MEXCO ENERGY CORP 10-Q

Item 1. Financial Statements Mexco Energy Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, March 31, 2020 2020 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 52,537 $ 34,381 Accounts receivable: Oil and natural gas sales 195,836 271,315 Trade 11,093 13,382 Derivative instruments 550 - Prepaid asset – option contract 11,400 - Prepaid costs and expenses 39,157 50,188 Total current assets 310,573 369,266 Property and equipment, at cost Oil and gas properties, using the full cost method 37,710,080 37,465,172 Other 118,388 116,993 Accumulated depreciation, depletion and amortization (28,333,356 ) (28,103,252 ) Property and equipment, net 9,495,112 9,472,913 Investment – cost basis 150,000 150,000 Operating lease, right-of-use asset 69,239 76,130 Other noncurrent assets 96 2,200 Total assets $ 10,025,020 $ 10,070,509 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 143,425 $ 116,760 Operating lease liability, current 65,083 65,721 Total current liabilities 208,508 182,481 Long-term liabilities Long-term debt, net 895,554 757,423 Operating lease liability, long-term 5,491 10,982 PPP loan payable 68,574 - Asset retirement obligations 768,196 755,261 Total long-term liabilities 1,737,815 1,523,666 Total liabilities 1,946,323 1,706,147 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 June 30, 2020 and March 31, 2020 1,053,583 1,053,583 Additional paid-in capital 7,353,356 7,339,351 Retained earnings 17,759 317,429 Treasury stock, at cost (67,000 shares) (346,001 ) (346,001 ) Total stockholders’ equity 8,078,697 8,364,362 Total liabilities and stockholders’ equity $ 10,025,020 $ 10,070,509 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) 2020 2019 Operating revenues: Oil sales $ 282,370 $ 588,436 Natural gas sales 81,809 103,258 Other 6,277 7,897 Total operating revenues 370,456 699,591 Operating expenses: Production 171,666 219,395 Accretion of asset retirement obligations 7,187 6,747 Depreciation, depletion and amortization 224,105 210,238 General and administrative 248,878 311,061 Total operating expenses 651,836 747,441 Operating loss (281,380 ) (47,850 ) Other income (expense): Interest income 15 20 Net realized and unrealized loss on derivative contracts (7,250 ) - Interest expense (11,055 ) (6,356 ) Net other expense (18,290 ) (6,336 ) Loss before provision for income taxes (299,670 ) (54,186 ) Income tax - - Net loss $ (299,670 ) $ (54,186 ) Loss per common share: Basic: $ (0.15 ) $ (0.03 ) Diluted: $ (0.15 ) $ (0.03 ) Weighted average common shares outstanding: Basic: 2,040,166 2,040,166 Diluted: 2,040,166 2,040,166 The accompanying notes are an integral part of the consolidated financial statements. Page 4 Mexco Energy Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) Common Stock Par Value Additional Paid-In Capital Retained Earnings Treasury Stock Total Stockholders’ Equity Balance at April 1, 2020 $ 1,053,583 $ 7,339,351 $ 317,429 $ (346,001 ) $ 8,364,362 Net loss - - (299,670 ) - (299,670 ) Stock based compensation - 14,005 - - 14,005 Balance at June 30, 2020 $ 1,053,583 $ 7,353,356 $ 17,759 $ (346,001 ) $ 8,078,697 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 - - (54,186 ) - (54,186 ) Stock based compensation - 8,125 - - 8,125 Balance at June 30, 2019 $ 1,053,583 $ 7,313,173 $ 362,721 $ (346,001 ) $ 8,383,476 SHARE ACTIVITY Common stock shares, issued: Balance at April 1, 2020 2,107,166 Issued - Balance at June 30, 2020 2,107,166 Common stock shares, held in treasury: Balance at April 1, 2020 (67,000 ) Acquisitions - Balance at June 30, 2020 (67,000 ) Common stock shares, outstanding at June 30, 2020 2,040,166 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) 2020 2019 Cash flows from operating activities: Net loss $ (299,670 ) $ (54,186 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 14,005 8,125 Depreciation, depletion and amortization 224,105 210,238 Accretion of asset retirement obligations 7,187 6,747 Amortization of debt issuance costs 3,131 3,593 Change in fair value of derivative instruments (550 ) - Changes in operating assets and liabilities Decrease (increase) in accounts receivable 77,768 (21,936 ) Decrease in prepaid expenses 11,032 15,387 Increase in prepaid asset – option contract (11,400 ) - Decrease in other assets - 30,421 Decrease in right-of-use asset 6,891 16,314 Increase (decrease) in accounts payable and accrued expenses 40,178 (10,148 ) Settlement of asset retirement obligations (76 ) (2,558 ) Decrease in operating lease liability (6,129 ) (16,041 ) Net cash provided by operating activities 66,472 185,956 Cash flows from investing activities: Additions to oil and gas properties (257,281 ) (314,945 ) Additions to other property and equipment (1,395 ) - Investment – cost basis - (75,000 ) Proceeds from sale of oil and gas properties and equipment 6,786 1,098 Net cash used in investing activities (251,890 ) (388,847 ) Cash flows from financing activities: Reduction of long-term debt (100,000 ) - Proceeds from long-term debt 303,574 225,000 Net cash