES 14
   
CERTIFICATIONS  

 

Page 2
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

    June 30,     March 31,  
    2018     2018  
    (Unaudited)        
ASSETS                
Current assets                
Cash and cash equivalents   $ 435,092     $ 492,610  
Accounts receivable:                
Oil and gas sales     424,162       395,991  
Trade     200,934       436,249  
Prepaid costs and expenses     37,688       47,583  
Total current assets     1,097,876       1,372,433  
                 
Property and equipment, at cost                
Oil and gas properties, using the full cost method     35,336,568       35,224,784  
Other     107,484       107,484  
Accumulated depreciation, depletion and amortization     (26,669,100 )     (26,453,025 )
Property and equipment, net     8,774,952       8,879,243  
                 
Other noncurrent assets     31,448       149,278  
Total assets   $ 9,904,276     $ 10,400,954  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Accounts payable and accrued expenses   $ 133,223     $ 446,815  
Total current liabilities     133,223       446,815  
                 
Long-term debt     500,000       700,000  
Asset retirement obligations     851,605       852,553  
Total liabilities     1,484,828       1,999,368  
                 
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; 2,104,266 shares issued and 2,037,266 shares outstanding as of June 30, 2018 and March 31, 2018     1,052,133       1,052,133  
Additional paid-in capital     7,269,043       7,265,601  
Retained earnings     444,273       429,853  
Treasury stock, at cost (67,000 shares)     (346,001 )     (346,001 )
Total stockholders’ equity     8,419,448       8,401,586  
Total liabilities and stockholders’ equity   $ 9,904,276     $ 10,400,954  

 

The accompanying notes are an integral part of

the consolidated financial statements.

 

Page 3
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30,

(Unaudited)

 

    2018     2017  
             
Operating revenues:                
Oil and gas   $ 735,353     $ 651,442  
Other     13,658       16,242  
Total operating revenues     749,011       667,684  
                 
Operating expenses:                
Production     258,935       309,863  
Accretion of asset retirement obligations     3,635       8,249  
Depreciation, depletion and amortization     216,075       311,258  
General and administrative     249,038       306,659  
Total operating expenses     727,683       936,029  
                 
Operating income (loss)     21,328       (268,345 )
                 
Other income (expense):                
Interest income     13       9  
Interest expense     (6,921 )     (27,216 )
Net other expense     (6,908 )     (27,207 )
                 
Income (loss) before provision for income taxes     14,420       (295,552 )
                 
Income tax     -       -  
                 
Net income (loss)   $ 14,420     $ (295,552 )
                 
Income (loss) per common share:                
Basic:   $ 0.01     $ (0.15 )
Diluted:   $ 0.01     $ (0.15 )
                 
Weighted average common shares outstanding:                
Basic:     2,037,266       2,037,266  
Diluted:     2,037,266       2,037,266  

 

The accompanying notes are an integral part of

the consolidated financial statements.

 

Page 4
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

    Common Stock Par Value     Treasury Stock     Additional Paid-In Capital     Retained Earnings     Total
Stockholders’ Equity
 
                               
Balance at April 1, 2018   $ 1,052,133     $ (346,001 )   $ 7,265,601     $ 429,483     $ 8,401,586  
Net income     -       -       -       14,420       14,420  
Stock based compensation     -       -       3,442       -       3,442  
Balance at June 30, 2018   $ 1,052,133     $ (346,001 )   $ 7,269,043     $ 444,273     $ 8,419,448  
                                         
SHARE ACTIVITY                                        
                                         
Common stock shares, issued:                                        
Balance at April 1, 2018             2,104,266                          
Issued             -                          
Balance at June 30, 2018             2,104,266                          
                                         
Common stock shares, held in treasury:                                        
Balance at April 1, 2018             (67,000 )                        
Acquisitions             -                          
Balance at June 30, 2018             (67,000 )                        
                                         
Common stock shares, outstanding at June 30, 2018             2,037,266                          

 

The accompanying notes are an integral part of

the consolidated financial statements.

