MEXCO ENERGY CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context otherwise requires, references to the “Company”, “Mexco”, “we”, “us” or “our” mean Mexco Energy Corporation and its consolidated subsidiaries. Cautionary Statements Regarding Forward-Looking Statements. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements regarding our plans, beliefs or current expectations and may be signified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict”, and other similar expressions. Forward-looking statements appear throughout this Form 10-Q with respect to, among other things: profitability; planned capital expenditures; estimates of oil and gas production; future project dates; estimates of future oil and gas prices; estimates of oil and gas reserves; our future financial condition or results of operations; our business strategy and other plans; and, objectives for future operations. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement. While we have made assumptions that we believe are reasonable, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statement contained in this section. We do not undertake to update, revise or correct any of the forward-looking information. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K. Liquidity and Capital Resources. Historically, we have funded our operations, acquisitions, exploration, and development expenditures from cash generated by operating activities, bank borrowings, sales of non-core properties, and issuance of common stock. Our primary financial resource is our base of oil and gas reserves. We have pledged our producing oil and gas properties to secure our credit facility. We do not have any delivery commitments to provide a fixed and determinable quantity of our oil and gas under any existing contract or agreement. Our long-term strategy is on increasing profit margins while concentrating on obtaining reserves with low-cost operations by acquiring and developing oil and gas properties with potential for long-lived production. We focus our efforts on the acquisition of royalty and working interests in non-operated properties in areas with significant development potential. Cash Flows Changes in the net funds provided by or (used in) each of our operating, investing and financing activities are set forth in the table below: For the Six Months Ended September 30, 2025 2024 Change Net cash provided by operating activities $ 2,067,549 $ 2,006,405 $ 61,144 Net cash used in investing activities $ (870,212 ) $ (2,066,957 ) $ (1,196,745 ) Net cash used in financing activities $ (204,600 ) $ (834,575 ) $ (629,975 ) Page 13 Cash Flow Provided by Operating Activities. Cash flow from operating activities is primarily derived from the production of our crude oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. Cash flow provided by our operating activities for the six months ended September 30, 2025 was $2,067,549 in comparison to $2,006,405 for the six months ended September 30, 2024. This increase of $61,144 in our cash flow operating activities consisted of an decrease in our non-cash expenses of $38,080; an increase in our accounts receivable of $167,957; a decrease of $26,351 in our accounts payable and accrued expenses; and, a decrease in our net income of $42,780. Variations in cash flow from operating activities may impact our level of exploration and development expenditures. Our expenditures in operating activities consist primarily of drilling expenses, production expenses, and engineering services. Our expenses also consist of employee compensation, accounting, insurance, and other general and administrative expenses that we have incurred in order to address normal and necessary business activities of a public company in the crude oil and natural gas production industry. Cash Flow Used in Investing Activities. Cash flow from investing activities is derived from changes in oil and gas property balances. For the six months ended September 30, 2025, we had net cash of $870,212 used for additions to oil and gas properties compared to $2,066,957 for the six months ended September 30, 2024. Cash Flow Used in Financing Activities. Cash flow from financing activities is derived from our changes in long-term debt and in equity account balances. Net cash flow used in our financing activities was $204,600 for the six months ended September 30, 2025 compared to $834,575 for the six months ended September 30, 2024. During the six months ended September 30, 2025, we expended $204,600 to pay the regular annual dividend. During the six months ended September 30, 2024, we expended $703,216 to purchase 57,766 shares of stock for the treasury account, $209,000 to pay the special dividend and received $77,641 from the exercise of stock options. Accordingly, net cash increased $992,737, leaving cash and cash equivalents on hand of $2,746,692 as of September 30, 2025. At September 30, 2025, we had working capital of $3,282,347 compared to working capital of $2,469,664 at March 31, 2025, an increase of $812,683 for the reasons set forth below. Oil and Natural Gas Property Development New Participations in Fiscal 2026. The Company currently plans to participate in the drilling and completion of forty-six horizontal wells and one vertical well at an estimated cost of approximately $1,000,000 for the fiscal year ending March 31, 2026. Forty-five of these wells are in the Delaware Basin located in the western portion of the Permian Basin in Lea and Eddy Counties, New Mexico. The remaining wells are in Reagan and Ward Counties, Texas. Mexco expended approximately $166,000 to participate in the drilling of five horizontal wells in the Bone Spring formation of the Delaware Basin in Eddy County, New Mexico. Subsequently, in October 2025, two of these wells were completed with initial average production rates of 1,194 barrels of oil, 2,924 barrels of water, and 1,819,000 cubic feet of gas per