MEXCO ENERGY CORP 10-Q

Item 1. Financial Statements Mexco Energy Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, March 31, 2021 2021 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 80,754 $ 57,813 Accounts receivable: Oil and natural gas sales 670,333 621,384 Trade 49,588 30,402 Prepaid costs and expenses 37,365 47,895 Total current assets 838,040 757,494 Property and equipment, at cost Oil and gas properties, using the full cost method 38,998,427 38,664,347 Other 120,208 120,208 Accumulated depreciation, depletion and amortization ( 29,279,932 ) ( 29,015,612 ) Property and equipment, net 9,838,703 9,768,943 Investment – cost basis 200,000 200,000 Operating lease, right-of-use asset 169,742 20,861 Other noncurrent assets 49,787 83,389 Total assets $ 11,096,272 $ 10,830,687 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 157,232 $ 116,569 Operating lease liability, current 53,958 21,965 Total current liabilities 211,190 138,534 Long-term liabilities Long-term debt, net 778,080 1,154,949 Operating lease liability, long-term 116,540 - Asset retirement obligations 724,184 713,797 Total long-term liabilities 1,618,804 1,868,746 Total liabilities 1,829,994 2,007,280 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; 2,148,666 and 2,143,666 shares issued; and, 2,081,666 and 2,076,666 shares outstanding as of June 30, 2021 and March 31, 2021, respectively 1,074,333 1,071,833 Additional paid-in capital 7,669,579 7,624,214 Retained earnings 868,367 473,361 Treasury stock, at cost ( 67,000 shares) ( 346,001 ) ( 346,001 ) Total stockholders’ equity 9,266,278 8,823,407 Total liabilities and stockholders’ equity $ 11,096,272 $ 10,830,687 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) 2021 2020 Operating revenues: Oil sales $ 987,103 $ 282,370 Natural gas sales 268,462 81,809 Other 8,633 6,277 Total operating revenues 1,264,198 370,456 Operating expenses: Production 276,987 171,666 Accretion of asset retirement obligations 7,058 7,187 Depreciation, depletion and amortization 264,320 224,105 General and administrative 308,167 248,878 Total operating expenses 856,532 651,836 Operating income (loss) 407,666 ( 281,380 ) Other income (expense): Interest income 59 15 Net realized and unrealized loss on derivative contracts - ( 7,250 ) Interest expense ( 12,719 ) ( 11,055 ) Net other expense ( 12,660 ) ( 18,290 ) Income (loss) before provision for income taxes 395,006 ( 299,670 ) Income tax - - Net income (loss) $ 395,006 $ ( 299,670 ) Income (loss) per common share: Basic: $ 0.19 $ ( 0.15 ) Diluted: $ 0.19 $ ( 0.15 ) Weighted average common shares outstanding: Basic: 2,076,756 2,040,166 Diluted: 2,119,955 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, 2021 $ 1,071,833 $ 7,624,214 $ 473,361 $ ( 346,001 ) $ 8,823,407 2,143,666 ( 67,000 ) Net income - - 395,006 - 395,006 Issuance of stock through options exercised 2,500 31,500 - - 34,000 Stock based compensation - 13,865 - - 13,865 5,000 - Balance at June 30, 2021 $ 1,074,333 $ 7,669,579 $ 868,367 $ ( 346,001 ) $ 9,266,278 2,148,666 ( 67,000 ) 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 ) Net income (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 SHARE ACTIVITY Common stock shares, issued: Balance at April 1, 2021 2,143,666 Issued 5,000 Balance at June 30, 2021 2,148,666 Common stock shares, held in treasury: Balance at April 1, 2021 ( 67,000 ) Acquisitions - Balance at June 30, 2021 ( 67,000 ) Common stock shares, outstanding at June 30, 2021 2,081,666 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) 2021 2020 Cash flows from operating activities: Net income (loss) $ 395,006 $ ( 299,670 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Stock-based compensation 13,865 14,005 Depreciation, depletion and amortization 264,320 224,105 Accretion of asset retirement obligations 7,058 7,187 Amortization of debt issuance costs 3,131 3,131 Change in fair value of derivative instruments - ( 550 ) Changes in operating assets and liabilities (Increase) decrease in accounts receivable ( 68,135 ) 77,768 Decrease in prepaid expenses 10,530 11,032 Increase in prepaid asset – option contract - ( 11,400 ) (Increase) decrease in right-of-use asset ( 148,881 ) 6,891 Increase in accounts payable and accrued expenses 40,918 40,178 Settlement of asset retirement obligations ( 291 ) ( 76 ) Increase (decrease) in operating lease liability 148,533 ( 6,129 ) Net cash provided by operating activities 666,054 66,472 Cash flows from investing activities: Additions to oil and gas properties ( 302,976 ) ( 257,281 ) Additions to other property and equipment - ( 1,395 ) Proceeds from sale of oil and gas properties and equipment 5,863 6,786 Net cash used in investing activities ( 297,113 ) ( 251,890 ) Cash flows from financing activities: Proceeds from exercise of stock options 