Item
1. Financial Statements
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
The
accompanying notes are an integral part of the consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
The
accompanying notes are an integral part of the consolidated financial statements.
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 June 30, 2022 | |
$ | 1,108,208 | | |
$ | 8,159,553 | | |
$ | 4,627,099 | | |
$ | (346,001 | ) | |
$ | 13,548,859 | |
Net income | |
| - | | |
| - | | |
| 1,211,716 | | |
| - | | |
| 1,211,716 | |
Profit from purchase of stock by insider | |
| - | | |
| 30,179 | | |
| - | | |
| - | | |
| 30,179 | |
Stock based compensation | |
| - | | |
| 34,431 | | |
| - | | |
| - | | |
| 34,431 | |
Balance at September 30, 2022 | |
$ | 1,108,208 | | |
$ | 8,224,163 | | |
$ | 5,838,815 | | |
$ | (346,001 | ) | |
$ | 14,825,185 | |
| |
Common
Stock Par
Value | | |
Additional
Paid-In
Capital | | |
Retained
Earnings | | |
Treasury
Stock | | |
Total
Stockholders’
Equity | |
Balance at April 1, 2021 | |
$ | 1,071,833 | | |
$ | 7,624,214 | | |
$ | 473,361 | | |
$ | (346,001 | ) | |
$ | 8,823,407 | |
Net income | |
| - | | |
| - | | |
| 1,103,834 | | |
| - | | |
| 1,103,834 | |
Issuance of stock through options exercised | |
| 13,950 | | |
| 171,782 | | |
| - | | |
| - | | |
| 185,732 | |
Stock based compensation | |
| - | | |
| 36,433 | | |
| - | | |
| - | | |
| 36,433 | |
Balance at September 30, 2021 | |
$ | 1,085,783 | | |
$ | 7,832,429 | | |
$ | 1,577,195 | | |
$ | (346,001 | ) | |
$ | 10,149,406 | |
| |
Common
Stock Par
Value | | |
Additional
Paid-In
Capital | | |
Retained
Earnings | | |
Treasury
Stock | | |
Total
Stockholders’
Equity | |
Balance at June 30, 2021 | |
$ | 1,074,333 | | |
$ | 7,669,579 | | |
$ | 868,367 | | |
$ | (346,001 | ) | |
$ | 9,266,278 | |
Net income | |
| - | | |
| - | | |
| 708,828 | | |
| - | | |
| 708,828 | |
Issuance of stock through options exercised | |
| 11,450 | | |
| 140,282 | | |
| - | | |
| - | | |
| 151,732 | |
Stock based compensation | |
| - | | |
| 22,568 | | |
| - | | |
| - | | |
| 22,568 | |
Balance at September 30, 2021 | |
$ | 1,085,783 | | |
$ | 7,832,429 | | |
$ | 1,577,195 | | |
$ | (346,001 | ) | |
$ | 10,149,406 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
SHARE ACTIVITY | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock shares, issued: | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at April 1, 2022 | |
| | | |
| 2,216,416 | | |
| | | |
| | | |
| | |
Issued | |
| | | |
| - | | |
| | | |
| | | |
| | |
Balance at September 30, 2022 | |
| | | |
| 2,216,416 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock shares, held in treasury: | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at April 1, 2022 | |
| | | |
| (67,000 | ) | |
| | | |
| | | |
| | |
Acquisitions | |
| | | |
| - | | |
| | | |
| | | |
| | |
Balance at September 30, 2022 | |
| | | |
| (67,000 | ) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock shares, outstanding at September 30, 2022 | |
| | | |
| 2,149,416 | | |
| | | |
| | | |
| | |
The
accompanying notes are an integral part of the consolidated financial statements.
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30,
(Unaudited)
The
accompanying notes are an integral part of the consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Operations
Mexco
Energy Corporation (a Colorado corporation) and its wholly owned subsidiaries, Forman Energy Corporation (a New York corporation), Southwest
Texas Disposal Corporation (a Texas corporation) and TBO Oil & Gas, LLC (a Texas limited liability company) (collectively, the “Company”)
are engaged in the acquisition, exploration, development and production of 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.