day, or 1,497 BOE per day. Mexco’s working interest in these wells is .5%. Mexco expended approximately $79,000 to drill and complete two horizontal wells in the Bone Spring formation of the Delaware Basin in Lea County, New Mexico. In August 2025, these wells were completed with initial average production rates of 741 barrels of oil, 3,276 barrels of water, and 1,110,000 cubic feet of gas per day, or 926 BOE per day. Mexco’s working interest in these wells is .3%. In September 2025, Mexco expended approximately $70,000 to participate in the drilling of three horizontal wells in the Wolfcamp Sand Formation of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .52%. Completion of Wells Drilled in Fiscal 2025. The Company also expects to expend approximately $150,000 for the completion of seventeen horizontal wells in which the Company participated during fiscal 2025. The Company expended approximately $85,000 for the completion costs of six horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico that the Company participated in drilling during fiscal 2025. In May 2025, these wells were completed with initial average production rates of 1,375 barrels of oil, 3,499 barrels of water, and 1,934,000 cubic feet of gas per day, or 1,697 BOE per day. Mexco’s working interest in these wells is .16%. Two horizontal wells in the Penn Shale formation of the Delaware Basin in Lea County, New Mexico in which the Company participated during fiscal 2025 were completed during the first six months of fiscal 2026 with initial average production rates of 805 barrels of oil, 2,142 barrels of water, and 721,000 cubic feet of gas per day, or 925 BOE per day. Mexco’s working interest in these wells is approximately .5%. Page 14 In July 2025, the Company expended approximately $53,000 for the completion costs of two horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico that the Company participated in drilling during fiscal 2025. In September 2025, these wells were completed with initial average production rates of 955 barrels of oil, 1,340 barrels of water, and 608,000 cubic feet of gas per day, or 1,056 BOE per day. Mexco’s working interest in these wells is .28%. Investments. In October 2022, the Company made an approximately 2% equity investment commitment in a limited liability company amounting to $2,000,000, which has been fully funded as of September 30, 2025. The limited liability company is capitalized at approximately $100 million to purchase mineral interests in the Utica and Marcellus areas in the state of Ohio. As of September 30, 2025, this LLC has returned $401,801 or 20% of the total investment. Subsequently, in October 2025, the Company expended $200,000 to exercise its option to participate in a voluntary optional cash call increasing the capitalized investment. Acquisitions. In May 2025, the Company acquired royalty (mineral) interests in 2 wells operated by Chevron USA and located in Pecos County, Texas for a purchase price of $40,000. This acquisition was effective April 1, 2025 and includes acreage for future development. In August 2025, the Company acquired royalty interests in 12 producing wells operated by Diamondback E & P and located in Martin County, Texas for a purchase price of $60,000 and royalty interests in 25 wells operated by Chevron USA and located in Weld County, Colorado for a purchase price of $26,000. These acquisitions were effective September 1, 2025. Subsequently, in October 2025, the Company acquired royalty interests in 3 producing wells operated by Expand Operating and located in Caddo Parish, Louisiana for a purchase price of $31,000; royalty interests in 14 producing wells wells operated by Diamondback E & P and located in Martin County, Texas for a purchase price of $44,000; royalty interests in 3 producing wells operated by Permian Resources and located in Eddy County, New Mexico for a purchase price of $7,000; and, overriding royalty interest in 4 producing wells operated by Tap Rock Operating and located in Eddy County, New Mexico for a purchase price of $240,000. All of these acquisitions are effective November 1, 2025. We are participating in other projects and are reviewing projects in which we may participate. The cost of such projects would be funded, to the extent possible, from existing cash balances and cash flow from operations. The remainder may be funded through borrowings on the credit facility and, if appropriate, sales of non-core properties. Crude oil and natural gas prices generally remained volatile during the last year. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, in the last twelve months, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $53.11 per bbl in May 2025 to a high of $76.02 per bbl in January 2025. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $1.21 per MMBtu in November 2024 to a high of $7.15 per MMBtu in February 2025. On September 30, 2025, the WTI posted price for crude oil was $58.35 and the Henry Hub spot price for natural gas was $3.12 per MMBtu. See Results of Operations below for realized prices. Pipeline capacity constraints and maintenance in the Permian Basin area has contributed to a wider difference between the WaHa Hub and the Henry Hub and at times prices were negative. Contractual Obligations. We have no off-balance sheet debt or unrecorded obligations and have not guaranteed the debt of any other party. The following table summarizes our future payments we are obligated to make based on agreements in place as of September 30, 2025: Payments due in: Total less than 1 year 1 - 3 years over 3 years Contractual obligations: Leases (1) $ 110,587 $ 60,320 $ 50,267 $ - (1) The lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a 36-month lease agreement expiring July 31, 2027. Of this total obligation for the remainder of the lease, our majority shareholder will pay $10,175 less than 1 year and $8,479 1-3 years for his portion of the shared