 

Page 5
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended June 30,

(Unaudited)

 

    2018     2017  
Cash flows from operating activities:                
Net income (loss)   $ 14,420     $ (295,552 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Stock-based compensation     3,442       8,725  
Depreciation, depletion and amortization     216,075       311,258  
Accretion of asset retirement obligations     3,635       8,249  
Changes in operating assets and liabilities                
Decrease in accounts receivable     207,144       30,998  
Decrease in prepaid expenses     9,895       1,643  
(Decrease) increase in accounts payable and accrued expenses     (299,061 )     146,697  
Decrease in asset retirement obligations     (1,049 )     (169 )
Net cash provided by operating activities     154,501       211,849  
                 
Cash flows from investing activities:                
Additions to oil and gas properties     (29,042 )     (200,062 )
Proceeds from sale of oil and gas properties and equipment     17,023       460,461  
Net cash (used in) provided by investing activities     (12,019 )     260,399  
                 
Cash flows from financing activities:                
Reduction of long-term debt     (200,000 )     (424,500 )
Net cash used in financing activities     (200,000 )     (424,500 )
                 
Net (decrease) increase in cash and cash equivalents     (57,518 )     47,748  
                 
Cash and cash equivalents at beginning of period     492,610       73,451  
                 
Cash and cash equivalents at end of period   $ 435,092     $ 121,199  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 7,964     $ 28,104  
                 
Non-cash investing and financing activities:                
Asset retirement obligations   $ 1,743     $ 1,943  

 

The accompanying notes are an integral part of

the consolidated financial statements.

 

Page 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 the Permian Basin of West Texas; however, the Company owns producing properties and undeveloped acreage in thirteen states. Although the Company’s oil and gas interests predominately are operated by others, the Company operates three wells on a lease in which it owns a 100% working interest.

 

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 June 30, 2018, and the results of its operations and cash flows for the interim periods ended June 30, 2018 and 2017. The consolidated financial statements as of June 30, 2018 and for the three month periods ended June 30, 2018 and 2017 are unaudited. The consolidated balance sheet as of March 31, 2018 was derived from the audited balance sheet filed in the Company’s 2018 annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note 2 of the “Notes to Consolidated Financial Statements” in the Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. However, the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K.

 

Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) . The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2017 and supersedes any previous revenue recognition guidance. On April 1, 2018 we adopted ASU 2014-09 using the modified retrospective approach which only applies to contracts that were not completed as of the date of initial application. Recognition of revenue involves a five step approach including identifying the contract, identifying the separate performance obligations, determining the transaction price, allocating the price to the performance obligations and recognizing revenue as the obligations are satisfied.

 

Adoption of this new standard did not have an impact on the Company’s financial statements. When comparing the Company’s historical revenue recognition to the newly applied revenue recognition under Topic 606, there was no change to the amount or timing of revenue recognized. Therefore, no quantitative adjustment was required to be made to the prior periods presented in the unaudited consolidated financial statements after the adoption. Upon adoption the Company had not altered its existing information technology and internal controls outside of the contract review processes in order to identify impacts of future revenue contracts the Company may enter into.

 

Page 7
 

 

Accounting Policy - Revenues from our royalty and non-operated working interest properties are recorded under the cash receipts approach as directly received from the remitters’ statement accompanying the revenue check. Since the revenue checks are generally received two to four months after the production month, the Company accrues for revenue earned but not received by estimating production volumes and product prices. Any identified differences between its revenue estimates and actual revenue received historically have not been significant.

 

The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical exemption in accordance with ASC 606. The exemption, as described in ASC 606-10-50-14(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

 

3. Asset Retirement Obligations

 

The Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is initially incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. The ARO is included on the consolidated balance sheets with the current portion being included in the accounts payable and other accrued expenses.

