UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File No. 1-31785

 

MEXCO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Colorado   84-0627918
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification Number)

 

415 West Wall Street, Suite 475    
Midland, Texas   79701
(Address of principal executive offices)   (Zip code)

 

(432) 682-1119

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.50 per share   MXC   NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer [  ]   Accelerated Filer [  ]
Non-Accelerated Filer [  ]   Smaller reporting company [X]
Emerging growth company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]

 

The number of shares outstanding of the registrant’s common stock, par value $.50 per share, as of November 5, 2020 was 2,051,866.

 

 

 

   
 

 

MEXCO ENERGY CORPORATION AND SUBSIDIARIES

 

    Table of Contents  
      Page
PART I. FINANCIAL INFORMATION  
   
  Item 1. Financial Statements  
    Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and March 31, 2020 3
       
    Consolidated Statements of Operations (Unaudited) for the three months and six months ended September 30, 2020 and September 30, 2019 4
       
    Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three and six months ended September 30, 2020 and September 30, 2019 5
       
    Consolidated Statements of Cash Flows (Unaudited) for the six months ended September 30, 2020 and September 30, 2019 6
       
    Notes to Consolidated Financial Statements (Unaudited) 7
       
  Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
       
  Item 4. Controls and Procedures 19
       
PART II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 20
       
  Item 1A. Risk Factors 20
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
       
  Item 3. Defaults upon Senior Securities 20
       
  Item 4. Mine Safety Disclosures 20
       
  Item 5. Other Information 20
       
  Item 6. Exhibits 20
       
SIGNATURES 21
   
CERTIFICATIONS

 

   
 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

   September 30,   March 31, 
   2020   2020 
   (Unaudited)     
ASSETS        
Current assets          
Cash and cash equivalents  $62,678   $34,381 
Accounts receivable:          
Oil and natural gas sales   320,772    271,315 
Trade   592    13,382 
Prepaid costs and expenses   23,901    50,188 
Total current assets   407,943    369,266 
Property and equipment, at cost          
Oil and gas properties, using the full cost method   38,022,952    37,465,172 
Other   120,208    116,993 
Accumulated depreciation, depletion and amortization   (28,569,491)   (28,109,252)
Property and equipment, net   9,573,669    9,472,913 
Investment – cost basis   175,000    150,000 
Operating lease, right-of-use asset   53,113    76,130 
Other noncurrent assets   44    2,200 
Total assets  $10,209,769   $10,070,509 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $112,288   $116,760 
Operating lease liability, current   54,912    65,721 
Total current liabilities   167,200    182,481 
Long-term liabilities          
Long-term debt   1,143,686    757,423 
PPP loan payable   68,574    - 
Operating lease liability, long-term   -    10,982 
Asset retirement obligations   770,204    755,261 
Total long-term liabilities   1,982,464    1,523,666 
Total liabilities   2,149,664    1,706,147 
           
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; 2,108,666 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   1,054,333    1,053,583 
Additional paid-in capital   7,375,984    7,339,351 
Retained (losses) earnings   (24,211)   317,429 
Treasury stock, at cost (67,000 shares)   (346,001)   (346,001)
Total stockholders’ equity   8,060,105    8,364,362 
Total liabilities and stockholders’ equity  $10,209,769   $10,070,509 

 

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

 

 Page 3 
 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Operating revenues:                    
Oil sales  $504,957   $531,086   $787,327   $1,119,522 
Natural gas sales   125,007    94,664    206,816    197,922 
Other   6,078    134    12,355    8,031 
Total operating revenues   636,042    625,884    1,006,498    1,325,475 
                     
Operating expenses:                    
Production   217,117    229,042    388,783    448,437 
Accretion of asset retirement obligations   7,237    6,590    14,424    13,337 
Depreciation, depletion, and amortization   236,134    209,729    460,239    419,967 
General and administrative   192,360    255,294    441,238    566,355 
Total operating expenses   652,848    700,655    1,304,684    1,448,096 
                     
Operating loss   (16,806)   (74,771)   (298,186)   (122,621)
                     
Other income (expenses):                    
Interest income   301    479    316    499 
Interest expense   (13,515)   (8,495)   (24,570)   (14,851)
Loss on derivative instruments   (11,950)   -    (19,200)   - 
Net other expense   (25,164)   (8,016)   (43,454)   (14,352)
                     
Loss before income taxes   (41,970)   (82,787)   (341,640)   (136,973)
                     
Income tax   -    -    -    - 
                     
Net loss  $(41,970)  $(82,787)  $(341,640)  $(136,973)
                     
Loss per common share:                    
Basic:  $(0.02)  $(0.04)  $(0.17)  $(0.07)
Diluted:  $(0.02)  $(0.04)  $(0.17)  $(0.07)
                     