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 consolidated 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,
2022, and the results of its operations and cash flows for the interim periods ended September 30, 2022 and 2021. The consolidated financial
statements as of September 30, 2022 and for the three and six month periods ended September 30, 2022 and 2021 are unaudited. The consolidated
balance sheet as of March 31, 2022 was derived from the audited balance sheet filed in the Company’s 2022 annual report on Form
10-K filed with the Securities and Exchange Commission (“SEC”). The results of operations for the periods presented are not
necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in
more detail in Note 2 of the “Notes to Consolidated Financial Statements” in the Form 10-K. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. However, the disclosures
herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K.
Investments.
The Company accounts for investments of less than 1% in limited liability companies at cost. The Company has no control of the limited
liability companies. The cost of the investment is recorded as an asset on the consolidated balance sheets and when income from the investment
is received, it is immediately recognized on the consolidated statements of operations.
3.
Asset Retirement Obligations
The
Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and equipment,
and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is incurred,
discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing
the carrying amount of the related long-lived asset. The liability is accreted each period until the liability is settled or the well
is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our
oil and natural gas properties. The ARO is included on the consolidated balance sheets with the current portion being included in the
accounts payable and other accrued expenses.
The
following table provides a rollforward of the AROs for the first six months of fiscal 2023:
Schedule of Rollforward of Asset Retirement Obligations
Carrying amount of asset retirement obligations as of April 1, 2022 | |
$ | 735,512 | |
Liabilities incurred | |
| 21,197 | |
Liabilities settled | |
| (12,006 | ) |
Accretion expense | |
| 15,349 | |
Carrying amount of asset retirement obligations as of September 30, 2022 | |
| 760,052 | |
Less: Current portion | |
| 15,000 | |
Non-Current asset retirement obligation | |
$ | 745,052 | |
4.
Long Term Debt
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, 2022, there was $1,500,000 available for borrowing by the Company on the facility.
No
principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2023. Upon closing with
WTNB on the original Agreement, the Company paid a .5% loan origination fee in the amount of $5,000 plus legal and recording expenses
totaling $34,532, which were deferred over the life of the credit facility. Upon closing the amendment to the Agreement, the Company
paid a .1% loan origination fee of $2,500 and an extension fee of $3,125 plus legal and recording expenses totaling $12,266, which were
also deferred over the life of the credit facility.
Amounts
borrowed under the Agreement are collateralized by the common stock of the Company’s wholly owned subsidiaries and substantially
all of the Company’s oil and gas properties.
The
Agreement contains customary covenants for credit facilities of this type including limitations on change in control, disposition of
assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement and requires
senior debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratios (Senior Debt/EBITDA) less
than or equal to 4.00 to 1.00 measured with respect to the four trailing quarters and minimum interest coverage ratios (EBITDA/Interest
Expense) of 2.00 to 1.00 for each quarter.
In
addition, this Agreement prohibits the Company from paying cash dividends on its common stock without written permission of WTNB. The
Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior WTNB approval.
There
was no balance outstanding on the line of credit as of September 30, 2022. The following table is a summary of activity on the WTNB line
of credit for the six months ended September 30, 2022:
Summary of Line of Credit Activity
| |
Principal | |
Balance at April 1, 2022: | |
$ | - | |
Borrowings | |
| 500,000 | |
Repayments | |
| (500,000 | ) |
Balance at September 30, 2022: | |
$ | - | |
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 1,112 square feet of office space shared with and reimbursed by our majority shareholder. The lease
does not include an option to renew and is a 36 month lease that was to expire in May 2021. In June 2020, in exchange for a reduction
in rent for the months of June and July 2020, the Company agreed to a 2-month extension to its current lease agreement at the regular
monthly rate extending its current lease expiration date to July 2021. In June 2021, the Company agreed to extend its current lease at
a flat (unescalated) rate for 36 months. The amended lease now expires on July 31, 2024.
The
Company determines an arrangement is a lease at inception. Operating leases are recorded in operating lease right-of-use asset, operating
lease liability, current, and operating lease liability, long-term on the consolidated balance sheets.
Operating
lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement
date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate,
the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value
of lease payments. The incremental borrowing rate used at adoption was 3.75%. Significant judgement is required when determining the
incremental borrowing rate. Rent expense for lease payments is recognized on a straight-line basis over the lease term.