 

The following table provides a rollforward of the AROs for the first three months of fiscal 2019:

 

Carrying amount of asset retirement obligations as of April 1, 2018   $ 862,553  
Liabilities incurred     1,743  
Liabilities settled     (6,328 )
Accretion expense     3,635  
Carrying amount of asset retirement obligations as of June 30, 2018     861,605  
Less: Current portion     10,000  
Non-Current asset retirement obligation   $ 851,605  

 

4. Credit Facility

 

The Company has a loan agreement with Bank of America, N.A. (the “Agreement”)(“Bank”), which provided for a credit facility of $5,570,000 with no monthly commitment reductions and a borrowing base to be evaluated on July 30 and January 1 of each year or at any additional time in the Bank’s discretion. The borrowing base also resets to the extent the Company sells or otherwise disposes of any of its oil and gas properties as the Company is required to pay 100% of such net proceeds to the lender resulting in a permanent reduction of the borrowing base unless prior approval by Bank states otherwise. As of June 30, 2018, the borrowing base was set at $750,000. Subsequently, the borrowing base was evaluated on July 31, 2018 and set at $525,000.

 

The Agreement was renewed eleven times with the eleventh amendment effective as of March 8, 2017 with a maturity date of November 30, 2020. Under such renewal agreement, interest on the facility accrues at an annual rate equal to the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) daily floating rate, plus 3.0 percentage points, which was 5.10% on June 30, 2018. Interest on the outstanding amount under the credit agreement is payable monthly. There was no availability of this facility at June 30, 2018. No principal payments are anticipated to be required through November 30, 2020. 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 minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $650,000 for each trailing four 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 June 30, 2018 and believes it will remain in compliance for the next fiscal year.

 

Page 8
 

 

The amended Agreement allows for up to $500,000 of the facility to be used for outstanding letters of credits. As of June 30, 2018, one letter of credit for $50,000, in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operates is outstanding under the facility. The Company will pay a fee in an amount equal to 1 percent (1.0%) per annum of the outstanding undrawn amount of each standby letter of credit, payable monthly in arrears, on the basis of the face amount outstanding on the day the fee is calculated. This letter of credit renews annually and was subsequently renewed on July 20, 2018 with an amended amount of $25,000.

 

In addition, this Agreement prohibits the Company from paying cash dividends on its common stock. The Agreement does grant the Company permission to enter into hedge agreements however, it is under no obligation to do so.

 

The balance outstanding on the line of credit as of June 30, 2018 was $500,000. The following table is a summary of activity on the Bank of America, N.A. line of credit for the three months ended June 30, 2018:

 

    Principal  
Balance at April 1, 2018:   $ 700,000  
Borrowings     -  
Repayments     (200,000 )
Balance at June 30, 2018:   $ 500,000  

 

5. 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 June 30, 2018. Our deferred tax asset is $1,238,530 as of June 30, 2018 with a valuation amount of $1,238,530. 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.

 

6. Related Party Transactions

 

Related party transactions for the Company relate to shared office expenditures in addition to administrative and operating expenses paid on behalf of the principal stockholder. The total billed to and reimbursed by the stockholder for the quarters ended June 30, 2018 and 2017 were $16,419 and $8,832, respectively.

 

7. Income (Loss) Per Common Share

 

The Company’s basic net income (loss) per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share assumes the exercise of all stock options having exercise prices less than the average market price of the common stock during the period using the treasury stock method and is computed by dividing net income (loss) by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In periods where losses are reported, the weighted average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive.

 

The following is a reconciliation of the number of shares used in the calculation of basic and diluted net income (loss) per share for the three month periods ended June 30, 2018 and 2017.

 

Page 9
 

 

    2018     2017  
Net income (loss)   $ 14,420     $ (295,552 )
                 
Shares outstanding:                
Weighted average common shares outstanding – basic     2,037,266       2,037,266  
Effect of the assumed exercise of dilutive stock options     -       -  
Weighted average common shares outstanding – dilutive     2,037,266       2,037,266  
Income (loss) per common share:                
Basic   $ 0.01     $ (0.15 )
Diluted   $ 0.01     $ (0.15 )

 

For the three months ended June 30, 2018, 148,600 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 $6.54 at June 30, 2018.

 

Due to a net loss for the three months ended June 30, 2017, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

8. Subsequent Events

 

The Company completed a review and analysis of all events that occurred after the consolidated balance sheet date to determine if any such events must be reported and has determined that there are no other subsequent events to be disclosed.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless the context otherwise requires, references to the “Company”, “Mexco”, “we”, “us” or “our” mean Mexco Energy Corporation and its consolidated subsidiaries.