Weighted average common shares outstanding:                    
Basic:   2,040,941    2,040,166    2,040,553    2,040,166 
Diluted:   2,040,941    2,040,166    2,040,553    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 (Losses)   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   -    -    (341,640)   -    (341,640)
Issuance of stock through options exercised   750    8,685              9,435 
Stock based compensation   -    27,948    -    -    27,948 
Balance at September 30, 2020  $1,054,333   $7,375,984   $(24,211)  $(346,001)  $8,060,105 
                          
    Common Stock Par Value    Additional Paid-In Capital    Retained Earnings (Losses)    Treasury Stock    Total
Stockholders’
Equity
 
Balance at June 30, 2020  $1,053,583   $7,353,356   $17,759   $(346,001)  $8,078,697 
Net loss   -    -    (41,970)   -    (41,970)
Issuance of stock through options exercised   750    8,685              9,435 
Stock based compensation   -    13,943    -    -    13,943 
Balance at September 30, 2020  $1,054,333   $7,375,984   $(24,211)  $(346,001)  $8,060,105 
                          
    Common Stock Par Value    Additional Paid-In Capital    Retained Earnings    Treasury Stock    Total
Stockholders’
Equity
 
Balance at April 1, 2019  $1,053,583   $7,305,048   $416,907   $(346,001)  $8,429,537 
Net loss   -    -    (136,973)   -    (136,973)
Stock based compensation   -    16,250    -    -    16,250 
Balance at September 30, 2019  $1,053,583   $7,321,298   $279,934   $(346,001)  $8,308,814 
                          
    Common Stock Par Value    Additional Paid-In Capital    Retained Earnings    Treasury Stock    Total
Stockholders’
Equity
 
Balance at June 30, 2019  $1,053,583   $7,313,173   $362,721   $(346,001)  $8,383,476 
Net loss   -    -    (82,787)   -    (82,787)
Stock based compensation   -    8,125    -    -    8,125 
Balance at September 30, 2019  $1,053,583   $7,321,298   $279,934   $(346,001)  $8,308,814 
                          
SHARE ACTIVITY                         
Common stock shares, issued:                         
Balance at April 1, 2020        2,107,166                
Issued        1,500                
Balance at September 30, 2020        2,108,666                
                          
Common stock shares, held in treasury:                         
Balance at April 1, 2020        (67,000)               
Acquisitions        -                
Balance at September 30, 2020        (67,000)               
                          
Common stock shares, outstanding at September 30, 2020        2,041,666                

 

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 Six Months Ended September 30,

(Unaudited)

 

   2020   2019 
Cash flows from operating activities:          
Net loss  $(341,640)  $(136,973)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Stock-based compensation   27,948    16,250 
Depreciation, depletion and amortization   460,239    419,967 
Accretion of asset retirement obligations   14,424    13,337 
Amortization of debt issuance costs   6,263    7,188 
Changes in operating assets and liabilities:          
(Increase) decrease in accounts receivable   (36,667)   456 
Decrease in right-of-use asset   23,017    32,628 
Decrease in prepaid expenses   26,287    14,568 
Decrease in other assets   -    30,421 
Increase (decrease) in accounts payable and accrued expenses   7,185    (13,956)
Settlement of asset retirement obligations   (1,028)   (8,694)
Decrease in operating lease liability   (21,791)   (32,254)
Net cash provided by operating activities   164,237    342,938 
           
Cash flows from investing activities:          
Additions to oil and gas properties   (714,079)   (842,139)
Drilling refunds   42,060    - 
Investment – cost basis   (25,000)   (100,000)
Proceeds from sale of oil and gas properties and equipment   106,285    26,448 
Additions to other property and equipment   (3,215)   - 
Net cash used in investing activities   (593,949)   (915,691)
           
Cash flows from financing activities:          
Proceeds from exercise of stock options   9,435    - 
Proceeds from long-term debt   673,574    555,000 
Reduction of long-term debt   (225,000)   (40,000)
Net cash provided by financing activities   458,009    515,000 
           
Net increase (decrease) in cash and cash equivalents   28,297    (57,753)
           
Cash and cash equivalents at beginning of period   34,381    128,252 
           
Cash and cash equivalents at end of period  $62,678   $70,499 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $17,859   $7,395 
           
Non-cash investing and financing activities:          
Asset retirement obligations  $11,269   $10,421 
Operating lease – right of use asset and associated liabilities  $9,360   $141,385 

 

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 natural gas, crude oil, condensate and natural gas liquids (“NGLs”). 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 the Company’s oil and gas interests are operated by others.

 

Recent Events

 

The 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. Federal, 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. In 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 operations.

 

The 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. The Company 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.

 

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.

 

 Page 7 
 

 

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 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”). 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 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 using the cost method. 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.

 

The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets.

