MEXCO ENERGY CORP 10-Q

Item 1. Financial Statements Mexco Energy Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, March 31, 2022 2022 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 537,001 $ 1,370,766 Accounts receivable: Oil and natural gas sales 1,532,385 1,310,137 Trade - - Prepaid costs and expenses 38,370 52,636 Total current assets 2,107,756 2,733,539 Property and equipment, at cost Oil and gas properties, using the full cost method 42,669,430 40,373,741 Other 121,926 120,208 Accumulated depreciation, depletion and amortization ( 30,748,176 ) ( 30,361,047 ) Property and equipment, net 12,043,180 10,132,902 Investment in limited liability company at cost 300,000 275,000 Operating lease, right-of-use asset 116,540 129,923 Other noncurrent assets 114,006 13,156 Total assets $ 14,681,482 $ 13,284,520 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued expenses $ 283,941 $ 209,469 Operating lease liability, current 54,806 54,294 Total current liabilities 338,747 263,763 Long-term liabilities Operating lease liability, long-term 61,734 75,629 Asset retirement obligations 732,142 720,512 Total long-term liabilities 793,876 796,141 Total liabilities 1,132,623 1,059,904 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; 2,216,416 shares issued and 2,149,416 shares outstanding as of June 30, 2022 and March 31, 2022, respectively 1,108,208 1,108,208 Additional paid-in capital 8,159,553 8,133,982 Retained earnings 4,627,099 3,328,427 Treasury stock, at cost ( 67,000 shares) ( 346,001 ) ( 346,001 ) Total stockholders’ equity 13,548,859 12,224,616 Total liabilities and stockholders’ equity $ 14,681,482 $ 13,284,520 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) 2022 2021 Operating revenues: Oil sales $ 1,559,321 $ 987,103 Natural gas sales 856,792 268,462 Other 33,860 8,633 Total operating revenues 2,449,973 1,264,198 Operating expenses: Production 435,028 276,987 Accretion of asset retirement obligations 7,519 7,058 Depreciation, depletion and amortization 387,128 264,320 General and administrative 318,530 308,167 Total operating expenses 1,148,205 856,532 Operating income 1,301,768 407,666 Other income (expense): Interest income 35 59 Interest expense ( 3,131 ) ( 12,719 ) Net other expense ( 3,096 ) ( 12,660 ) Income before provision for income taxes 1,298,672 395,006 Income tax - - Net income $ 1,298,672 $ 395,006 Income per common share: Basic: $ 0.60 $ 0.19 Diluted: $ 0.59 $ 0.19 Weighted average common shares outstanding: Basic: 2,149,416 2,076,756 Diluted: 2,216,742 2,119,955 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, 2022 $ 1,108,208 $ 8,133,982 $ 3,328,427 $ ( 346,001 ) $ 12,224,616 Net income - - 1,298,672 - 1,298,672 Stock based compensation - 25,571 - - 25,571 Balance at June 30, 2022 $ 1,108,208 $ 8,159,553 $ 4,627,099 $ ( 346,001 ) $ 13,548,859 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 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 Balance at June 30, 2021 $ 1,074,333 $ 7,669,579 $ 868,367 $ ( 346,001 ) $ 9,266,278 SHARE ACTIVITY Common stock shares, issued: Balance at April 1, 2022 2,216,416 Issued - Balance at June 30, 2022 2,216,416 Common stock shares, held in treasury: Balance at April 1, 2022 ( 67,000 ) Acquisitions - Balance at June 30, 2022 ( 67,000 ) Common stock shares, outstanding at June 30, 2022 2,149,416 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) 2022 2021 Cash flows from operating activities: Net income $ 1,298,672 $ 395,006 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 25,571 13,865 Depreciation, depletion and amortization 387,128 264,320 Accretion of asset retirement obligations 7,519 7,058 Amortization of debt issuance costs 3,131 3,131 Changes in operating assets and liabilities Increase in accounts receivable ( 222,248 ) ( 68,135 ) Decrease in prepaid expenses 14,266 10,530 Decrease (increase) in right-of-use asset 13,384 ( 148,881 ) (Decrease) increase in accounts payable and accrued expenses ( 12,364 ) 40,918 Settlement of asset retirement obligations ( 6,077 ) ( 291 ) (Decrease) increase in operating lease liability ( 13,384 ) 148,533 Net cash provided by operating activities 1,495,598 666,054 Cash flows from investing activities: Additions to oil and gas properties ( 2,320,974 ) ( 302,976 ) Additions to other property and equipment ( 1,718 ) - Investment in limited liability company at cost ( 25,000 ) - Drilling refund 18,329 - Proceeds from sale of oil and gas properties and equipment - 5,863 Net cash used in investing activities ( 2,329,363 ) ( 297,113 ) Cash flows from financing activities: Proceeds from exercise of stock options - 34,000 Reduction of long-term debt - ( 480,000 ) Proceeds from long-term debt - 100,000 Net cash used in financing activities - ( 346,000 ) Net (decrease) increase in cash and cash equivalents ( 833,765 ) 22,941 Cash and cash equivalents at beginning of period 1,370,766 57,813 Cash and cash equivalents at end of period $ 537,001 $ 80,754 Supplemental disclosure of cash flow information: Cash paid for interest $ - $ 10,040 Non-cash investing and financing activities: Asset retirement obligations $ 14,668 $ 3,329 Operating lease – right of use asset and associated liabilities $ - $ 165,007 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 acquisition, 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 consolidated 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, 2022, and the results of its operations and cash flows for the interim periods ended June 30, 2022 and 2021. The consolidated financial statements as of June 30, 2022 and for the three-month periods ended June 30, 2022 and 2021 are unaudited. The consolidated balance sheet as of March 31, 2022 was derived from the audited balance sheet filed in the Company’s 2022 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. 