 

Cautionary Statements Regarding Forward-Looking Statements. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements regarding our plans, beliefs or current expectations and may be signified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and other similar expressions. Forward-looking statements appear throughout this Form 10-Q with respect to, among other things: profitability; planned capital expenditures; estimates of oil and gas production; future project dates; estimates of future oil and gas prices; estimates of oil and gas reserves; our future financial condition or results of operations; and our business strategy and other plans and objectives for future operations. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement.

 

While we have made assumptions that we believe are reasonable, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. All forward-looking statements in 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 consolidated financial statements and notes thereto included in the Form 10-K.

 

Liquidity and Capital Resources. Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings, sales of non-core properties and issuance of common stock. Our primary financial resource is our base of oil and gas reserves. We have pledged our producing oil and gas properties to secure our revolving line of credit. We do not have any delivery commitments to provide a fixed and determinable quantity of our 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.

 

Page 10
 

 

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 three months of fiscal 2019, cash flow from operations was $154,501, a decrease when compared to the corresponding period of fiscal 2018 as a result of a decrease in accounts payable and accrued expenses partially offset by an increase in oil and gas revenues. Cash of $200,000 was used to reduce the line of credit and net cash of $12,019 was used for addition to oil and gas properties. Accordingly, net cash decreased $57,518 leaving cash and cash equivalents on hand of $435,092 as of June 30, 2018.

 

At June 30, 2018, we had working capital of $964,653 compared to working capital of $925,618 at March 31, 2018, an increase of $39,035 for the reasons set forth 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 expects to participate in the drilling and completion of approximately 50 horizontal wells at an estimated aggregate cost of approximately $1,300,000 for the fiscal year ended March 31, 2019. The operators of these wells include Concho Resources, Inc., Marathon Oil Company, Mewbourne Oil Company, XTO Energy, Inc. and others.

 

During the first quarter of fiscal 2019, Mexco participated with various percentage interests in the drilling of the first 8 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 $142,000. Subsequently, in July 2018, Mexco expended an additional $192,600 for the completion of five of these wells.

 

In June 2018, the Company received approximately $18,000 in cash from a sale of joint venture leasehold acreage and marginal producing working interest wells in North Dakota and Montana.

 

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, cash flow from operations and sales of non-core properties.

 

Crude oil and natural gas prices generally increased 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 WTI posted price for crude oil has ranged from a low of $40.75 per bbl in July 2017 to a high of $70.50 per bbl in June 2018. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $2.49 per MMBtu in February 2018 to a high of $6.24 per MMBtu in January 2018. On June 30, 2018 the WTI posted price for crude oil was $70.50 per bbl and the Henry Hub spot price for natural gas was $2.96 per MMBtu.

 

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 June 30, 2018:

 

    Payments due in:  
    Total     less than 1 year     1 - 3 years     over 3 years  
Contractual obligations:                                
Secured bank line of credit (1)   $ 500,000     $ -     $ 500,000     $ -  
Leases (2)   $ 142,791     $ 48,212     $ 94,579     $ -  

 

  (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 $25,489 less than 1 year and $36,109 1-3 years.  
  (2) The lease amount represents the monthly rent amount for our principal office space in Midland, Texas under one three year lease agreement effective May 15, 2018. The total obligation for the remainder of the lease is $189,245 which includes $46,454 billed to and reimbursed by our majority shareholder for his portion of the shared office space.  

 

Results of Operations – Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017. For the quarter ended June 30, 2018, there was net income of $14,420, compared to a net loss of $295,552 for the quarter ended June 30, 2017. This was a result of a decrease in operating expenses and an increase in operating revenues that is further explained below.

 

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Oil and gas sales. Revenue from oil and gas sales was $735,353 for the quarter ended June 30, 2018, a 13% increase from $651,442 for the quarter ended June 30, 2017. This primarily resulted from an increase in oil prices partially offset by a decrease gas prices and a decrease in oil and gas production.