 

Recent Accounting Pronouncements. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to the following: (i) hybrid tax regimes; (ii) the tax basis step-up in goodwill obtained in a transaction that is not a business combination; (iii) separate financial statements of entities not subject to tax; (iv) the intraperiod tax allocation exception to the incremental approach; (v) ownership changes in investments - changes from a subsidiary to an equity method investment (and vice versa); (vi) interim-period accounting for enacted changes in tax laws; and (vii) the year-to-date loss limitation in interim-period tax accounting. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. If an entity early adopts these amendments in an interim period, it should reflect any adjustments as of the beginning of the annual period that includes that interim period. In addition, an entity that elects to early adopt ASU 2019-12 is required to adopt all of the amendments in the same period. The Company is currently assessing the effect that ASU 2019-12 will have on its financial position, results of operations and disclosures.

 

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.

 

 Page 8 
 

 

The 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  $762,761 
Liabilities incurred   11,269 
Liabilities settled   (10,750)
Accretion expense   14,424 
Carrying amount of asset retirement obligations as of September 30, 2020   777,704 
Less: Current portion   7,500 
Non-Current asset retirement obligation  $770,204 

 

4. Long Term Debt

 

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

 

   September 30, 2020   March 31, 2020 
Credit facility  $1,175,000   $795,000 
Unamortized debt issuance costs   (31,314)   (37,577)
Total long-term debt  $1,143,686   $757,423 

 

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 September 30, 2020, there was $325,000 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. The Company is in compliance with all covenants as of September 30, 2020.

 

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

 

 Page 9 
 

 

The 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:

 

   Principal 
Balance at April 1, 2020:  $795,000 
Borrowings   605,000 
Repayments   (225,000)
Balance at September 30, 2020:  $1,175,000 

 

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.

 

The Company also maintained a Certificate of Deposit Account at WTNB to collateralize one outstanding letter of credit for $25,000 in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operated. The operated property was sold effective December 1, 2019 and the letter of credit was cancelled. On April 10, 2020, the Certificate of Deposit Account was terminated and the funds deposited into the Company’s operating account.

 

5. 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 1,021 square feet of office space shared with and reimbursed by our majority shareholder. 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.

 

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 6.0%. Significant judgement is required when determining the incremental borrowing rate. The Company chose not to discount because the difference is not significant. 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:

 

   September 30, 2020 
Assets     
Operating lease right-of-use asset, beginning balance  $76,130 
Current period amortization   (32,377)
Lease amendment   (1,622)
Lease extension   10,982 
Total operating lease right-of-use asset  $53,113 
      
Liabilities     
Operating lease liability, current  $54,912 
Operating lease liability, long term   - 
Total lease liabilities  $54,912 

 

 Page 10 
 

 

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

 

   Lease Obligation 
Fiscal Year Ended March 31, 2021   32,947 
Fiscal Year Ended March 31, 2022   21,965 
Total lease payments  $54,912 
Less: imputed interest   - 
Operating lease liability   54,912 
Less: operating lease liability, current   (54,912)
Operating lease liability, long term  $- 

 

Net 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.

 

6. Fair Value Measurements

 

The Company applies FASB ASC Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), which establishes a framework for measuring fair value based upon inputs that market participants use in pricing an asset or liability, which are classified into two catagories: observable inputs or unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:

 

Level 1: Quoted prices for identical instruments in active markets at the measurement date.

 

Level 2: 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.

 

Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability acquired, based on the best information available in the circumstances.

 

The carrying amount reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments.

 

The fair value amount reported in the accompanying consolidated balance sheets for long-term debt approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics. See the Company’s note 4 on Long Term Debt for further discussion.

 

Fair Value Measurements on a Recurring Basis

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

The Company’s commodity derivative instruments were carried at fair value on a recurring basis in the Company’s consolidated balance sheets. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties.

 

Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Assumed credit risk adjustments, based on published credit ratings and public bond yield spreads are applied to the Company’s commodity derivatives. The Company’s derivative instruments are subject to netting arrangements and qualify for net presentation in the consolidated balance sheets in those instances where such arrangements exist with the respective counterparty.

 

To ensure these derivative instruments are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party as well as market constraints on liquidity. Any such adjustment was not material as of September 30, 2020.

 

 Page 11 
 

 

Fair Value Measurements on a Nonrecurring Basis

 

The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments and, therefore, the Company has designated these liabilities as Level 3 measurements. The significant inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free rate. See Note 3 for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations.

 

7. Derivative Financial Instruments

 

It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive.

 

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk. Derivative contracts are utilized to economically hedge the Company’s exposure to price fluctuations and reduce the variability in the Company’s cash flows associated with anticipated sales of future oil and natural gas production. The Company follows FASB ASC Topic 815, Derivatives and Hedging (ASC Topic 815), to account for its derivative financial instruments.

 

The Company’s crude oil derivative positions consist of put options. The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in net realized and unrealized gain (loss) on commodity price hedging contracts on the consolidated statements of operations. All derivative contracts are recorded at fair market value and included in the consolidated balance sheets as assets or liabilities.

 

The Company may have multiple hedge positions that span a several-month time period and result in fair value asset and liability positions. At the end of the reporting periods, those positions are offset to a single fair value asset or liability for each commodity and the netted balance is reflected in the consolidated balance sheets as an asset or liability.

