What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 395 added, 269 removed, 383 unchanged (63% of the section changed)

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BALANCE SHEETS

September 30,

Current assets

Cash and cash equivalents

and cash equivalents

Accounts receivable:

Oil and natural gas sales

Derivative instruments

Prepaid asset –

option contract

Prepaid costs and expenses

Oil and natural

costs and expenses

Total current assets

Property and equipment, at cost

Oil and gas properties, using the full cost method

Accumulated depreciation, depletion and amortization

Property and equipment,

Oil and gas properties,

using the full cost method

depreciation, depletion and amortization

(28,569,491 )

(28,109,252 )

Property and equipment, net

Property and equipment,

Investment –

Operating lease, right-of-use asset

Other noncurrent assets

Operating lease,

right-of-use asset

noncurrent assets

LIABILITIES AND STOCKHOLDERS’

Current liabilities

Accounts payable and accrued expenses

Operating lease liability, current

Accounts payable

and accrued expenses

lease liability, current

Total current liabilities

Long-term liabilities

Long-term debt, net

Operating lease liability, long-term

Long-term debt

PPP loan payable

Asset retirement obligations

Total long-term liabilities

Operating lease

liability, long-term

retirement obligations

long-term liabilities

Total liabilities

Commitments and contingencies

Commitments and

contingencies

Stockholders’

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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

Additional paid-in capital

Retained earnings

Treasury stock, at cost (67,000 shares)

2,108,666 and 2,107,166 shares issued;

2,041,666 and 2,040,166 shares outstanding as of September 30, 2020 and March 31, 2020, respectively

Additional paid-in

Retained (losses)

stock, at cost (67,000 shares)

Total stockholders’

Total liabilities and stockholders’

liabilities and stockholders’

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

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STATEMENTS OF OPERATIONS

the Three Months Ended June 30,

operating revenues

Natural gas sales

Total operating revenues

of asset retirement obligations

Depreciation,

depletion, and amortization

and administrative

operating expenses

Accretion of asset retirement obligations

Depreciation, depletion and amortization

General and administrative

Total operating expenses

Operating loss

Other income (expense):

Interest income

Net realized and unrealized loss on derivative contracts

Interest expense

Net other expense

Loss before provision for income taxes

Loss per common share:

Weighted average common shares outstanding:

income (expenses):

on derivative instruments

other expense

before income taxes

per common share:

average common shares outstanding:

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

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STATEMENTS OF CHANGES IN STOCKHOLDERS’

Stock Par Value

Paid-In Capital

Earnings (Losses)

Stockholders’

Balance at April 1, 2020

Stock based compensation

Issuance of stock

through options exercised

based compensation

Balance at September 30, 2020

Stock Par Value

Paid-In Capital

Earnings (Losses)

Stockholders’

Balance at June 30, 2020

Issuance of stock

through options exercised

based compensation

Balance at September 30, 2020

Stock Par Value

Paid-In Capital

Stockholders’

Balance at April 1, 2019

Stock based compensation

based compensation

Balance at September 30, 2019

Stock Par Value

Paid-In Capital

Stockholders’

Balance at June 30, 2019

based compensation

Balance at September 30, 2019

SHARE ACTIVITY

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Balance at April 1, 2020

Balance at June 30, 2020

Balance at September 30, 2020

Common stock shares, held in treasury:

Balance at April 1, 2020

Balance at June 30, 2020

Common stock shares, outstanding at June 30, 2020

Balance at September 30, 2020

Common stock shares, outstanding at

September 30, 2020

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

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STATEMENTS OF CASH FLOWS

the Three Months Ended June 30,

Cash flows from operating activities:

the Six Months Ended September 30,

Cash flows from

operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Stock-based compensation

Depreciation, depletion and amortization

Accretion of asset retirement obligations

Amortization of debt issuance costs

Change in fair value of derivative instruments

Changes in operating assets and liabilities

Decrease (increase) in accounts receivable

Decrease in prepaid expenses

Increase in prepaid asset –

option contract

Decrease in other assets

Decrease in right-of-use asset

Increase (decrease) in accounts payable and accrued expenses

Settlement of asset retirement obligations

Decrease in operating lease liability

Net cash provided by operating activities

Cash flows from investing activities:

Additions to oil and gas properties

Additions to other property and equipment

Investment –

Proceeds from sale of oil and gas properties and equipment

Net cash used in investing activities

Cash flows from financing activities:

Reduction of long-term debt

Proceeds from long-term debt

Net cash provided by financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosure of cash flow information:

Cash paid for interest

Non-cash investing and financing activities:

Depreciation,

depletion and amortization

asset retirement obligations

Operating lease –

of debt issuance costs

Changes in operating

assets and liabilities:

(Increase) decrease

in accounts receivable

Decrease in right-of-use

Decrease in prepaid

Decrease in other

Increase (decrease)

in accounts payable and accrued expenses

Settlement of

asset retirement obligations

in operating lease liability

Net cash provided

by operating activities

Cash flows from

investing activities:

oil and gas properties

Drilling refunds

Investment –

Proceeds from

sale of oil and gas properties and equipment

to other property and equipment

Net cash used

in investing activities

Cash flows from

financing activities:

Proceeds from

exercise of stock options

Proceeds from

long-term debt

of long-term debt

cash provided by financing activities

Net increase (decrease) in cash and

cash equivalents

Cash and cash

equivalents at beginning of period

and cash equivalents at end of period

Supplemental disclosure of cash flow

Cash paid for

Non-cash investing and financing

Asset retirement

Operating lease

right of use asset and associated liabilities

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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

the “Company”) are engaged in the exploration, development and production of natural gas, crude oil, condensate and

natural gas liquids (“NGLs”).

Most of the Company’s oil and gas interests are centered in West Texas and Southeastern

Most of the Company’s oil and gas interests are centered in the West Texas and

Southeastern New Mexico;

however, the Company owns producing properties and undeveloped acreage in fourteen states.

All of Company’s

oil and gas interests are operated by others.

Company’s oil and gas interests are operated by others.

outbreak of the novel coronavirus (“COVID-19”) in the first calendar quarter of 2020 and its continued spread across

the globe in the second and third calendar quarters of 2020 has resulted, and is likely to continue to result, in significant

economic disruption and has, and is likely to continue to, adversely affect the operations of the Company’s business, as

the significantly reduced global and national economic activity has resulted in reduced demand for oil and natural gas.

state and local governments mobilized to implement containment mechanisms to minimize impacts to their populations and economies.

Various containment measures, which include the quarantining of cities, regions and countries, while aiding in the prevention

of further outbreak, have resulted in a severe drop in general economic activity and a resulting decrease in energy demand.

addition, the global economy has experienced a significant disruption to global supply chains.

The extent of the COVID-19 outbreak

on the Company’s operational and financial performance will continue to depend on certain developments, including the duration

and spread of the outbreak and its continued impact on customer activity and third-party providers.

The direct impact to the Company’s

operations began to take effect at the close of the fiscal year ended March 31, 2020, and continued through the issuance of these

condensed consolidated financial statements.

The full extent to which the COVID-19 outbreak may affect the Company’s financial

conditions, results of operations or liquidity subsequent to the issuance of these condensed consolidated financial statements

is uncertain.

At the time of this filing, cases of COVID-19 in the U.S.

remain high, including in Texas, where we conduct significant

severe drop in economic activity, travel restrictions and other restrictions due to COVID-19 have had a significant negative impact

on the demand for oil and gas.

Due to the significantly reduced demand for oil and natural gas as a result of the COVID-19 pandemic

and the current oversupply of oil and natural gas in the market, available storage and capacity for the Company’s customers’

production may be limited or completely unavailable in the future, which may further negatively impact the price of oil.

cannot predict whether, or when, the global supply and demand imbalance will be resolved or whether, or when, oil and natural

gas production and economic activities will return to normalized levels.

In the absence of additional reductions to global production,

oil, natural gas and NGLs prices could remain at current levels, or decline further, for an extended period of time.