34,000 - Reduction of long-term debt ( 480,000 ) ( 100,000 ) Proceeds from long-term debt 100,000 303,574 Net cash (used in) provided by financing activities ( 346,000 ) 203,574 Net increase in cash and cash equivalents 22,941 18,156 Cash and cash equivalents at beginning of period 57,813 34,381 Cash and cash equivalents at end of period $ 80,754 $ 52,537 Supplemental disclosure of cash flow information: Cash paid for interest $ 10,040 $ 7,865 Non-cash investing and financing activities: Asset retirement obligations $ 3,329 $ 5,748 Operating lease – right of use asset and associated liabilities $ 165,007 $ 9,360 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, 2021, and the results of its operations and cash flows for the interim periods ended June 30, 2021 and 2020. The consolidated financial statements as of June 30, 2021 and for the three-month periods ended June 30, 2021 and 2020 are unaudited. The consolidated balance sheet as of March 31, 2021 was derived from the audited balance sheet filed in the Company’s 2021 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 at cost . The Company has no control of the limited liability companies. 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 As of June 30, 2021, the Company had no derivative contracts. During the quarter ended June 30, 2020, the Company entered into a series of crude oil put option contracts. All of these such contracts expired in July and August 2020. 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 2022: Schedule of Rollforward of Asset Retirement Obligations Carrying amount of asset retirement obligations as of April 1, 2021 $ 728,797 Liabilities incurred 3,329 Liabilities settled - Accretion expense 7,058 Carrying amount of asset retirement obligations as of June 30, 2021 739,184 Less: Current portion 15,000 Non-Current asset retirement obligation $ 724,184 4. Long Term Debt Long-term debt on the Consolidated Balance Sheets consisted of the following as of the dates indicated: Schedule of Long-Term Debt June 30, 2021 March 31, 2021 Credit facility $ 800,000 $ 1,180,000 Unamortized debt issuance costs ( 21,920 ) ( 25,051 ) Total long-term debt $ 778,080 $ 1,154,949 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 . 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, 2021, there was $ 700,000 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. Page 8 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. 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 balance outstanding on the credit facility as of June 30, 2021 was $ 800,000 . The following table is a summary of activity on the WTNB credit facility for the three months ended June 30, 2021: Summary of Line of Credit Activity Principal Balance at April 1, 2021: $ 1,180,000 Borrowings 100,000 Repayments ( 480,000 ) Balance at June 30, 2021: $ 800,000 Subsequently, the Company has made payments totaling $ 250,000 , leaving a balance of $ 550,000 as of the date of this report. 5. Stock-based Compensation The Company recognized compensation expense of $ 13,865 and $ 14,005 related to vesting stock options in general and administrative expense in the Consolidated Statements of Operations for the first quarter of fiscal 2022 and 2021, respectively. The total cost related to non-vested awards not yet recognized at June 30, 2021 totals $ 100,266 , which is expected to be recognized over a weighted average of 2.10 years. The following table is a summary of stock options activity for the three months ended June 30, 2021 and 2020: Summary of Activity of Stock Options Number of Shares Weighted Average Exercise Price Per Share Weighted Aggregate Average Remaining Contract Life in Years Intrinsic Value Outstanding at April 1, 2021 156,000 $ 5.28 5.53 $ 555,100 Granted - - Exercised 5,000 6.80 Forfeited or Expired - - Outstanding at June 30, 2021 151,000 $ 5.23 5.45 $ 685,330 Vested at June 30, 2021 105,250 $ 5.88 4.10 $ 390,033 Exercisable at June 30, 2021 105,250 $ 5.88 4.10 $ 390,033 During the three months ended June 30, 2021 and 2020, no stock options were granted. Subsequently, pursuant to approval from the Compensation Committee of the Board of Directors, the Company granted options covering 31,000 shares of stock at a strike price of $ 8.51 effective July 26, 2021. During the three months ended June 30, 2021, stock options covering 5,000 shares were exercised with a total intrinsic value of $ 15,036 . The Company received proceeds of $ 34,000 from these exercises. During the three months ended June 30, 2020, no stock options were exercised. Subsequently, in July 2021, stock options covering 10,500 were exercised with a total intrinsic value of $ 36,433 . The Company received proceeds of $ 73,500 from these exercises. No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history for these types of awards. During the three months ended June 30, 2021 and 2020, there were no stock options forfeited or expired. Page 9 Outstanding options at June 30, 2021 expire between April 2023 and March 2030 and have exercise prices ranging from $ 3.34 to $ 7.00 . 