 

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.

 

The 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.

 

   Loss Recognized 
Realized loss on oil price hedging contracts  $(19,200)
Unrealized gain (loss) on oil price hedging contracts   - 
Net realized and unrealized loss on derivative contracts  $(19,200)

 

8. Stock-based Compensation

 

The 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.

 

 Page 12 
 

 

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

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contract Life in Years 
Outstanding at April 1, 2020   227,700   $5.65    4.83 
Granted   -    -      
Exercised   (1,500)   6.29      
Forfeited or Expired   (35,200)   -      
Outstanding at September 30, 2018   191,000   $5.56    5.14 
                
Vested at September 30, 2020   130,000   $6.37    3.35 
Exercisable at September 30, 2020   130,000   $6.37    3.35 

 

During 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.

 

During 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.

 

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

 

9. 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 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 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.

 

10. Related Party Transactions

 

Related 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.

 

11. Loss Per Common Share

 

The Company’s basic net loss per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net 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 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.

 

 Page 13 
 

 

The following is a reconciliation of the number of shares used in the calculation of basic and diluted net loss per share for the three and six month periods ended September 30, 2020 and 2019.

 

   Three Months Ended   Six Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Net loss  $(41,970)  $(82,787)  $(341,640)  $(136,973)
                     
Shares outstanding:                    
Weighted avg. shares outstanding – basic   2,040,941    2,040,166    2,040,553    2,040,166 
Effect of assumed exercise of dilutive stock options   -    -    -    - 
Weighted avg. shares outstanding – dilutive   2,040,941    2,040,166    2,040,553    2,040,166 
                     
Loss per common share:                    
Basic  $(0.02)  $(0.04)  $(0.17)  $(0.07)
Diluted  $(0.02)  $(0.04)  $(0.17)  $(0.07)

 

Due 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.

 

12. Subsequent Events

 

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.

 

On 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.

 

On 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.

 

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 14 
 

 

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; and 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 revolving line of credit. 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.

 

Due to the current commodity price environment, we are applying financial discipline to all aspects of our business. In order to meet obligations, we may continue to sell non-core assets.

 

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

 

For 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.

 

At 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.

 

Oil and Natural Gas Property Development. 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.

 

 Page 15 
 

 

During 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 $233,000. 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%.

 

During 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. Mexco’s working interest in these wells is 1.2%.

 

Also during the first quarter of fiscal 2021, Mexco expended $99,000 to participate in the drilling of 5 horizontal wells in the Upper Avalon formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .5%.

 

The Company also expended $5,000 during the first quarter of fiscal 2021 for its share to participate in 1 horizontal well in the Bone Spring formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in this well is .14%.

 

In 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; and 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 is .69%. 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 day. Mexco’s interest in these wells is .104%.

 

Effective 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.

 

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.

 

Beginning in March 2020, crude oil and natural gas prices decreased significantly through May 2020. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil on March 31, 2020 was $16.75 per bbl and averaged $14.68 and $24.67 per bbl for the months of April and May, respectively. The WTI posted price for crude oil was $36.25 on September 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 $1.66 on September 30, 2020. See Results of Operations below for realized prices which are substantially below the Henry Hub Spot Market Price.

 

Paycheck Protection Program (PPP) Loan. 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. The PPP provides funds to pay up to 24 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The Company applied for, and was accepted to participate in this program. On May 5, 2020, the Company received funding for approximately $68,600.

 

The loan is a two-year loan with a maturity date of May 5, 2022. The loan bears an annual interest rate of 1%. The loan shall be payable monthly with the first six monthly payments deferred. 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.

 

 Page 16 
 

 

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, 2020:

 

   Payments due in: 
   Total   less than 1 year   1 - 3 years   over 3 years 
Contractual obligations:                    
Secured bank line of credit (1)  $1,175,000   $-   $1,175,000   $- 
Leases (2)  $54,912   $54,912   $-   $- 

 

  (1) These 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 $44,063 less than 1 year, and $66,094 1-3 years.
     
  (2) The 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.

 

Results of Operations – Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019. There was a 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 30, 2019. This was a result of an increase in operating revenues and a decrease in operating expenses that is further explained below.

 

Oil and gas sales. 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.

 

   2020   2019   % Difference 
Oil:               
Revenue  $504,957   $531,086    (4.9)%
Volume (bbls)   13,143    10,094    30.2%
Average Price (per bbl)  $38.42   $52.61    (27.0)%
                
Gas:               
Revenue  $125,007   $94,664    32.1%
Volume (mcf)   88,890    72,686    22.3%
Average Price (per mcf)  $1.41   $1.30    8.5%

 

Production 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.

 

General 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 expense.

 

Interest expense. 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.

 

Income taxes. There was no income tax expense for the three months ended September 30, 2020 and for the three months ended September 30, 2019. 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.

 

 Page 17 
 

 

Results 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 30, 2019. This was a result of a decrease in operating revenues partially offset by a decrease in operating expenses that is further explained below.