provided by financing activities 203,574 225,000 Net increase in cash and cash equivalents 18,156 22,109 Cash and cash equivalents at beginning of period 34,381 128,252 Cash and cash equivalents at end of period $ 52,537 $ 150,361 Supplemental disclosure of cash flow information: Cash paid for interest $ 7,865 $ 4,063 Non-cash investing and financing activities: Asset retirement obligations $ 5,748 $ 2,363 Operating lease – right of use asset and associated liabilities $ 9,360 $ 141,385 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 crude oil, natural gas, 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 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 June 30, 2020, and the results of its operations and cash flows for the interim periods ended June 30, 2020 and 2019. The consolidated financial statements as of June 30, 2020 and for the three-month periods ended June 30, 2020 and 2019 are unaudited. The consolidated balance sheet as of March 31, 2020 was derived from the audited balance sheet filed in the Company’s 2020 annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note 2 of the “Notes to Consolidated Financial Statements” in the Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. However, the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K. Investments. The Company accounts for investments of less than 1% in limited liability companies using the cost method. The cost of the investment is recorded as an asset on the consolidated balance sheets and when income from the investment is received, it is immediately recognized on the consolidated statements of operations. Derivative Financial Instruments. The Company’s derivative financial instruments are used to manage commodity price risk attributable to expected oil and gas production. While there is risk the financial benefit of rising oil and gas prices may not be captured, the Company believes the benefits of stable and predictable cash flows outweigh the potential risks. The Company accounts for derivative financial instruments using fair value accounting and recognizes gains and losses in earnings during the period in which they occur. Unsettled derivative instruments are recorded in the accompanying consolidated balance sheets as either a current or non-current asset or a liability measured at its fair value. The Company only offsets derivative assets and liabilities for arrangements with the same counterparty when right of setoff exists. Derivative assets and liabilities with different counterparties are recorded gross in the consolidated balance sheets. Derivative contract settlements are reflected in operating activities in the accompanying consolidated statements of cash flows. Page 7 The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Recently Adopted Accounting Pronouncements. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to the following: (i) hybrid tax regimes; (ii) the tax basis step-up in goodwill obtained in a transaction that is not a business combination; (iii) separate financial statements of entities not subject to tax; (iv) the intraperiod tax allocation exception to the incremental approach; (v) ownership changes in investments - changes from a subsidiary to an equity method investment (and vice versa); (vi) interim-period accounting for enacted changes in tax laws; and (vii) the year-to-date loss limitation in interim-period tax accounting. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. If an entity early adopts these amendments in an interim period, it should reflect any adjustments as of the beginning of the annual period that includes that interim period. In addition, an entity that elects to early adopt ASU 2019-12 is required to adopt all of the amendments in the same period. The Company is currently assessing the effect that ASU 2019-12 will have on its financial position, results of operations and disclosures. 3. Asset Retirement Obligations The Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is initially incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our oil and natural gas properties. The ARO is included on the consolidated balance sheets with the current portion being included in the accounts payable and other accrued expenses. The following table provides a rollforward of the AROs for the first three months of fiscal 2021: Carrying amount of asset retirement obligations as of April 1, 2020 $ 762,761 Liabilities incurred 5,748 Liabilities settled - Accretion expense 7,187 Carrying amount of asset retirement obligations as of June 30, 2020 775,696 Less: Current portion 7,500 Non-Current asset retirement obligation $ 768,196 4. Long Term Debt Long-term debt on the Consolidated Balance Sheets consisted of the following as of the dates indicated: June 30, 2020 March 31, 2020 Credit facility $ 930,000 $ 795,000 Unamortized debt issuance costs (34,446 ) (37,577 ) Total long-term debt $ 895,554 $ 757,423 On December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”), which provided for a credit facility of $1,000,000 with a maturity date of December 28, 2021. The Agreement has no monthly commitment reduction and a borrowing base to be evaluated annually. On February 28, 2020, the Agreement was amended to increase the credit facility to $2,500,000, extend the maturity date to March 28, 2023 and increase the borrowing base to $1,500,000. Page 8 Under the Agreement, interest on the facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal plus one-half of one percent (0.5%) floating daily. Interest on the outstanding amount under the Agreement is payable monthly. In addition, the Company will pay an unused commitment fee in an amount equal to one-half of one percent (0.5%) times the daily average of the unadvanced amount of the commitment. The unused commitment fee is payable quarterly in arrears on the last day of each calendar quarter. As of June 30, 2020, there was $570,000 available on the facility. No principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2023. Upon closing with WTNB on the original Agreement, the Company paid a .5% loan origination fee in the amount of $5,000 plus legal and recording expenses totaling $34,532, which were deferred over the life of the credit facility. Upon closing the amendment to the Agreement, the Company paid a .1% loan origination fee of $2,500 and an extension fee of $3,125 plus legal and recording expenses totaling $12,266, which were also deferred over the life of the credit facility. Amounts borrowed under the Agreement are collateralized by the common stock of the Company’s wholly owned subsidiaries and substantially all of the Company’s oil and gas properties. The Agreement contains customary covenants for credit facilities of this type including limitations on change in control, disposition of assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement and requires senior debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratios (Senior Debt/EBITDA) less than or equal to 4.00 to 1.00 measured with respect to the four trailing quarters and minimum interest coverage ratios (EBITDA/Interest Expense) of 2.00 to 1.00 for each quarter. The Company is in compliance with all covenants as of June 30, 2020. In addition, this Agreement prohibits the Company from paying cash dividends on its common stock without written permission of WTNB. The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior WTNB approval. The Company obtained written permission prior to entering into the current hedge agreement discussed in Note 7 of this report. The balance outstanding on the line of credit as of June 30, 2020 was $930,000. The following table is a summary of activity on the WTNB line of credit for the three months ended June 30, 2020: Principal Balance at April 1, 2020: $ 795,000 Borrowings 235,000 Repayments 100,000 Balance at June 30, 2020: $ 930,000 The Company also maintained 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. The operated property was sold effective December 1, 2019 and the letter of credit was cancelled. On April 10, 2020, the Certificate of Deposit Account was terminated and the funds deposited into the Company’s operating account. 5. Leases The Company leases approximately 4,160 rentable square feet of office space from an unaffiliated third party for our corporate office located in Midland, Texas. This includes 1,021 square feet of office space shared with and reimbursed by our majority shareholder. The lease is a 36-month lease that was to expire in May 2021 and does not include an option to renew. In June 2020, in exchange for a reduction in rent for the months of June and July 2020, the Company agreed to a 2-month extension to its current lease agreement at the regular monthly rate extending its current lease expiration date to July 2021. 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. Page 9 The balance sheets classification of lease assets and liabilities was as follows: June 30, 2020 Assets Operating lease right-of-use asset, beginning balance $ 76,130 Current period amortization (16,251 ) Lease amendment (1,622 ) Lease extension 10,982 Total operating lease right-of-use asset $ 69,239 Liabilities Operating lease liability, current $ 65,083 Operating lease liability, long term 5,491 Total lease liabilities $ 70,574 Future minimum lease payments as of June 30, 2019 under non-cancellable operating leases are as follows: Lease Obligation Fiscal Year Ended March 31, 2021 48,609 Fiscal Year Ended March 31, 2022 21,965 Total lease payments $ 70,574 Less: imputed interest - Operating lease liability 70,574 Less: operating lease liability, current (65,083 ) Operating lease liability, long term $ 5,491 Net cash paid for our operating lease for the three months ended June 30, 2020 and 2019 was $10,600 and $11,016, respectively. Rent expense, less sublease income of $3,803 and $3,938, respectively, is included in general and administrative expenses. Note 6. Fair Value Measurements The Company applies FASB ASC Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), which establishes a framework for measuring fair value based upon inputs that market participants use in pricing an asset or liability, which are classified into two catagories: observable inputs or unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy: Level 1: Quoted prices for identical instruments in active markets at the measurement date. Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument. Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability acquired, based on the best information available in the circumstances. Page 10 The carrying amount reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments. The fair value amount reported in the accompanying consolidated balance sheets for long-term debt approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics. See the Company’s note 4 on Long Term Debt for further discussion. Fair Value Measurements on a Recurring Basis A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company’s commodity derivative instruments were carried at fair value on a recurring basis in the Company’s consolidated balance sheets. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Assumed credit risk adjustments, based on published credit ratings and public bond yield spreads are applied to the Company’s commodity derivatives. The Company’s derivative instruments are subject to netting arrangements and qualify for net presentation in the consolidated balance sheets in those instances where such arrangements exist with the respective counterparty. To ensure these derivative instruments are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party as well as market constraints on liquidity. Any such adjustment was not material as of June 30, 2020. The following tables presents the fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of June 30, 2020. Level 1 Level 2 Level 3 Total Fair Value June 30, 2020 Financial asset – current Oil derivative price put option contracts $ - $ 550 $ - $ 550 Financial asset – non-current Oil derivative price put option contracts - - - - Total financial assets $ - $ 550 $ - $ 550 Fair Value Measurements on a Nonrecurring Basis The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments and, therefore, the Company has designated these liabilities as Level 3 measurements. The significant inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free rate. See Note 3 for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations. Note 7. Derivative Financial Instruments It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive. The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk. Derivative contracts are utilized to economically hedge the Company’s exposure to price fluctuations and reduce the variability in the Company’s cash flows associated with anticipated sales of future oil and natural gas production. The Company follows FASB ASC Topic 815, Derivatives and Hedging (ASC Topic 815), to account for its derivative financial instruments. Page 11 The Company’s crude oil derivative positions consist of put options. The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in net realized and unrealized gain (loss) on commodity price hedging contracts on the consolidated statements of operations. All derivative contracts are recorded at fair market value and included in the consolidated balance sheets as assets or liabilities. The Company may have multiple hedge positions that span a several-month time period and result in fair value asset and liability positions. At the end of the reporting periods, those positions are offset to a single fair value asset or liability for each commodity and the netted balance is reflected in the consolidated balance sheets as an asset or liability. During the quarter ended June 30, 2020 the Company entered into a series of crude oil put option contracts. The following table summarizes the fair value amounts of derivative contracts in the consolidated balance sheets as well as the gross recognized derivative assets in the consolidated balance sheets as of June 30, 2020. Gross Recognized Asset Gross Amounts Offset Net Recognized Asset Oil price hedging contracts - current $ 550 $ - $ 550 Oil price hedging contracts – non-current - - - $ 550 $ - $ 550 The following tables summarizes the amounts of the Company’s realized and unrealized gains (losses) on derivative contracts in the Company’s consolidated statements of operations for the quarter ended June 30, 2020. Gain Recognized Realized gain (loss) on oil price hedging contracts $ (7,800 ) Unrealized gain (loss) on oil price hedging contracts 550 Net realized and unrealized loss on derivative contracts $ (7,250 ) The periods covered, notional amounts, fixed price and related commodity pricing index of the Company’s outstanding crude oil derivative contracts as of June 30, 2020 are set forth in the table below: Period Type of Contract Index Volume Bbls Weighted Average Floor Price July 2020 Put Options NY MEX WTI 3,000 $ 25.00 August 2020 Put Options NY MEX WTI 2,000 $ 25.00 8. 