3. Asset Retirement Obligations The Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our oil and natural gas properties. The ARO is included on the consolidated balance sheets with the current portion being included in the accounts payable and other accrued expenses. Page 7 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, 2022 $ 735,512 Liabilities incurred 14,668 Liabilities settled ( 10,557 ) Accretion expense 7,519 Carrying amount of asset retirement obligations as of June 30, 2022 747,142 Less: Current portion 15,000 Non-Current asset retirement obligation $ 732,142 4. Long Term Debt On December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”), which originally 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, 2022, there was $ 1,500,000 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. In addition, this Agreement prohibits the Company from paying cash dividends on its common stock without prior written permission of WTNB. The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior WTNB approval. There was no balance outstanding on the credit facility as of June 30, 2022. Page 8 5. Stock-based Compensation The Company recognized compensation expense of $ 25,571 and $ 13,865 related to vesting stock options in general and administrative expense in the Consolidated Statements of Operations for the first quarter of fiscal 2023 and 2022, respectively. The total cost related to non-vested awards not yet recognized at June 30, 2022 totals $ 188,537 , which is expected to be recognized over a weighted average of 2.14 years. The following table is a summary of stock options activity for the three months ended June 30, 2022: 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, 2022 114,250 $ 5.51 7.40 $ 1,221,670 Granted - - Exercised - - Forfeited or Expired - - Outstanding at June 30, 2022 114,250 $ 5.51 7.15 $ 1,334,778 Vested at June 30, 2022 52,750 $ 4.68 5.99 $ 660,023 Exercisable at June 30, 2022 52,750 $ 4.68 5.99 $ 660,023 During the three months ended June 30, 2022 and 2021, no stock options were granted. During the three months ended June 30, 2022, no stock options were exercised. 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. 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, 2022 and 2021, there were no stock options forfeited or expired. Outstanding options at June 30, 2022 expire between August 2024 and July 2031 and have exercise prices ranging from $ 3.34 to $ 8.51 . 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 was to expire 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 at a flat (unescalated) rate 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. Page 9 The balance sheets classification of lease assets and liabilities was as follows: Schedule of Operating Lease Assets and Liabilities June 30, 2022 Assets Operating lease right-of-use asset, beginning balance $ 129,923 Current period amortization ( 13,383 ) Total operating lease right-of-use asset $ 116,540 Liabilities Operating lease liability, current $ 54,806 Operating lease liability, long term 61,734 Total lease liabilities $ 116,540 Future minimum lease payments as of June 30, 2022 under non-cancellable operating leases are as follows: Schedule of Future Minimum Lease Payments Lease Obligation Fiscal Year Ended March 31, 2023 43,680 Fiscal Year Ended March 31, 2024 58,240 Fiscal Year Ended March 31, 2025 19,413 Total lease payments $ 121,333 Less: imputed interest ( 4,793 ) Operating lease liability 116,540 Less: operating lease liability, current ( 54,806 ) Operating lease liability, long term $ 61,734 Net cash paid for our operating lease for the three months ended June 30, 2022 and 2021 was $ 10,667 and $ 10,929 , respectively. Rent expense, less sublease income of $ 3,893 and $ 5,200 , respectively, is included in general and administrative expenses. 7. Income Taxes A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Based on the material write-downs of the carrying value of our oil and natural gas properties during fiscal 2016, we are in a net deferred tax asset position as of June 30, 2022. Our deferred tax asset is $ 526,846 as of June 30, 2022 with a valuation amount of $ 526,846 . We believe it is more likely than not that these deferred tax assets will not be realized. Management considers the likelihood that the Company’s net operating losses and other deferred tax attributes will be utilized prior to their expiration, if applicable. The determination to record a valuation allowance was based on management’s assessment of all available evidence, both positive and negative, supporting realizability of the Company deferred tax asset as required by applicable accounting standards. In light of those criteria for recognizing the tax benefit of deferred tax assets, the Company’s assessment resulted in application of a valuation allowance against the deferred tax asset as of June 30, 2022. 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, 2022 and 2021 was $ 10,085 and $ 12,768 , 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, 2022 and 2021 were $ 3,893 and $ 4,045 , respectively. Page 10 9. Income Per Common Share The following is a reconciliation of the number of shares used in the calculation of basic and diluted net income per share for the three-month periods ended June 30, 2022 and 2021. Schedule of Reconciliation of Basic and Diluted Net Income (loss) Per Share 2022 2021 Net income $ 1,298,672 $ 395,006 Shares outstanding: Weighted average common shares outstanding – basic 2,149,416 2,076,756 Effect of the assumed exercise of dilutive stock options 67,326 43,199 Weighted average common shares outstanding – dilutive 2,216,742 2,119,955 Income per common share: Basic $ 0.60 $ 0.19 Diluted $ 0.59 $ 0.19 For the three months ended June 30, 2022 and 2021, no anti-dilutive shares relating to stock options were excluded from the computation of diluted net income. 10. Subsequent Events In July 2022, Mexco expended approximately $ 300,000 for the remaining balance in the drilling and completion of four horizontal wells Eddy County, New Mexico. In July and August 2022, Mexco expended approximately $ 768,000 to purchase additional working interests and to complete three horizontal wells in Reagan County, Texas. In July and August 2022, Mexco expended approximately $ 377,000 to purchase additional working interests and to complete a horizontal well in Reagan County, Texas. In August 2022, Mexco expended approximately $ 33,000 to participate in the drilling of two horizontal wells in Lea County, New Mexico. 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.