The
balance sheets classification of lease assets and liabilities was as follows:
Schedule of Operating Lease Assets and Liabilities
| |
September 30,
2022 | |
Assets | |
| | |
Operating lease right-of-use asset, beginning balance | |
$ | 129,923 | |
Current period amortization | |
| (26,893 | ) |
Total operating lease right-of-use asset | |
$ | 103,030 | |
| |
| | |
Liabilities | |
| | |
Operating lease liability, current | |
$ | 55,321 | |
Operating lease liability, long term | |
| 47,709 | |
Total lease liabilities | |
$ | 103,030 | |
Future
minimum lease payments as of September 30, 2022 under non-cancellable operating leases are as follows:
Schedule of Future Minimum Lease Payments
| |
Lease Obligation | |
Fiscal Year Ended March 31, 2023 | |
| 29,120 | |
Fiscal Year Ended March 31, 2024 | |
| 58,240 | |
Fiscal Year Ended March 31, 2025 | |
| 19,413 | |
Total lease payments | |
$ | 106,773 | |
Less: imputed interest | |
| (3,743 | ) |
Operating lease liability | |
| 103,030 | |
Less: operating lease liability, current | |
| (55,321 | ) |
Operating lease liability, long term | |
$ | 47,709 | |
Net
cash paid for our operating lease for the six months ended September 30, 2022 and 2021 was $21,334 and $20,903, respectively. Rent expense,
less sublease income of $7,786 and $10,768, respectively, is included in general and administrative expenses.
6.
Stock-based Compensation
The
Company recognized stock-based compensation expense of $34,431 and $22,568 in general and administrative expense in the Consolidated
Statements of Operations for the three months ended September 30, 2022 and 2021, respectively. Stock-based compensation expense recognized
for the six months ended September 30, 2022 and 2021 was $60,002 and $36,433, respectively. The total cost related to non-vested awards
not yet recognized at September 30, 2022 totals $539,745 which is expected to be recognized over a weighted average of 2.88 years.
During
the six months ended September 30, 2022, the Compensation Committee of the Board of Directors approved and the Company granted 31,000
stock options exercisable at $18.05 per share with an estimated fair value of $385,640. During the six months ended September 30, 2021,
the Compensation Committee of the Board of Directors approved and the Company granted 31,000 stock options exercisable at $8.51 per share
with an estimated fair value of $187,550. These options are exercisable at a price not less than the fair market value of the stock at
the date of grant, have an exercise period of ten years and generally vest over four years.
Included
in the following table is a summary of the grant-date fair value of stock options granted and the related assumptions used in the Binomial
models for stock options granted during the six months ended September 30, 2022 and 2021. All such amounts represent the weighted average
amounts.
Summary of Grant-date Fair Value of Stock Options Granted and Assumptions Used Binomial Models
| |
Six Months Ended | |
| |
September 30 | |
| |
2022 | | |
2021 | |
Grant-date fair value | |
$ | 18.05 | | |
$ | 6.05 | |
Volatility factor | |
| 57.3 | % | |
| 65.38 | % |
Dividend yield | |
| - | | |
| - | |
Risk-free interest rate | |
| 3.15 | % | |
| 0.92 | % |
Expected term (in years) | |
| 6.25 | | |
| 6.25 | |
The
following table is a summary of activity of stock options for the six months ended September 30, 2022:
Summary of Activity of Stock Options
| |
Number of
Shares | | |
Weighted
Average
Exercise
Price | | |
Weighted Average
Remaining
Contract Life in
Years | | |
Intrinsic
Value | |
Outstanding at April 1, 2022 | |
| 114,250 | | |
$ | 5.51 | | |
| 7.40 | | |
$ | 1,221,670 | |
Granted | |
| 31,000 | | |
| 18.05 | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Forfeited or Expired | |
| - | | |
| - | | |
| | | |
| | |
Outstanding at September 30, 2022 | |
| 145,250 | | |
$ | 8.18 | | |
| 7.54 | | |
$ | 1,167,225 | |
| |
| | | |
| | | |
| | | |
| | |
Vested at September 30, 2022 | |
| 70,500 | | |
$ | 5.15 | | |
| 6.11 | | |
$ | 780,658 | |
Exercisable at September 30, 2022 | |
| 70,500 | | |
$ | 5.15 | | |
| 6.11 | | |
$ | 780,658 | |
During
the six months ended September 30, 2022, no stock options were exercised. During the six months ended September 30, 2021, stock options
covering 27,900 shares were exercised with a total intrinsic value of $104,473. The Company received proceeds of $185,732 from these
exercises.