Basis of Presentation and Significant Accounting Policies

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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”

of September 30, 2020, and the results of its operations and cash flows for the interim periods ended September 30, 2020 and 2019.

The consolidated financial statements as of September 30, 2020 and for the three and six month periods ended September 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”).

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.

Certain information and footnote disclosures normally included in financial statements prepared

in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in

this Form 10-Q pursuant to the rules and regulations of the SEC.

However, the disclosures herein are adequate to make the information

presented not misleading.

It is suggested that these financial statements be read in conjunction with the consolidated financial

statements and notes thereto included in the Form 10-K.

The Company accounts for investments of less than 1% in limited liability companies using the cost method.

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from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active

Adopted Accounting Pronouncements.

Accounting Pronouncements.

In December 2019, the FASB issued ASU No.

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the current portion being included in the accounts payable and other accrued expenses.

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

following table provides a rollforward of the AROs for the first six months of fiscal 2021:

Carrying amount of asset retirement obligations

as of April 1, 2020

Liabilities incurred

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Accretion expense

Carrying amount of asset retirement obligations as of June 30, 2020

Current portion

Non-Current asset retirement obligation

Carrying amount of asset retirement obligations as of September

Non-Current asset

retirement obligation

Long Term Debt

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

June 30, 2020

March 31, 2020

Credit facility

Unamortized debt issuance costs

Total long-term debt

Unamortized debt

issuance costs

long-term debt

December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”),

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The unused commitment fee is payable quarterly in arrears on the last day of each calendar

As of June 30, 2020, there was $570,000 available on the facility.

As of September 30, 2020, there was $325,000 available on the facility.

principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2023.

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ratios (EBITDA/Interest Expense) of 2.00 to 1.00 for each quarter.

The Company is in compliance with all covenants as of June

The Company is in compliance with all covenants as of September

addition, this Agreement prohibits the Company from paying cash dividends on its common stock without written permission of WTNB.

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The Company obtained written permission prior to entering into the current hedge agreement discussed in Note 7.

of this report.

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:

balance outstanding on the line of credit as of September 30, 2020 was $1,175,000.

The following table is a summary of activity

on the WTNB line of credit for the six months ended September 30, 2020:

Balance at April 1, 2020:

Balance at June 30, 2020:

Balance at September 30, 2020:

Subsequently,

on October 16, 2020, the Company made a payment of $75,000 on the WTNB line of credit leaving a balance of $1,100,000.

Company also maintained a Certificate of Deposit Account at WTNB to collateralize one outstanding letter of credit for $25,000

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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

The lease is a 36 month lease that expires 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.

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balance sheets classification of lease assets and liabilities was as follows:

June 30, 2020

Operating lease right-of-use asset, beginning balance

lease right-of-use asset, beginning balance

Current period amortization

Lease amendment

Lease extension

Total operating lease right-of-use asset

Operating lease liability, current

Operating lease liability, long term

Total lease liabilities

minimum lease payments as of June 30, 2019 under non-cancellable operating leases are as follows:

Lease Obligation

operating lease right-of-use asset

Operating lease

liability, current

lease liability, long term

lease liabilities

minimum lease payments as of September 30, 2020 under non-cancellable operating leases are as follows:

Fiscal Year Ended March 31, 2021

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Total lease payments

imputed interest

Operating lease liability

operating lease liability, current

Operating lease liability, long term

cash paid for our operating lease for the three months ended June 30, 2020 and 2019 was $10,600 and $11,016, respectively.

lease liability, current

Operating lease

liability, long term

cash paid for our operating lease for the six months ended September 30, 2020 and 2019 was $21,693 and $24,173, respectively.

Rent expense, less sublease income of $9,459 and $8,080, respectively, is included in general and administrative expenses.

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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.

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.

Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable

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of either party as well as market constraints on liquidity.

Any such adjustment was not material as of June 30, 2020.

following tables presents the fair value hierarchy for those derivative instruments measured at fair value on a recurring basis

as of June 30, 2020.