 

Oil 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.

 

   2020   2019   % Difference 
Oil:               
Revenue  $787,327   $1,119,522    (29.7)%
Volume (bbls)   24,677    20,703    19.2%
Average Price (per bbl)  $31.91   $54.08    (41.0)%
                
Gas:               
Revenue  $206,816   $197,922    4.5%
Volume (mcf)   168,406    144,533    16.5%
Average Price (per mcf)  $1.23   $1.37    (10.2)%

 

Production and exploration. 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.

 

Depreciation, depletion and 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.

 

General and administrative expenses. 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. 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.

 

Income taxes. There was no income tax expense for the six months ended September 30, 2020 and for the six months ended September 30, 2019. 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The primary sources of market risk for us include fluctuations in commodity prices and interest rates. All of our financial instruments are for purposes other than trading.

 

Interest Rate Risk. At September 30, 2020, we had an outstanding loan balance of $1,175,000 under our credit agreement, which bears interest 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. If the interest rate on our bank debt increases or decreases by one percentage point our annual pretax income would change by $11,750 based on the outstanding balance at September 30, 2020.

 

Credit Risk. Credit risk is the risk of loss as a result of nonperformance by other parties of their contractual obligations. Our primary credit risk is related to oil and gas production sold to various purchasers and the receivables are generally not collateralized. At September 30, 2020, our largest credit risk associated with any single purchaser was $212,549 or 66% of our total oil and gas receivables. We have not experienced any significant credit losses.

 

 Page 18 
 

 

Energy Price Risk. Our most significant market risk is the pricing for crude oil and natural gas. Our financial condition, results of operations, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. Prices for oil and natural gas fluctuate widely. We cannot predict future oil and natural gas prices with any certainty. Pricing for oil and natural gas production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future.

 

Factors that can cause price fluctuations include the level of global demand for petroleum products, foreign and domestic supply of oil and gas, the establishment of and compliance with production quotas by oil-exporting countries, weather conditions, the price and availability of alternative fuels and overall political and economic conditions in oil producing countries.

 

Oil prices dropped sharply in early March 2020, and then continued to decline reaching levels below zero dollars per barrel. This was a result of multiple factors affecting supply and demand in global oil and gas markets, including the announcement of price reductions and production increases by OPEC members and other oil exporting nations and the ongoing COVID-19 pandemic. Oil and natural gas prices are expected to continue to be volatile as a result of the changes in oil and natural gas production, inventories and demand, as well as national and international economic performance. Even though oil prices improved in June 2020, we cannot predict when oil prices will stabilize.

 

Declines in oil and natural gas prices will materially adversely affect our financial condition, liquidity, ability to obtain financing and operating results. Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity of proved reserves. Any reduction in reserves, including reductions due to price fluctuations, can reduce the borrowing base under our credit facility and adversely affect the amount of cash flow available for capital expenditures and our ability to obtain additional capital for our acquisition, exploration and development activities. In addition, a noncash write-down of our oil and gas properties could be required under full cost accounting rules if prices declined significantly, even if it is only for a short period of time. Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically. Thus, we may experience material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well performance.

 

Similarly, any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources. Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. If the average oil price had increased or decreased by ten dollars per barrel for the first six months of fiscal 2021, our pretax income would have increased or decreased by $246,770. If the average gas price had increased or decreased by one dollar per mcf for the first six months of fiscal 2021, our pretax income would have increased or decreased by $168,406.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis. At the end of the period covered by this report, our principal executive officer and principal financial officer reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e). Based on such evaluation, such officers concluded that, as of September 30, 2020, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting. No changes in our internal control over financial reporting occurred during the six months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 Page 19 
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. We are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under various environmental protection statutes or other regulations to which we are subject.

 

Item 1A. Risk Factors

 

There have been no material changes to the information previously disclosed in Item 1A. “Risk Factors” in our 2020 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

  31.1 Certification of the Chief Executive Officer of Mexco Energy Corporation
     
  31.2 Certification of the Chief Financial Officer of Mexco Energy Corporation
     
  32.1 Certification of the Chief Executive Officer and Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C. §1350

 

 Page 20 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  MEXCO ENERGY CORPORATION
  (Registrant)
   
Dated: November 5, 2020 /s/ Nicholas C. Taylor
  Nicholas C. Taylor
  Chairman of the Board and Chief Executive Officer
   
Dated: November 5, 2020 /s/ Tamala L. McComic
  Tamala L. McComic
  President, Chief Financial Officer, Treasurer and Assistant Secretary

 

 Page 21 

 

Exhibit 31.1

 

CHIEF EXECUTIVE OFFICER CERTIFICATION

 

CERTIFICATION

 

I, Nicholas C. Taylor, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy Corporation;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 5, 2020 /s/ Nicholas C. Taylor
  Nicholas C. Taylor
  Chairman of the Board and Chief Executive Officer

 

   

 

Exhibit 31.2

 

CHIEF FINANCIAL OFFICER CERTIFICATION

CERTIFICATION

 

I, Tamala L. McComic, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy Corporation;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 5, 2020 /s/ Tamala L. McComic
  Tamala L. McComic
  President and Chief Financial Officer

 

   

 

 

Exhibit 32.1

 

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

OF MEXCO ENERGY CORPORATION

PURSUANT TO 18 U.S.C. §1350

 

In connection with the Quarterly Report of Mexco Energy Corporation on Form 10-Q for the quarterly period ended September 30, 2020, as filed with the Securities and Exchange Commission on November 5, 2020 (the “Report”), the undersigned, in the capacities and on the dates indicated below, each hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Mexco Energy Corporation as of the dates and for periods presented as required by such Report.