There
were no stock options forfeited or expired during the six months ended September 30, 2022 and 2021. 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, 2022 expire between August 2024 and August 2032 and have exercise prices ranging from $3.34 to $18.05.
7.
Income Taxes
A
valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some
or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding
our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine
whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both
actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business
economics of our industry.
Based
on the material write-downs of the carrying value of our oil and natural gas properties during fiscal 2016, we are in a net deferred
tax asset position as of September 30, 2022. Our deferred tax asset is $313,582 as of September 30, 2022 with a valuation amount of $313,582.
We believe it is more likely than not that these deferred tax assets will not be realized. Management considers the likelihood that the
Company’s net operating losses and other deferred tax attributes will be utilized prior to their expiration, if applicable. The
determination to record a valuation allowance was based on management’s assessment of all available evidence, both positive and
negative, supporting realizability of the Company deferred tax asset as required by applicable accounting standards. In light of those
criteria for recognizing the tax benefit of deferred tax assets, the Company’s assessment resulted in application of a valuation
allowance against the deferred tax asset as of September 30, 2022.
8.
Related Party Transactions
Related
party transactions for the Company primarily relate to shared office expenditures in addition to administrative and operating expenses
paid on behalf of the principal stockholder. The total billed to and reimbursed by the stockholder for the quarters ended September 30,
2022 and 2021 was $13,649 and $10,288, respectively. The total billed to and reimbursed by the stockholder for the six months ended September
30, 2022 and 2021 was $23,735 and $23,056, 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, 2022 and 2021 were $3,893 and $3,944, respectively. Amounts paid by the principal stockholder directly to the lessor for the six
months ending September 30, 2022 and 2021 were $7,786 and $7,988, respectively.
9.
Income Per Common Share
The
following is a reconciliation of the number of shares used in the calculation of basic and diluted net income per share for the three
and six month periods ended September 30, 2022 and 2021.
Schedule of Reconciliation of Basic and Diluted Net Income (loss) Per Share
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended | | |
Six Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net income | |
$ | 1,211,716 | | |
$ | 708,828 | | |
$ | 2,510,388 | | |
$ | 1,103,834 | |
| |
| | | |
| | | |
| | | |
| | |
Shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Weighted avg. shares outstanding – basic | |
| 2,149,416 | | |
| 2,091,417 | | |
| 2,149,416 | | |
| 2,084,127 | |
Effect of assumed exercise of dilutive stock options | |
| 69,095 | | |
| 52,326 | | |
| 68,211 | | |
| 47,762 | |
Weighted avg. shares outstanding – dilutive | |
| 2,218,511 | | |
| 2,143,743 | | |
| 2,217,627 | | |
| 2,131,889 | |
| |
| | | |
| | | |
| | | |
| | |
Income per common share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.56 | | |
$ | 0.34 | | |
$ | 1.17 | | |
$ | 0.53 | |
Diluted | |
$ | 0.55 | | |
$ | 0.33 | | |
$ | 1.13 | | |
$ | 0.52 | |
For
the three and six months ended September 30, 2022 and 2021, 31,000 shares relating to stock options were excluded from the computation
of diluted net income because their inclusion would be anti-dilutive.
10.
Stockholders’ Equity
On
September 6, 2022, one of the Company’s directors paid the Company $30,179, representing profit on Company stock purchased within
the six-month window of a previous Company stock sale. Such payment was made in accordance with Section 16(b) of the Securities Exchange
Act of 1934.
11.
Subsequent Events
On
October 3, 2022, the Company expended approximately $698,000 for the drilling and completion of seven wells in Eddy and Lea Counties,
New Mexico.
On
October 21, 2022, the Company expended $147,600 for the completion of four wells in Lea County, New Mexico.
On
October 27, 2022, the Company made an approximately 2% equity investment commitment in a limited liability company amounting to $2,000,000.
The limited liability is capitalized at approximately $100 million to purchase mineral interests in the Utica and Marcellus areas in
the state of Ohio.
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.
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 credit facility. We
do not have any delivery commitments to provide a fixed and determinable quantity of our oil and gas under any existing contract or agreement.