June 30, 2020

Financial asset –

Oil derivative price put option contracts

Financial asset –

Oil derivative price put option contracts

Total financial assets

Any such adjustment was not material as of September 30, 2020.

Value Measurements on a Nonrecurring Basis

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the quarter ended June 30, 2020 the Company entered into a series of crude oil put option contracts.

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

Gross Amounts

Net Recognized

Oil price hedging contracts - current

Oil price hedging contracts –

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

Unrealized gain (loss) on oil price hedging contracts

Net realized and unrealized loss on derivative contracts

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:

Type of Contract

Weighted Average

All of these such contracts

expired in July and August 2020.

following tables summarizes the amounts of the Company’s realized and unrealized losses on derivative contracts in the Company’s

consolidated statements of operations for the six months ended September 30, 2020.

Realized loss on oil

price hedging contracts

gain (loss) on oil price hedging contracts

and unrealized loss on derivative contracts

Stock-based Compensation

Company recognized stock-based compensation expense of $13,943 and $8,125 in general and administrative expense in the Consolidated

Statements of Operations for the three months ended September 30, 2020 and 2019, respectively.

Stock-based compensation expense

recognized for the six months ended September 30, 2020 and 2019 was $27,948 and $16,250, respectively.

The total cost related

to non-vested awards not yet recognized at September 30, 2020 totals $141,861 which is expected to be recognized over a weighted

average of 2.94 years.

following table is a summary of activity of stock options for the six months ended September 30, 2020:

Average Exercise Price

Average Remaining Contract Life in Years

Outstanding at April 1, 2020

Outstanding at September 30, 2018

Vested at September 30, 2020

Exercisable at September 30, 2020

the six months ended September 30, 2020, stock options covering 1,500 shares were exercised with a total intrinsic value of $135.

The Company received proceeds of $9,435 from these exercises.

During the six months ended September 30, 2019, no stock options

were exercised.

the six months ended September 30, 2020, 1,000 unvested stock options were forfeited due to the resignation of an employee and

34,200 vested stock options expired unexercised.

There were no stock options forfeited or expired during the six months ended

September 30, 2019.

No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate

history of these types of awards.

options at September 30, 2020 expire between November 2021 and March 2030 and have exercise prices ranging from $3.34 to $7.00.

valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that

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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.

tax asset position as of September 30, 2020.

Our deferred tax asset is $1,389,101 as of September 30, 2020 with a valuation amount

of $1,389,101.

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

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.

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.

Related Party Transactions

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.

party transactions for the Company relate to shared office expenditures in addition to administrative and operating expenses paid

on behalf of the principal stockholder.

The total billed to and reimbursed by the stockholder for the quarters ended September

30, 2020 and 2019 was $8,219 and $9,842, respectively.

The total billed to and reimbursed by the stockholder for the six months

ended September 30, 2020 and 2019 was $18,321 and $19,943, respectively.

The principal stockholder pays for his share of the lease

amount for the shared office space directly to the lessor.

Amounts paid by the principal stockholder directly to the lessor for

the three months ending September 30, 2020 and 2019 were $3,846 and $3,981, respectively.

Amounts paid by the principal stockholder

directly to the lessor for the six months ending September 30, 2020 and 2019 were $7,649 and $7,919, respectively.

Loss Per Common Share

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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.

three and six month periods ended September 30, 2020 and 2019.

Three Months Ended

Six Months Ended

Shares outstanding:

Weighted average common shares outstanding –

Effect of the assumed exercise of dilutive stock options

Weighted average common shares outstanding –

Weighted avg.

shares outstanding –

Effect of assumed

exercise of dilutive stock options

Weighted avg.

shares outstanding

Loss per common share:

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.

to a net loss for the for the three and six months ended September 30, 2020, the weighted average number of common shares outstanding

excludes common stock equivalents because their inclusion would be anti-dilutive.

Subsequent Events

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.

October 16, 2020, the Company made a payment of $75,000 on the WTNB line of credit leaving a balance of $1,100,000.