 

Date: November 5, 2020 /s/ Nicholas C. Taylor
  Nicholas C. Taylor
  Chairman of the Board and Chief Executive Officer
   
Date: November 5, 2020 /s/ Tamala L. McComic
  Tamala L. McComic
  President and Chief Financial Officer

 

   

 

v3.20.2
Document and Entity Information - shares
6 Months Ended
Sep. 30, 2020
Nov. 05, 2020
Cover [Abstract]    
Entity Registrant Name MEXCO ENERGY CORP  
Entity Central Index Key 0000066418  
Document Type 10-Q  
Document Period End Date Sep. 30, 2020  
Amendment Flag false  
Current Fiscal Year End Date --03-31  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Non-accelerated Filer  
Entity Small Business Flag true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   2,051,866
Document Fiscal Period Focus Q2  
Document Fiscal Year Focus 2021  
v3.20.2
Consolidated Balance Sheets - USD ($)
Sep. 30, 2020
Mar. 31, 2020
Current assets    
Cash and cash equivalents $ 62,678 $ 34,381
Accounts receivable:    
Oil and natural gas sales 320,772 271,315
Trade 592 13,382
Prepaid costs and expenses 23,901 50,188
Total current assets 407,943 369,266
Property and equipment, at cost    
Oil and gas properties, using the full cost method 38,022,952 37,465,172
Other 120,208 116,993
Accumulated depreciation, depletion and amortization (28,569,491) (28,109,252)
Property and equipment, net 9,573,669 9,472,913
Investment - cost basis 175,000 150,000
Operating lease, right-of-use asset 53,113 76,130
Other noncurrent assets 44 2,200
Total assets 10,209,769 10,070,509
Current liabilities    
Accounts payable and accrued expenses 112,288 116,760
Operating lease liability, current 54,912 65,721
Total current liabilities 167,200 182,481
Long-term liabilities    
Long-term debt 1,143,686 757,423
PPP loan payable 68,574
Operating lease liability, long-term 10,982
Asset retirement obligations 770,204 755,261
Total long-term liabilities 1,982,464 1,523,666
Total liabilities 2,149,664 1,706,147
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; 2,108,666 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 1,054,333 1,053,583
Additional paid-in capital 7,375,984 7,339,351
Retained (losses) earnings (24,211) 317,429
Treasury stock, at cost (67,000 shares) (346,001) (346,001)
Total stockholders' equity 8,060,105 8,364,362
Total liabilities and stockholders' equity $ 10,209,769 $ 10,070,509
v3.20.2
Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2020
Mar. 31, 2020
Statement of Financial Position [Abstract]    
Preferred stock, par value $ 1.00 $ 1.00
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares outstanding
Common stock, par value $ 0.50 $ 0.50
Common stock, shares authorized 40,000,000 40,000,000
Common stock, shares issued 2,108,666 2,107,166
Common stock, shares outstanding 2,041,666 2,040,166
Treasury stock, shares 67,000 67,000
v3.20.2
Consolidated Statements of Operations (Unaudited) - USD ($)
3 Months Ended 6 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Operating revenues:        
Total operating revenues $ 636,042 $ 625,884 $ 1,006,498 $ 1,325,475
Operating expenses:        
Production 217,117 229,042 388,783 448,437
Accretion of asset retirement obligations 7,237 6,590 14,424 13,337
Depreciation, depletion, and amortization 236,134 209,729 460,239 419,967
General and administrative 192,360 255,294 441,238 566,355
Total operating expenses 652,848 700,655 1,304,684 1,448,096
Operating loss (16,806) (74,771) (298,186) (122,621)
Other income (expenses):        
Interest income 301 479 316 499
Interest expense (13,515) (8,495) (24,570) (14,851)
Loss on derivative instruments (11,950) (19,200)
Net other expense (25,164) (8,016) (43,454) (14,352)
Loss before income taxes (41,970) (82,787) (341,640) (136,973)
Income tax
Net loss $ (41,970) $ (82,787) $ (341,640) $ (136,973)
Loss per common share:        
Basic: $ (0.02) $ (0.04) $ (0.17) $ (0.07)
Diluted: $ (0.02) $ (0.04) $ (0.17) $ (0.07)
Weighted average common shares outstanding:        
Basic: 2,040,941 2,040,166 2,040,553 2,040,166
Diluted: 2,040,941 2,040,166 2,040,553 2,040,166
Oil Sales [Member]        
Operating revenues:        
Total operating revenues $ 504,957 $ 531,086 $ 787,327 $ 1,119,522
Natural Gas Sales [Member]        
Operating revenues:        
Total operating revenues 125,007 94,664 206,816 197,922
Other [Member]        
Operating revenues:        
Total operating revenues $ 6,078 $ 134 $ 12,355 $ 8,031