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, 2020. Our deferred tax asset is $1,374,837 as of June 30, 2020 with a valuation amount of $1,374,837. 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 increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as expected future growth. Page 12 9. Related Party Transactions Related party transactions for the Company primarily 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, 2020 and 2019 was $10,102 and $10,101, 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 June 30, 2020 and 2019 were $3,803 and $3,938, respectively. 10. Loss Per Common Share The Company’s basic net loss per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net 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 loss by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In periods where losses are reported, the weighted average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive. The following is a reconciliation of the number of shares used in the calculation of basic and diluted net loss per share for the three-month periods ended June 30, 2020 and 2019. 2020 2019 Net loss $ (299,670 ) $ (54,186 ) Shares outstanding: Weighted average common shares outstanding – basic 2,040,166 2,040,166 Effect of the assumed exercise of dilutive stock options - - Weighted average common shares outstanding – dilutive 2,040,166 2,040,166 Loss per common share: Basic $ (0.15 ) $ (0.03 ) Diluted $ (0.15 ) $ (0.03 ) Due to a net loss for the three months ended June 30, 2020 and 2019, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. 11. Subsequent Events Effective July 1, 2020, the Company sold its interest in the deep rights of a property in Martin County, Texas for a cash payment of $100,000. The Company completed a review and analysis of all events that occurred after the consolidated balance sheet date to determine if any such events must be reported and has determined that there are no other subsequent events to be disclosed. Page 13 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. 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 royalty and working interests and non-operated properties in areas with significant development potential. For the first three months of fiscal 2021, cash flow from operations was $66,472, a decrease of 64% when compared to the corresponding period of fiscal 2020 primarily due to a 56% decrease in crude oil price and a 29% decrease in natural gas price partially offset by a 9% increase in oil production and an 11% increase in gas production. Net cash of $204,000 was received from long-term borrowings and net cash of $251,890 was used for addition to oil and gas properties. Accordingly, net cash increased $18,157 leaving cash and cash equivalents on hand of $52,537 as of June 30, 2020. At June 30, 2020, we had working capital of $102,065 compared to working capital of $186,785 at March 31, 2020, a decrease of $84,720 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 plans to participate in the drilling and completion of approximately 20 horizontal wells at an estimated aggregate cost of approximately $950,000 for the fiscal year ending March 31, 2021 of which, $205,000 has already been expended. The operators of these wells include Concho Resources, Inc., Marathon Oil Company, Mewbourne Oil Company, and others. The Company also plans to expend approximately $280,000 for the additional completion costs of 22 horizontal wells located in Eddy and Lea Counties, New Mexico that the Company participated in drilling during fiscal 2020 that were delayed due to the depressed oil and gas prices in March 2020. Of these wells, 4 were completed in April 2020 and are currently producing at an aggregate average rate of 3,298 barrels of oil 6,486 barrels of water; and 6,154,000 cubic feet of gas per day, or 4,324 barrels of oil equivalent per day. Mexco’s working interest in these wells is .48%. Another 3 of these wells were completed in May 2020 and are currently producing at an aggregate average rate of 1,801 barrels of oil and 6,626,000 cubic feet of gas per day, or 2,905 barrels of oil equivalent per day. Mexco’s interest in these wells is .006%. Page 14 During the first quarter of fiscal 2021, Mexco participated in the drilling of 2 horizontal wells in the Wolfcamp formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico with aggregate costs of approximately $101,000. Mexco’s working interest in these wells is 1.2%. Also during the first quarter of fiscal 2021, Mexco expended $99,000 to participate in the drilling of 5 horizontal wells in the Upper Avalon formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .5%. The Company also expended $5,000 during the first quarter of fiscal 2021 for its share to participate in 1 horizontal well in the Bone Spring formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in this well is .14%. 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. Beginning in March 2020, crude oil and natural gas prices decreased significantly through May 2020. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil on March 31, 2020 was $16.75 per bbl and averaged $14.68 and $24.67 per bbl for the months of April and May, respectively. The WTI posted price for crude oil was $35.25 on June 30, 2020. The Henry Hub Spot Market Price (“Henry Hub”) posted price for natural gas on March 31, 2020 was $1.71 per MMBtu and averaged $1.74 and $1.75 per MMBtu for the months of April and May, respectively. The Henry Hub posted price for natural gas was $1.67 on June 30, 2020. Paycheck Protection Program (PPP) Loan. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act. One component of the CARES Act was the paycheck protection program (“PPP”) which provides small businesses with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the United States Small Business Administration (“SBA”) with support from the Department of the Treasury. The PPP provides funds to pay up to 24 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The Company applied for, and was accepted to participate in this program. On May 5, 2020, the Company received funding for approximately $68,574. The loan is a two-year loan with a maturity date of May 5, 2022. The loan bears an annual interest rate of 1%. The loan shall be payable monthly with the first six monthly payments deferred. It is the Company’s intent to apply for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness is subject to the sole approval of the SBA. The Company is eligible for loan forgiveness in an amount equal to payments made during the 24-week period beginning on the Loan date, with the exception that no more than 40.0% of the amount of loan forgiveness may be for expenses other than payroll expenses. The Company used all loan proceeds to partially subsidize direct payroll expenses and rent for our corporate office space. 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, 2020: Payments due in: Total less than 1 year 1 - 3 years over 3 years Contractual obligations: Secured bank line of credit (1) $ 930,000 $ - $ 930,000 $ - Leases (2) $ 70,574 $ 65,083 $ 5,491 $ - (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 $34,875 less than 1 year and $61,031 1-3 years. (2) The lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a 38 month lease agreement effective May 15, 2018. Of this total obligation for the remainder of the lease, our majority shareholder will pay $15,980 less than 1 year and $1,348 1-3 years for his portion of the shared office space. Page 15 Results of Operations – Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019. For the quarter ended June 30, 2020, there was a net loss of $299,670, compared to a net loss of $54,186 for the quarter ended June 30, 2019. This was a result of a decrease in operating revenues due to a decrease in oil and gas prices partially offset by a decrease in operating expenses that is further explained below. Oil and gas sales. Revenue from oil and gas sales was $364,179 for the quarter ended June 30, 2020, a 47% decrease from $691,694 for the quarter ended June 30, 2019. This primarily resulted from a decrease in oil and gas prices partially offset by an increase in oil and gas production. 2020 2019 % Difference Oil: Revenue $ 282,370 $ 588,436 (52.0 )% Volume (bbls) 11,534 10,609 8.7 % Average Price (per bbl) $ 24.48 $ 55.47 (55.9 )% Gas: Revenue $ 81,809 $ 103,258 (20.8 )% Volume (mcf) 79,516 71,847 10.7 % Average Price (per mcf) $ 1.03 $ 1.44 (28.5 )% Production and exploration. Production costs were $171,666 for the three months ended June 30, 2020, a 22% decrease from $219,395 for the three months ended June 30, 2019. This decrease is primarily the result of a decrease in production taxes as a result of a decrease in oil and gas revenues and a decrease in lease operating expenses due to numerous wells being shut-in during the month of May 2020 as well as cost cutting measures being implemented by the operators because of the depressed oil and gas prices. Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) expense was $224,105 for the first quarter of fiscal 2021, a 7% increase from $210,238 for the first quarter of fiscal 2020, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves partially offset by a decrease in the full cost pool amortization base. General and administrative expenses. General and administrative expenses were $248,878 for the three months ended June 30, 2020, a 20% decrease from $311,061 for the three months ended June 30, 2019. This was primarily due to a decrease in engineering and accounting fees and salaries. Interest expense. Interest expense was $11,055 for the first quarter of fiscal 2021, an increase of 74% from $6,356 for the first quarter of fiscal 2020 due to an increase in borrowings partially offset by a decrease in interest rate. Income taxes. There was no income tax expense for the three months ended June 30, 2020 and for the three months ended June 30, 2019. The effective tax rate for the three months ended June 30, 2020 and June 30, 2019 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.