Our
long-term strategy is on increasing profit margins while concentrating on obtaining reserves with low-cost operations by acquiring and
developing oil and gas properties with potential for long-lived production. We focus our efforts on the acquisition of royalty and working
interests in non-operated properties in areas with significant development potential.
At
September 30, 2022, we had working capital of $2,298,977 compared to working capital of $2,469,776 at March 31, 2022, a decrease of $170,789
for the reasons set forth below.
Cash
Flows
Changes
in the net funds provided by or (used in) each of our operating, investing and financing activities are set forth in the table below:
| |
For the Six Months
Ended September 30, | | |
| |
| |
2022 | | |
2021 | | |
Change | |
Net cash provided by operating activities | |
$ | 3,418,087 | | |
$ | 1,584,816 | | |
$ | 1,833,271 | |
Net cash used in investing activities | |
$ | (4,253,453 | ) | |
$ | (554,787 | ) | |
$ | 3,698,666 | |
Net cash provided by (used in) financing activities | |
$ | 30,179 | | |
$ | (994,268 | ) | |
$ | 1,024,447 | |
Cash
Flow Provided by Operating Activities. Cash flow from operating activities is primarily derived from the production of our crude
oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other property asset account
balances. Cash flow provided by our operating activities for the six months ended September 30, 2022 was $3,418,087 in comparison to
$1,584,816 for the six months ended September 30, 2021. This increase of $1,833,271 in our cash flow operating activities consisted of
an increase in our non-cash expenses of $251,742; a decrease in our accounts receivable of $263,939; a decrease of $80,141 in our accounts
payable and accrued expenses; and, an increase in our net income for the current quarter of $1,406,554. Variations in cash flow from
operating activities may impact our level of exploration and development expenditures.
Our
expenditures in operating activities consist primarily of drilling expenses, production expenses and engineering services. Our expenses
also consist of employee compensation, accounting, insurance and other general and administrative expenses that we have incurred in order
to address normal and necessary business activities of a public company in the crude oil and natural gas production industry.
Cash
Flow Used in Investing Activities. Cash flow from investing activities is derived from changes in oil and gas property balances.
For the six months ended September 30, 2022, we had net cash of $4,253,453 used for additions to oil and gas properties compared to $554,787
for the six months ended September 30, 2021.
Cash
Flow Provided by Financing Activities. Cash flow from financing activities is derived from our changes in long-term debt and in equity
account balances. Cash flow provided by our financing activities was $30,179 for the six months ended September 30, 2022 compared to
cash flow used in our financing activities of $994,268 for the six months ended September 30, 2021. During the six months ended September
30, 2022, we received advances and made payments of $500,000 on our credit facility and received payment of $30,179 from a director for
profits on purchase of stock within the six-month window of a previous sale of stock.
Accordingly,
net cash decreased $805,187, leaving cash and cash equivalents on hand of $565,579 as of September 30, 2022.
Oil
and Natural Gas Property Development
New
Participations in Fiscal 2023. The Company currently plans to participate in the drilling and completion of 48 horizontal wells at
an estimated aggregate cost of approximately $4,300,000 for the fiscal year ending March 31, 2023, of which 57% will be spent in the
Delaware Basin and the remaining balance in the Midland Basin. Thirty-six of these horizontal wells are in the Delaware Basin located
in the western portion of the Permian Basin in Lea and Eddy Counties, New Mexico and twelve are in the Midland Basin located in the eastern
portion of the Permian Basin in Reagan County, Texas.
In
April 2022, Mexco expended approximately $140,000 to participate in the drilling of four horizontal wells in the Wolfcamp Sand formation
of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .52%.
During
the first six months of fiscal 2023, Mexco expended approximately $1,196,000 to participate in the drilling and completion of three horizontal
wells in the Wolfcamp Sand formation of the Midland Basin located in the eastern portion of the Permian Basin in Reagan County, Texas.
Mexco’s working interest in these wells is 3.2%. These wells are currently being completed.
In
May 2022, Mexco expended approximately $97,000 to participate in the drilling of four horizontal wells in the Wolfcamp Sand formation
of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .52%. Subsequently, in October 2022,
Mexco expended approximately $148,000 to complete these wells.
During
the first six months of fiscal 2023, Mexco expended approximately $607,000 to participate in the drilling and completion of a horizontal
well in the Wolfcamp Sand formation of the Midland Basin in Reagan County, Texas. Mexco’s working interest in this well is 5.1%.