v3.20.2
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - USD ($)
Common Stock Par Value [Member]
Additional Paid-In Capital [Member]
Retained Earnings (Losses) [Member]
Treasury Stock [Member]
Total
Balance at Mar. 31, 2019 $ 1,053,583 $ 7,305,048 $ 416,907 $ (346,001) $ 8,429,537
Net loss (136,973) (136,973)
Stock based compensation 16,250 16,250
Balance at Sep. 30, 2019 1,053,583 7,321,298 279,934 (346,001) 8,308,814
Balance at Jun. 30, 2019 1,053,583 7,313,173 362,721 (346,001) 8,383,476
Net loss (82,787) (82,787)
Stock based compensation 8,125 8,125
Balance at Sep. 30, 2019 1,053,583 7,321,298 279,934 (346,001) 8,308,814
Balance at Mar. 31, 2020 1,053,583 7,339,351 317,429 (346,001) $ 8,364,362
Common stock shares, issued at Mar. 31, 2020         2,107,166
Common stock shares, held in treasury at Mar. 31, 2020         (67,000)
Net loss (341,640) $ (341,640)
Issuance of stock through options exercised 750 8,685     9,435
Stock based compensation 27,948 $ 27,948
Common stock shares, issued         1,500
Common stock shares, held in treasury, Acquisitions, shares        
Balance at Sep. 30, 2020 1,054,333 7,375,984 (24,211) (346,001) $ 8,060,105
Common stock shares, issued at Sep. 30, 2020         2,108,666
Common stock shares, held in treasury at Sep. 30, 2020         (67,000)
Common stock shares outstanding at Sep. 30, 2020         2,041,666
Balance at Jun. 30, 2020 1,053,583 7,353,356 17,759 (346,001) $ 8,078,697
Net loss (41,970) (41,970)
Issuance of stock through options exercised 750 8,685 9,435
Stock based compensation 13,943 13,943
Balance at Sep. 30, 2020 $ 1,054,333 $ 7,375,984 $ (24,211) $ (346,001) $ 8,060,105
Common stock shares, issued at Sep. 30, 2020         2,108,666
Common stock shares, held in treasury at Sep. 30, 2020         (67,000)
Common stock shares outstanding at Sep. 30, 2020         2,041,666
v3.20.2
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
6 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Cash flows from operating activities:    
Net loss $ (341,640) $ (136,973)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Stock-based compensation 27,948 16,250
Depreciation, depletion and amortization 460,239 419,967
Accretion of asset retirement obligations 14,424 13,337
Amortization of debt issuance costs 6,263 7,188
Changes in operating assets and liabilities:    
(Increase) decrease in accounts receivable (36,667) 456
Decrease in right-of-use asset 23,017 32,628
Decrease in prepaid expenses 26,287 14,568
Decrease in other assets 30,421
Increase (decrease) in accounts payable and accrued expenses 7,185 (13,956)
Settlement of asset retirement obligations (1,028) (8,694)
Decrease in operating lease liability (21,791) (32,254)
Net cash provided by operating activities 164,237 342,938
Cash flows from investing activities:    
Additions to oil and gas properties (714,079) (842,139)
Drilling refunds 42,060
Investment - cost basis (25,000) (100,000)
Proceeds from sale of oil and gas properties and equipment 106,285 26,448
Additions to other property and equipment (3,215)
Net cash used in investing activities (593,949) (915,691)
Cash flows from financing activities:    
Proceeds from exercise of stock options 9,435
Proceeds from long-term debt 673,574 555,000
Reduction of long-term debt (225,000) (40,000)
Net cash provided by financing activities 458,009 515,000
Net increase (decrease) in cash and cash equivalents 28,297 (57,753)
Cash and cash equivalents at beginning of period 34,381 128,252
Cash and cash equivalents at end of period 62,678 70,499
Supplemental disclosure of cash flow information:    
Cash paid for interest 17,859 7,395
Non-cash investing and financing activities:    
Asset retirement obligations 11,269 10,421
Operating lease - right of use asset and associated liabilities $ 9,360 $ 141,385
v3.20.2
Nature of Operations
6 Months Ended
Sep. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Nature of Operations

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 natural gas, crude oil, condensate and natural gas liquids (“NGLs”). 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 the Company’s oil and gas interests are operated by others.

 

Recent Events

 

The 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. Federal, 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. In 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 operations.