6. 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 1,112 square feet of office space shared with and reimbursed by our majority shareholder. The lease does not include an option to renew and is a 36 -month lease that expired in May 2021. 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. In June 2021, the Company agreed to extend its current lease for 36 months . The amended lease now expires on July 31, 2024 . 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 3.75 %. Significant judgement is required when determining the incremental borrowing rate. Rent expense for lease payments is recognized on a straight-line basis over the lease term. The balance sheets classification of lease assets and liabilities was as follows: Schedule of Operating Lease Assets and Liabilities June 30, 2021 Assets Operating lease right-of-use asset, beginning balance $ 20,861 Current period amortization ( 16,126 ) Lease amendment 165,007 Total operating lease right-of-use asset $ 169,742 Liabilities Operating lease liability, current $ 53,958 Operating lease liability, long term 116,540 Total lease liabilities $ 170,498 Future minimum lease payments as of June 30, 2021 under non-cancellable operating leases are as follows: Schedule of Future Minimum Lease Payments Lease Obligation Fiscal Year Ended March 31, 2022 44,318 Fiscal Year Ended March 31, 2023 58,240 Fiscal Year Ended March 31, 2024 58,240 Fiscal Year Ended March 31, 2025 19,413 Total lease payments $ 180,211 Less: imputed interest ( 9,713 ) Operating lease liability 170,498 Less: operating lease liability, current ( 53,958 ) Operating lease liability, long term $ 116,540 Net cash paid for our operating lease for the three months ended June 30, 2021 and 2020 was $ 10,929 and $ 10,600 , respectively. Rent expense, less sublease income of $ 5,200 and $ 4,889 , respectively, is included in general and administrative expenses. Page 10 7. Income Taxes A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Based on the material write-downs of the carrying value of our oil and natural gas properties during fiscal 2016, we are in a net deferred tax asset position as of June 30, 2021. Our deferred tax asset is $ 1,180,248 as of June 30, 2021 with a valuation amount of $ 1,180,248 . 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. 8. 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, 2021 and 2020 was $ 12,768 and $ 10,102 , 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 less sublease income for the three months ending June 30, 2021 and 2020 were $ 3,700 and $ 3,803 , respectively. 9. Income (loss) Per Common Share The Company’s basic net income (loss) per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share assumes the exercise of all stock options having exercise prices less than the average market price of the common stock during the period using the treasury stock method and is computed by dividing net income (loss) by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In periods where losses are reported, the weighted average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive. The following is a reconciliation of the number of shares used in the calculation of basic and diluted net income (loss) per share for the three-month periods ended June 30, 2021 and 2020. Schedule of Reconciliation of Basic and Diluted Net Income (loss) Per Share 2021 2020 Net income (loss) $ 395,006 $ ( 299,670 ) Shares outstanding: Weighted average common shares outstanding – basic 2,076,756 2,040,166 Effect of the assumed exercise of dilutive stock options 43,199 - Weighted average common shares outstanding – dilutive 2,119,955 2,040,166 Income (loss) per common share: Basic $ 0.19 $ ( 0.15 ) Diluted $ 0.19 $ ( 0.15 ) For the three months ended June 30, 2021, no anti-dilutive shares relating to stock options were excluded from the computation of diluted net income. Due to a net loss for the three months ended June 30, 2020, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. 10. Subsequent Events During July 2021, the Company made payments totaling $ 250,000 on the credit facility leaving a balance of $ 550,000 . During July 2021, stock options covering 10,500 shares were exercised with a total intrinsic value of $ 36,433 . The Company received proceeds of $ 73,500 from these exercises. Pursuant to approval from the Compensation Committee of the Board of Directors, the Company granted options covering 31,000 shares of stock at a strike price of $ 8.51 effective July 26, 2021. 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 11