This well are currently being completed.
During
the first six months of fiscal 2023, Mexco expended approximately $600,000 to participate in the drilling and completion of four horizontal
wells in the Bone Spring formation of the Delaware Basin in Eddy County, New Mexico. Mexco’s working interest in these wells is
2.1%. These wells are currently being completed.
In
June 2022, Mexco expended approximately $157,000 to participate in the drilling of four horizontal wells in the Wolfcamp Sand formation
of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .52%.
In
August 2022, Mexco expended approximately $33,000 to participate in the drilling of two horizontal wells in the Penn Shale formation
of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .22%.
Completion
of Wells Drilled in Fiscal 2022. The Company expended approximately $329,000 for the completion costs of 8 horizontal wells located
in Lea County, New Mexico that the Company participated in drilling during fiscal 2022. The first 4 of these wells began producing in
May 2022 with initial average production rates of 1,384 barrels of oil, 3,530 barrels of water and 2,172,000 cubic feet of gas per day,
or, 1,804 barrels of oil equivalent per day.
Subsequent
Participations. In October 2022, Mexco expended approximately $682,000 to participate in the drilling and completion of four horizontal
wells operated by XTO Energy, Inc. in the Bone Spring formation of the Delaware Basin in Lea County, New Mexico. Mexco’s working
interest in these wells is 2.2%
Also
in October 2022, Mexco expended $16,000 to participate in the drilling and completion of three horizontal wells operated by Mewbourne
Oil Company in the Bone Spring formation of the Delaware Basin in Eddy County, New Mexico. Mexco’s working interest in these wells
is .05%.
Acquisitions.
The Company acquired various royalty (mineral) interests in 22 wells and several additional potential locations for development operated
by Chesapeake Energy Corporation and located in the Eagleford area of Dimmit County, Texas for a purchase price of $939,000 which was
effective April 1, 2022.
We
are participating in other projects and are reviewing projects in which we may participate. The cost of such projects would be funded,
to the extent possible, from existing cash balances and cash flow from operations. The remainder may be funded through borrowings on
the credit facility and, if appropriate, sales of non-core properties.
Crude
oil and natural gas prices generally remained volatile during the last year. The volatility of the energy markets makes it extremely
difficult to predict future oil and natural gas price movements with any certainty. For example, in the last twelve months, the NYMEX
West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $61.55 per bbl in December 2021 to a
high of $119.68 per bbl in March 2022. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low
of $3.32 per MMBtu in December 2021 to a high of $9.85 per MMBtu in August 2022.
On
September 30, 2022, the WTI posted price for crude oil was $75.47 and the Henry Hub spot price for natural gas was $6.40 per MMBtu. See
Results of Operations below for realized prices.
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, 2022:
| |
Payments due in: | |
| |
Total | | |
less than 1
year | | |
1 - 3 years | | |
over 3 years | |
Contractual obligations: | |
| | | |
| | | |
| | | |
| | |
Leases (1) | |
$ | 106,773 | | |
$ | 58,240 | | |
$ | 48,533 | | |
$ | - | |
|
(1) |
The
lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a 38 month lease agreement
effective May 15, 2018 and extended another 36 months to July 31, 2024. Of this total obligation for the remainder of the lease,
our majority shareholder will pay $15,572 less than 1 year and $12,977 1-3 years for his portion of the shared office space. |
Results
of Operations – Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021. There was net income
of $1,211,716 for the quarter ended September 30, 2022 compared to net income of $708,828 for the quarter ended September 30, 2021. This
was a result of an increase in oil and gas prices and an increase in gas production partially offset by an increase in operating expenses
and a decrease in oil production that is further explained below.
Oil
and gas sales. Revenue from oil and gas sales was $2,281,895 for the second quarter of fiscal 2023, a 48% increase from $1,541,171
for the same period of fiscal 2022. This resulted from an increase in oil and gas prices and an increase in gas production partially
offset by a decrease in oil production.
