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 the Form 10-Q are qualified in their entirety by the cautionary statement contained in this section. We do not undertake to update, revise or correct any of the forward-looking information. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K. Liquidity and Capital Resources. Historically, we have funded our operations, acquisitions, exploration, and development expenditures from cash generated by operating activities, bank borrowings, sales of non-core properties and issuance of common stock. Our primary financial resource is our base of oil and gas reserves. We have pledged our producing oil and gas properties to secure our 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 and non-operated properties in areas with significant development potential. Page 12 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 Three Months Ended June 30, 2025 2024 Change Net cash provided by operating activities $ 1,363,277 $ 1,078,614 $ 284,663 Net cash used in investing activities $ (365,910 ) $ (717,387 ) $ (351,477 ) Net cash used in financing activities $ (204,600 ) $ (319,996 ) $ (115,396 ) 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 three months ended June 30, 2025 was $1,363,277 in comparison to $1,078,614 for the three months ended June 30, 2024. This increase of $284,663 in our cash flow from operating activities consisted of an increase in our non-cash expenses of $21,304; a decrease in our accounts receivable of $211,775; a increase of $92,998 in our payables and accrued expenses; and, a decrease in our net income for the current quarter of $49,088. 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 three months ended June 30, 2025, we had net cash of $365,910 used for additions to oil and gas properties compared to $517,387 and a $200,000 investment in a limited liability company for the three months ended June 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 three months ended June 30, 2025 compared to cash flow used in our financing activities of $319,996 for the three months ended June 30, 2024. During the three months ended June 30, 2025, we expended $204,600 to pay the regular annual dividend. During the three months ended June 30, 2024, we expended $209,000 to pay the regular annual dividend, expended $188,637 to purchase 13,766 shares of our stock for the treasury account, and received proceeds of $77,641 from the exercise of employee stock options. Accordingly, net cash increased $792,767, leaving cash and cash equivalents on hand of $2,546,722 as of June 30, 2025. At June 30, 2025, we had working capital of $2,922,683 compared to working capital of $2,469,664 at March 31, 2025, an increase of $453,019 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 35 horizontal wells at an estimated cost of approximately $1,100,000 for the fiscal year ending March 31, 2026. Thirty-four 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 well is in Reagan County, Texas. In June 2025, Mexco expended approximately $116,000 to participate in the drilling of five horizontal wells in the Bone Spring formation of the Delaware Basin in Eddy County, New Mexico. Mexco’s working interest in these wells is .5%. In June 2025, Mexco expended approximately $79,000 to drill and complete three horizontal wells in the Bone Spring formation of the Delaware Basin in Lea County, New Mexico. Subsequently, 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 cubic feet of gas per day, or 926 BOE per day. Mexco’s working interest in these wells is .3%. Page 13 In October 2022, the Company made an approximately 2% equity investment commitment in a limited liability company amounting to $2,000,000, of which $1,800,000 has been funded as of June 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. Subsequently, in July 2025, the Company funded the remaining $200,000 toward this investment. To date, this LLC has returned $303,164 or 15% of the total investment. Completion of Wells Drilled in Fiscal 2025. The Company also expects to expend approximately $150,000 for the completion of 17 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. 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 in June 2025 with initial average production rates of 676 barrels of oil, 1,899 barrels of water, and 729,000 cubic feet of gas per day, or 798 BOE per day. Mexco’s working interest in these wells is approximately .5%. Subsequently, 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. Mexco’s working interest in these wells is .28%. 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. Other Projects. 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. Pricing. 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 $79.86 per bbl in July 2024. 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 $9.86 per MMBtu in January 2025. On June 30, 2025, the WTI posted price for crude oil was $61.09 and the Henry Hub spot price for natural gas was $3.26 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 June 30, 2025: Payments due in: Total less than 1 year 1 - 3 years over 3 years Contractual obligations: Leases (1) $ 125,667 $ 60,320 $ 65,347 $ - (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 $11,023 1-3 years for his portion of the shared office space. Results of Operations – Three Months Ended June 30, 2025 Compared to Three Months Ended June 30, 2024. For the quarter ended June 30, 2025, net income was $241,951 compared to net income of $291,039 for the quarter ended June 30, 2024. This was primarily the result of an increase in operating revenues and an increase in operating expenses, which is further explained below. Page 14 Oil and gas sales. Revenue from oil and gas sales was $1,754,734 for the quarter ended June 30, 2025, a 4% increase from $1,688,056 for the quarter ended June 30, 2024. This primarily resulted from an increase in oil and gas production and an increase in gas prices partially offset by a decrease in oil prices. The following table sets forth our oil and natural gas revenues, production quantities and average prices received during the three months ended June 30: 2025 2024 % Difference Oil: Revenue $ 1,395,937 $ 1,510,304 (7.6 )% Volume (bbls) 22,010 18,909 16.4 % Average Price (per bbl) $ 63.42 $ 79.87 (20.6 )% Gas: Revenue $ 358,797 $ 177,752 101.9 % Volume (mcf) 169,905 136,307 24.6 % Average Price (per mcf) $ 2.11 $ 1.30 62.4 % Other operating revenues. Other revenues increased 49% to 59,442 for the quarter ended June 30, 2025 from $39,779 for the quarter ended June 30, 2024. This resulted from an increase in income from one of our limited liability company investments. Interest income. Interest income on corporate funds decreased 36% to $14,531 for the quarter ended June 30, 2025 from $22,746 for the quarter ended June 30, 2024. This decrease resulted from a change in our average cash balances due to using the corporate funds for property acquisitions. Production and exploration. Production costs were $404,770 for the three months ended June 30, 2025, a 7% decrease from $437,420 for the three months ended June 30, 2024. This was primarily due to a decrease in lease operating expenses on wells in which we own a working interest. Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) expense was $675,270 for the first quarter of fiscal 2026, an 25% increase from $539,697 for the first quarter of fiscal 2025, 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 $394,437 for the three months ended June 30, 2025, an 7% increase from $367,045 for the three months ended June 30, 2024. This was primarily due to an increase in engineering and accounting fees. Income taxes. Income tax for the three months ended June 30, 2025 was $103,231 compared to $106,586 for the three months ended June 30, 2024. The effective tax rate for state and federal taxes combined for the three months ended June 30, 2025 and 2024 was 30% and 27%, respectively. Page 15