 

The 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. The Company 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.

v3.20.2
Basis of Presentation and Significant Accounting Policies
6 Months Ended
Sep. 30, 2020
Accounting Policies [Abstract]  
Basis of Presentation and Significant Accounting Policies

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 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”). 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 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 using the cost method. 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.

 

The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets.

 

Recent Accounting Pronouncements. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to the following: (i) hybrid tax regimes; (ii) the tax basis step-up in goodwill obtained in a transaction that is not a business combination; (iii) separate financial statements of entities not subject to tax; (iv) the intraperiod tax allocation exception to the incremental approach; (v) ownership changes in investments - changes from a subsidiary to an equity method investment (and vice versa); (vi) interim-period accounting for enacted changes in tax laws; and (vii) the year-to-date loss limitation in interim-period tax accounting. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. If an entity early adopts these amendments in an interim period, it should reflect any adjustments as of the beginning of the annual period that includes that interim period. In addition, an entity that elects to early adopt ASU 2019-12 is required to adopt all of the amendments in the same period. The Company is currently assessing the effect that ASU 2019-12 will have on its financial position, results of operations and disclosures. 

v3.20.2
Asset Retirement Obligations
6 Months Ended
Sep. 30, 2020
Asset Retirement Obligation Disclosure [Abstract]  
Asset Retirement Obligations

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 six months of fiscal 2021:

 

Carrying amount of asset retirement obligations as of April 1, 2020   $ 762,761  
Liabilities incurred     11,269  
Liabilities settled     (10,750 )
Accretion expense     14,424  
Carrying amount of asset retirement obligations as of September 30, 2020     777,704  
Less: Current portion     7,500  
Non-Current asset retirement obligation   $ 770,204  
v3.20.2
Long Term Debt
6 Months Ended
Sep. 30, 2020
Debt Disclosure [Abstract]  
Long Term Debt

4. Long Term Debt

 

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

 

    September 30, 2020     March 31, 2020  
Credit facility   $ 1,175,000     $ 795,000  
Unamortized debt issuance costs     (31,314 )     (37,577 )
Total long-term debt   $ 1,143,686     $ 757,423  

 

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 September 30, 2020, there was $325,000 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. The Company is in compliance with all covenants as of September 30, 2020.

 

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

 

The 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:

 

    Principal  
Balance at April 1, 2020:   $ 795,000  
Borrowings     605,000  
Repayments     (225,000 )
Balance at September 30, 2020:   $ 1,175,000  

 

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.

 

The Company also maintained a Certificate of Deposit Account at WTNB to collateralize one outstanding letter of credit for $25,000 in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operated. The operated property was sold effective December 1, 2019 and the letter of credit was cancelled. On April 10, 2020, the Certificate of Deposit Account was terminated and the funds deposited into the Company’s operating account. 

v3.20.2
Leases
6 Months Ended
Sep. 30, 2020
Leases [Abstract]  
Leases

5. 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 1,021 square feet of office space shared with and reimbursed by our majority shareholder. 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.

 

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 6.0%. Significant judgement is required when determining the incremental borrowing rate. The Company chose not to discount because the difference is not significant. 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:

 

    September 30, 2020  
Assets        
Operating lease right-of-use asset, beginning balance   $ 76,130  
Current period amortization     (32,377 )
Lease amendment     (1,622 )
Lease extension     10,982  
Total operating lease right-of-use asset   $ 53,113  
         
Liabilities        
Operating lease liability, current   $ 54,912  
Operating lease liability, long term     -  
Total lease liabilities   $ 54,912  

 

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

 

    Lease Obligation  
Fiscal Year Ended March 31, 2021     32,947  
Fiscal Year Ended March 31, 2022     21,965  
Total lease payments   $ 54,912  
Less: imputed interest     -  
Operating lease liability     54,912  
Less: operating lease liability, current     (54,912 )
Operating lease liability, long term   $ -  

 

Net 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. 

v3.20.2
Fair Value Measurements
6 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements

6. Fair Value Measurements

 

The Company applies FASB ASC Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), which establishes a framework for measuring fair value based upon inputs that market participants use in pricing an asset or liability, which are classified into two catagories: observable inputs or unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:

 

Level 1: Quoted prices for identical instruments in active markets at the measurement date.

 

Level 2: 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.

 

Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability acquired, based on the best information available in the circumstances.

 

The carrying amount reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments.

 

The fair value amount reported in the accompanying consolidated balance sheets for long-term debt approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics. See the Company’s note 4 on Long Term Debt for further discussion.

 

Fair Value Measurements on a Recurring Basis

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

The Company’s commodity derivative instruments were carried at fair value on a recurring basis in the Company’s consolidated balance sheets. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties.

 

Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Assumed credit risk adjustments, based on published credit ratings and public bond yield spreads are applied to the Company’s commodity derivatives. The Company’s derivative instruments are subject to netting arrangements and qualify for net presentation in the consolidated balance sheets in those instances where such arrangements exist with the respective counterparty.

 

To ensure these derivative instruments are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party as we