| |
2022 | | |
2021 | | |
% Difference | |
Oil: | |
| | | |
| | | |
| | |
Revenue | |
$ | 1,397,875 | | |
$ | 1,133,134 | | |
| 23.4 | % |
Volume (bbls) | |
| 14,520 | | |
| 16,277 | | |
| (10.8 | %) |
Average Price (per bbl) | |
$ | 96.27 | | |
$ | 69.62 | | |
| 38.3 | % |
| |
| | | |
| | | |
| | |
Gas: | |
| | | |
| | | |
| | |
Revenue | |
$ | 884,020 | | |
$ | 408,037 | | |
| 116.7 | % |
Volume (mcf) | |
| 118,607 | | |
| 92,607 | | |
| 28.1 | % |
Average Price (per mcf) | |
$ | 7.45 | | |
$ | 4.41 | | |
| 68.9 | % |
Production
and exploration. Production costs were $394,445 for the second quarter of fiscal 2023, an 18% increase from $335,588 for the same
period of fiscal 2022. This is primarily the result of an increase in production taxes and marketing charges as a result of the increase
in oil and gas revenues.
Depreciation,
depletion and amortization. Depreciation, depletion and amortization expense was $384,379 for the second quarter of fiscal 2023,
a 37% increase from $280,060 for the same period of fiscal 2022, primarily due to an increase in production and an increase in the full
cost pool amortization base partially offset by an increase in reserves.
General
and administrative expenses. General and administrative expenses were $322,919 for the second quarter of fiscal 2023, a 51% increase
from $214,242 for the same period of fiscal 2022. This was primarily due to an increase in salaries and contract services, legal fees,
employee stock option compensation and shareholder services.
Interest
expense. Interest expense was $3,561 for the second quarter of fiscal 2023, a 53% decrease from $7,530 for the same period of fiscal
2022, due to a decrease in borrowings partially offset by an increase in interest rate.
Income
taxes. There was no income tax expense for the three months ended September 30, 2022 and 2021. The effective tax rate for the three
months ended September 30, 2022 and 2021 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.
Results
of Operations – Six Months Ended September 30, 2022 Compared to Six Months Ended September 30, 2021. For the six months ended
September 30, 2022, there was net income of $2,510,388 compared to net income of $1,103,834 for the six months ended September 30, 2021.
This was a result of an increase in operating revenues partially offset by an increase in operating expenses that is further explained
below.
Oil
and gas sales. Revenue from oil and gas sales was $4,698,008 for the six months ended September 30, 2022, a 68% increase from $2,796,736
for the same period of fiscal 2022. This resulted from an increase in oil and gas prices and an increase in gas production partially
offset by a decrease in oil production.
| |
2022 | | |
2021 | | |
% Difference | |
Oil: | |
| | | |
| | | |
| | |
Revenue | |
$ | 2,957,196 | | |
$ | 2,120,237 | | |
| 39.5 | % |
Volume (bbls) | |
| 28,744 | | |
| 31,715 | | |
| (9.4 | %) |
Average Price (per bbl) | |
$ | 102.88 | | |
$ | 66.85 | | |
| 53.9 | % |
| |
| | | |
| | | |
| | |
Gas: | |
| | | |
| | | |
| | |
Revenue | |
$ | 1,740,812 | | |
$ | 676,499 | | |
| 157.3 | % |
Volume (mcf) | |
| 248,313 | | |
| 182,670 | | |
| 35.9 | % |
Average Price (per mcf) | |
$ | 7.01 | | |
$ | 3.70 | | |
| 89.5 | % |
Production
and exploration. Production costs were $829,473 for the six months ended September 30, 2022, a 35% increase from $612,575 for the
six months ended September 30, 2021. This is primarily the result of an increase in production taxes and marketing charges as a result
of the increase in oil and gas revenues.
Depreciation,
depletion and amortization. Depreciation, depletion and amortization expense was $771,507 for the six months ended September 30,
2022, an 42% increase from $544,380 for the six months ended September 30, 2021, primarily due to an increase in production and an increase
in the full cost pool amortization base partially offset by an increase in reserves.
General
and administrative expenses. General and administrative expenses were $641,449 for the six months ended September 30, 2022, a 23%
increase from $522,409 for the six months ended September 30, 2021. This was primarily due to an increase in salaries and contract services,
employee stock option compensation, legal fees and shareholder services.
Interest
expense. Interest expense was $6,692 for the six months ended September 30, 2022, a 67% decrease from $20,249 for the same period
fiscal 2022 due to a decrease in borrowings partially offset by an increase in interest rate.
Income
taxes. There was no income tax expense for the six months ended September 30, 2022 and 2021. The effective tax rate for the six months
ended September 30, 2022 and 2021 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.