October 13, 2020, the Company expended $10,200 for its share to participate in 2 horizontal wells in the Bone Spring formation

of the Delaware Basin located in Lea County, New Mexico.

October 9, 2020, stock options covering 10,200 shares were exercised with a total intrinsic value of $12,083.

The Company received

proceeds of $69,360 from these exercises.

Company completed a review and analysis of all events that occurred after the consolidated balance sheet date to determine if

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upon information that is currently available and is subject to change.

All forward-looking statements in the Form 10-Q are qualified

All forward-looking statements in this Form 10-Q are qualified

in their entirety by the cautionary statement contained in this section.

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line of credit.

We do not have any delivery commitments to provide a fixed and determinable quantity of our oil and gas under

We do not have any delivery commitments to provide a fixed and determinable quantity of its oil and gas under

any existing contract or agreement.

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and developing oil and gas properties with potential for long-lived production.

We focus our efforts on the acquisition of royalty

We focus our efforts on the acquisition of royalties

and working interests and non-operated properties in areas with significant development potential.

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.

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.

the first six months of fiscal 2021, cash flow from operations was $164,237, a 52% decrease when compared to the corresponding

period of fiscal 2020 as a result of a 25% decrease in crude oil and natural gas sales primarily due to a 41% decrease in crude

oil price and a 10% decrease in natural gas price partially offset by a 19% increase in crude oil production and a 17% increase

in natural gas production.

Net cash of $449,000 was received from the line of credit, net cash of $566,000 was used for additions

to oil and gas properties and cash of $25,000 was used for an investment at cost basis.

Accordingly, net cash increased $28,297,

leaving cash and cash equivalents on hand of $62,678 as of September 30, 2020.

September 30, 2020, we had working capital of $240,743 compared to working capital of $186,785 at March 31, 2020, an increase

of $53,958 primarily due to the reasons set forth below.

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,

The Company currently plans to participate in the drilling and completion of 20 horizontal

wells at an estimated aggregate cost of approximately $1,200,000 for the fiscal year ending March 31, 2021 of which, $538,000

has already been expended.

The operators of these wells include Concho Resources, Inc., Marathon Oil Company, Mewbourne

Oil Company, and others.

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

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%.

the first quarter of fiscal 2021, Mexco participated in the drilling of 2 horizontal wells in the Wolfcamp formation of the Delaware

The operators of these wells include Concho Resources, Inc., Marathon Oil Company, Mewbourne Oil Company,

the first six months of fiscal 2021, Mexco participated in the drilling and completion 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

These wells were completed in September 2020 with initial average production rates of 1,224 barrels of oil, 4,881 barrels

of water and 3,422,000 cubic feet of gas per day, or 1,794 barrels of oil equivalent per day.

Mexco’s working interest in

these wells is 1.2%.

the second quarter of fiscal 2021, Mexco participated in the drilling of 4 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 $202,000.

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working interest in this well is .14%.

addition to the above investments, the Company plans to expend approximately $280,000 for additional completion costs of 22 horizontal

wells located in Eddy and Lea Counties, New Mexico which were drilled during fiscal 2020.

To date, $97,000 has already been expended.

Of these wells, 7 wells were completed during Mexco’s first quarter of fiscal 2021.

In August 2020, 4 more of these wells

were completed and are currently producing at an average production rate of 1,160 barrels of oil;

4,400 barrels of water;

2,166,000 cubic feet of gas per day, or 1,521 barrels of oil equivalent per day.

Mexco’s working interest in these wells

Another 2 of these wells were also completed in August 2020 and are currently producing at an average production rate

of 2,026 barrels of oil;

2,347 barrels of water;

and 2,514,000 cubic feet of gas per day, or 2,445 barrels of oil equivalent per

Mexco’s interest in these wells is .104%.

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.

are participating in other projects and are reviewing projects in which we may participate.

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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.

The WTI posted price for crude oil was $36.25 on September 30,

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 $1.66 on September 30, 2020.

See Results of Operations below for realized prices which are substantially below the Henry Hub

Spot Market Price.

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.

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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred

to as the CARES Act became effective.