 

    2018     2017     % Difference  
Oil:                        
Revenue   $ 570,063     $ 423,415       34.6 %
Volume (bbls)     9,387       9,499       (1.2 )%
Average Price (per bbl)   $ 60.73     $ 44.57       36.3 %
                         
Gas:                        
Revenue   $ 165,290     $ 228,027       (27.5 )%
Volume (mcf)     73,374       89,896       (18.4 )%
Average Price (per mcf)   $ 2.25     $ 2.54       (11.4 )%

 

Production and exploration. Production costs were $258,935 for the three months ended June 30, 2018, a 16% decrease from $309,863 for the three months ended June 30, 2017. This decrease is primarily the result of XTO Energy, Inc. incorrectly providing us a refund for marketing and transportation fees of approximately $67,000 during this same quarter last year.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) expense was $216,075 for the first quarter of fiscal 2019, a 31% decrease from $311,258 for the first quarter of fiscal 2018, primarily due to a decrease in oil and gas production, full cost pool amortization base and future development costs partially offset by a decrease in oil and gas reserves.

 

General and administrative expenses. General and administrative expenses were $249,038 for the three months ended June 30, 2018, a 19% decrease from $306,659 for the three months ended June 30, 2017. This was primarily due to a decrease in accounting fees partially offset by expenditures due to our office relocation.

 

Interest expense. Interest expense was $6,921 for the first quarter of fiscal 2019, a decrease of 75% from $27,216 for the first quarter of fiscal 2018 due to a decrease in borrowings partially offset by an increase in interest rate.

 

Income taxes. There was no income tax expense for the three months ended June 30, 2018 and for the three months ended June 30, 2017. The effective tax rate for the three months ended June 30, 2018 and June 30, 2017 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 source of market risk for us includes fluctuations in commodity prices and interest rates. All of our financial instruments are for purposes other than trading.

 

Interest Rate Risk. At June 30, 2018, we had an outstanding loan balance of $500,000 under our revolving credit agreement, which bears interest at an annual rate equal to the BBA LIBOR daily floating rate, plus 3.0 percentage points. If the interest rate on our bank debt increases or decreases by one percentage point our annual pretax income would change by $5,000, based on the outstanding balance at June 30, 2018.

 

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 June 30, 2018, our largest credit risk associated with any single purchaser was $192,053 or 45% 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 crude oil and natural gas. 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 crude oil and natural gas have been adversely effected by temporary pipeline capacity constraints primarily in the Permian Basin. We are unable to predict exactly how long this limitation will continue.

 

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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. 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 quarter ended June 30, 2018, our pretax income would have increased or decreased by $93,870. If the average gas price had increased or decreased by one dollar per mcf for the quarter ended June 30, 2018, our pretax income would have increased or decreased by $73,374.

 

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 June 30, 2018, 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 quarter ended June 30, 2018 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 2018 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

 

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: August 10, 2018   /s/ Nicholas C. Taylor
    Nicholas C. Taylor
    Chairman of the Board and Chief Executive Officer
     
Dated: August 10, 2018   /s/ Tamala L. McComic
    Tamala L. McComic
    President, Chief Financial Officer, Treasurer and Assistant Secretary

 

Page 14
 

 

 

Exhibit 31.1

 

CHIEF EXECUTIVE OFFICER CERTIFICATION

 

CERTIFICATION

 

I, Nicholas C. Taylor, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy Corporation;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
     
  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 10, 2018   /s/ Nicholas C. Taylor
    Nicholas C. Taylor
    Chief Executive Officer

 

 
 

 

 

Exhibit 31.2

 

CHIEF FINANCIAL OFFICER CERTIFICATION

CERTIFICATION

 

I, Tamala L. McComic, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy Corporation;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
     
  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 10, 2018   /s/ Tamala L. McComic
    Tamala L. McComic
    Chief Financial Officer

 

 
 

 

 

Exhibit 32.1

 

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

OF MEXCO ENERGY CORPORATION

PURSUANT TO 18 U.S.C. §1350

 

In connection with the Quarterly Report of Mexco Energy Corporation on Form 10-Q for the quarterly period ended June 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Mexco Energy Corporation as of the dates and for periods presented as required by such Report.

 

Date: August 10, 2018   /s/ Nicholas C. Taylor
    Nicholas C. Taylor
    Chief Executive Officer
     
Date: August 10, 2018   /s/ Tamala L. McComic
    Tamala L. McComic
    Chief Financial Officer