office space. Page 15 Results of Operations – Three Months Ended September 30, 2025 Compared to Three Months Ended September 30, 2024. There was net income of $323,506 for the quarter ended September 30, 2025 compared to net income of $317,198 for the quarter ended September 30, 2024. This was a result of a decrease in the provision for income taxes partially offset by a decrease in oil and gas revenues and an increase in operating expense that is further explained below. Oil and gas sales. Revenue from oil and gas sales was $1,624,566 for the second quarter of fiscal 2026, a 4% decrease from $1,695,853 for the same period of fiscal 2025. This resulted from a decrease in oil price partially offset by an increase in gas price and production. The following table sets forth our oil and natural gas revenues, production quantities and average prices received during the three months ended September 30: 2025 2024 % Difference Oil: Revenue $ 1,302,105 $ 1,521,618 (14.4 %) Volume (bbls) 20,114 20,325 (1.0 %) Average Price (per bbl) $ 64.74 $ 74.86 (13.5 %) Gas: Revenue $ 322,461 $ 174,235 85.1 % Volume (mcf) 171,058 133,984 27.7 % Average Price (per mcf) $ 1.89 $ 1.30 45.4 % Other operating revenues. Other revenues increased 106% to $110,177 for the quarter ended September 30, 2025 from $53,374 for the quarter ended September 30, 2024. This resulted from an increase in income from our most recent limited liability company investment. Production and exploration. Production costs were $369,093 for the second quarter of fiscal 2026, an 11% decrease from $413,405 for the same period of fiscal 2025. This was primarily the result of a decrease in lease operating expenses on wells in which we own a working interest and a decrease in production taxes due to the decrease in oil revenue partially offset by the increase in gas revenue. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $662,647 for the second quarter of fiscal 2026, a 13% increase from $584,288 for the same period of fiscal 2025, primarily due to a a decrease in the full cost pool amortization base, an increase in gas production volumes and a decrease in oil and gas reserves partially offset by a decrease in the full cost amortization base. General and administrative expenses. General and administrative expenses were $332,264 for the second quarter of fiscal 2026, a 1% decrease from $334,525 for the same period of fiscal 2025. This was primarily due to a decrease in contract services. Income taxes. Federal income tax for the three months ended September 30, 2025 was $31,001. Federal income tax for the three months ended September 30, 2024 was $84,833. State income tax was $27,234 for the three months ended September 30, 2025, a 1% increase from $26,920 for the three months ended September 30, 2024. The effective tax rate for the three months ended September 30, 2025 and 2024 was 15% and 26%, respectively. Results of Operations – Six Months Ended September 30, 2025 Compared to Six Months Ended September 30, 2024. For the six months ended September 30, 2025, there was net income of $565,457 compared to net income of $608,237 for the six months ended September 30, 2024. This was a result of an increase in operating revenues partially offset by an increase in operating expenses that is further explained below. Page 16 Oil and gas sales. Revenue from oil and gas sales was $3,379,300 for the six months ended September 30, 2025, a decrease from $3,383,909 for the same period of fiscal 2025. This resulted from a decrease in oil prices partially offset an increase in oil and gas production and an increase in gas prices. The following table sets forth our oil and natural gas revenues, production quantities and average prices received during the six months ended September 30: 2025 2024 % Difference Oil: Revenue $ 2,698,042 $ 3,031,922 (11.0 %) Volume (bbls) 42,124 39,234 7.4 % Average Price (per bbl) $ 64.05 $ 77.28 (17.1 %) Gas: Revenue $ 681,258 $ 351,987 93.5 % Volume (mcf) 340,963 270,291 26.1 % Average Price (per mcf) $ 2.00 $ 1.30 53.7 % Other operating revenues. Other revenues increased 82% to $169,619 for the six months ended September 30, 2025 from $93,153 for the six months ended September 30, 2024. This resulted from an increase in income from our most recent limited liability company investment. Production and exploration. Production costs were $773,863 for the six months ended September 30, 2025, a 9% decrease from $850,825 for the six months ended September 30, 2024. This was primarily the result of a decrease in lease operating expenses on wells in which we own a working interest and a decrease in production taxes due to the decrease in oil revenue partially offset by the increase in gas revenue. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $1,337,917 for the six months ended September 30, 2025, a 19% increase from $1,123,985 for the six months ended September 30, 2024, primarily due to an increase in oil and gas production volumes and a decrease in oil and gas reserves partially offset by a decrease in the full cost pool amortization base. General and administrative expenses. General and administrative expenses were $726,701 for the six months ended September 30, 2025, a 4% increase from $701,570 for the six months ended September 30, 2024. This was primarily due to an increase in accounting fees and engineering services partially offset by a decrease in contract services. Income taxes. Federal income tax for the six months ended September 30, 2025 was $108,781. Federal income tax for the six months ended September 30, 2024 was $171,353. State income tax was $52,685 for the six months ended September 30, 2025, a 12% increase from $46,986 for the six months ended September 30, 2024 due to the increase in oil and natural gas sales in the states that have state income tax. The effective tax rate for the six months ended September 30, 2025 and 2024 was 22% and 26%, respectively.