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.

provides funds to pay up to 24 weeks of payroll costs including benefits.

Funds can also be used to pay interest on mortgages,

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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.

The Company’s has applied 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.

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.

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:

less than 1 year

Contractual obligations:

Secured bank line of credit (1)

The following table summarizes our future payments we are obligated to make based on agreements in place as of September 30, 2020:

bank line of credit (1)

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.

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.

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 $44,063 less than 1 year,

and $66,094 1-3 years.

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.

Of this total obligation for the remainder of the lease, our majority shareholder will pay

$13,483 his portion of the shared office space.

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.

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.

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019.

net loss of $41,970 for the quarter ended September 30, 2020 compared to a net loss of $82,787 for the quarter ended September

This was a result of an increase in operating revenues and a decrease in operating expenses that is further explained

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

Revenue from oil and gas sales was $629,964 for the second quarter of fiscal 2021, a 1% increase from $625,750

for the same period of fiscal 2020.

This resulted from an increase in oil and gas production and an increase in gas prices partially

offset by a decrease in oil prices.

Volume (bbls)

Average Price (per bbl)

Average Price (per mcf)

and exploration.

Production costs were $217,117 for the second quarter of fiscal 2021, a 5% decrease from $229,042 for the

same period of fiscal 2020.

This is primarily the result of a decrease in lease operating expenses due to the sale of our marginal

operated properties in Ector County, Texas and a decrease in production taxes as a result of the decrease in oil and gas sales.

Depreciation,

depletion and amortization.

Depreciation, depletion and amortization expense was $236,134 for the second quarter of fiscal

2021, a 13% increase from $209,729 for the same period of fiscal 2020, primarily due to an increase in oil and gas production

and a decrease oil and gas reserves partially offset by a decrease in the full cost pool amortization base.

and administrative expenses.

General and administrative expenses were $192,360 for the second quarter of fiscal 2021, a 25%

decrease from $255,294 for the same period of fiscal 2020.

This was primarily due to a decrease in salaries, legal fees and insurance

Interest expense was $13,515 for the second quarter of fiscal 2021, a 59% increase from $8,495 for the same period

of fiscal 2020, due to an increase in borrowings partially offset by a decrease in interest rates.

There was no income tax expense for the three months ended September 30, 2020 and for the three months ended September

The effective tax rate for the three months ended September 30, 2020 and September 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.

of Operations –

Six Months Ended September 30, 2020 Compared to Six Months Ended September 30, 2019.

For the six months

ended September 30, 2020, there was a net loss of $341,640 compared to a net loss of $136,973 for the six months ended September

This was a result of a decrease in operating revenues partially offset by a decrease in operating expenses that is further

explained below.

and gas sales.

Revenue from oil and gas sales was $994,143 for the six months ended September 30, 2020, a 25% decrease from

$1,317,444 for the same period of fiscal 2020.

This resulted from a decrease in oil and gas prices partially offset by an increase

in oil and gas production.

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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

Production costs were $388,783 for the six months ended September 30, 2020, a 13% decrease from $448,437

for the six months ended September 30, 2019.

This decrease is primarily the result of a decrease in production taxes as a result

of a decrease in oil 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.

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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

Depreciation, depletion and amortization expense was $460,239 for the six months ended September

30, 2020, a 10% increase from $419,967 for the six months ended September 30, 2019, due to an increase in oil and gas production

and a decrease of oil and gas reserves partially offset by a decrease in the full cost pool amortization base.

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 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.

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.

General and administrative expenses were $441,238 for the six months ended September 30, 2020,

a 22% decrease from $566,355 for the six months ended September 30, 2019.

This was primarily due to a decrease in salaries, engineering

fees and accounting fees.

Interest expense was $24,570 for the six months ended September 30, 2020, a 65% increase from $14,851 for the same

period fiscal 2020 due to an increase in borrowings partially offset by a decrease in interest rate.

There was no income tax expense for the six months ended September 30, 2020 and for the six months ended September

The effective tax rate for the six months ended September 30, 2020 and September 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements