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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from to
Commission
File No.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
| (Address of principal executive offices) | (Zip code) |
(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 | ||
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. ☒ 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).
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 ☐ | |
| Smaller reporting company | ||
| 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 ☐
The number of shares outstanding of the registrant’s common stock, par value $.50 per share, as of February 8, 2022 was .
MEXCO ENERGY CORPORATION AND SUBSIDIARIES
Table of Contents
| Page | ||
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | 2 | |
| Consolidated Statements of Operations (Unaudited) for the three months and nine months ended December 31, 2021 and December 31, 2020 | 3 | |
| 4 | ||
| Consolidated Statements of Cash Flows (Unaudited) for the nine months ended December 31, 2021 and December 31, 2020 | 5 | |
| Notes to Consolidated Financial Statements (Unaudited) | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16 |
| Item 4. | Controls and Procedures | 16 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 17 |
| Item 1A. | Risk Factors | 17 |
| Item 6. | Exhibits | 17 |
| SIGNATURES | 18 | |
| CERTIFICATIONS | ||
| 1 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| December 31, | March 31, | |||||||
| 2021 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable: | ||||||||
| Oil and natural gas sales | ||||||||
| Trade | ||||||||
| Prepaid costs and expenses | ||||||||
| Total current assets | ||||||||
| Property and equipment, at cost | ||||||||
| Oil and gas properties, using the full cost method | ||||||||
| Other | ||||||||
| Accumulated depreciation, depletion and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
| Investment – cost basis | ||||||||
| Operating lease, right-of-use asset | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Long-term debt | - | |||||||
| Operating lease liability, long-term | - | |||||||
| Asset retirement obligations | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock - $par value; shares authorized; outstanding | - | - | ||||||
| Common stock - $ par value; shares authorized; and shares issued; and shares outstanding as of December 31, 2021 and March 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock, at cost ( shares) | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| 2 |
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating revenue: | ||||||||||||||||
| Oil sales | $ | $ | $ | $ | ||||||||||||
| Natural gas sales | ||||||||||||||||
| Other | ||||||||||||||||
| Total operating revenues | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Production | ||||||||||||||||
| Accretion of asset retirement obligation | ||||||||||||||||
| Depreciation, depletion, and amortization | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ||||||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| PPP loan forgiveness | - | - | ||||||||||||||
| Loss on derivative instruments | - | - | - | ( | ) | |||||||||||
| Net other (expense) income | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Income (loss) per common share: | ||||||||||||||||
| Basic: | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted: | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic: | ||||||||||||||||
| Diluted: | ||||||||||||||||
The accompanying notes are an integral part of
the consolidated financial statements.
| 3 |
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock Par Value | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||
| Balance at April 1, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | - | - | - | |||||||||||||||||
| Issuance of stock through options exercised | - | - | ||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock Par Value | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | - | - | - | |||||||||||||||||
| Issuance of stock through options exercised | - | - | ||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock Par Value | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||
| Balance at April 1, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | |||||||||||||
| Issuance of stock through options exercised | - | - | ||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock Par Value | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Net income | - | - | - | |||||||||||||||||
| Issuance of stock through options exercised | - | - | ||||||||||||||||||
| Stock based compensation | - | - | - | |||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| SHARE ACTIVITY | ||||
| Common stock shares, issued: | ||||
| Balance at April 1, 2021 | ||||
| Issued | ||||
| Balance at Dec. 31, 2021 | ||||
| Common stock shares, held in treasury: | ||||
| Balance at April 1, 2021 | ( | ) | ||
| Acquisitions | ||||
| Balance at Dec. 31, 2021 | ( | ) | ||
| Common stock shares, outstanding at December 31, 2021 |
The accompanying notes are an integral part of the consolidated financial statements.
| 4 |
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31,
(Unaudited)
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Depreciation, depletion and amortization | ||||||||
| Accretion of asset retirement obligations | ||||||||
| Non-cash lease expense | ||||||||
| PPP loan forgiveness | - | ( | ) | |||||
| Amortization of debt issuance costs | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||
| Decrease in prepaid expenses | ||||||||
| Increase (decrease) in accounts payable and accrued expenses | ( | ) | ||||||
| Settlement of asset retirement obligations | ( | ) | ( | ) | ||||
| Decrease in operating lease liability | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Additions to oil and gas properties | ( | ) | ( | ) | ||||
| Additions to other property and equipment | - | ( | ) | |||||
| Drilling refund | ||||||||
| Investment in limited liability company at cost | ( | ) | ( | ) | ||||
| Proceeds from sale of oil and gas properties and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from long-term debt | ||||||||
| Proceeds from PPP loan | - | |||||||
| Reduction of long-term debt | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Asset retirement obligations | $ | $ | ||||||
| Operating lease – right of use asset and associated liabilities | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| 5 |
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 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 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 December 31, 2021, and the results of its operations and cash flows for the interim periods ended December 31, 2021 and 2020. The consolidated financial statements as of December 31, 2021 and for the three and nine month periods ended December 31, 2021 and 2020 are unaudited. The consolidated balance sheet as of March 31, 2021 was derived from the audited balance sheet filed in the Company’s 2021 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 financial statements and notes thereto included in the Form 10-K.
Investments.
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 offset 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.
As
of December 31, 2021, the Company had no derivative contracts.
| 6 |
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 in 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 nine months of fiscal 2022:
| Carrying amount of asset retirement obligations as of April 1, 2021 | $ | |||
| Liabilities incurred | ||||
| Liabilities settled | ( | ) | ||
| Accretion expense | ||||
| Carrying amount of asset retirement obligations as of December 31, 2021 | ||||
| Less: Current portion | ||||
| Non-Current asset retirement obligation | $ |
The Company recognized stock-based compensation expense of $ and $ in general and administrative expense in the Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020, respectively. Stock-based compensation expense recognized for the nine months ended December 31, 2021 and 2020 was $ and $, respectively. The total cost related to non-vested awards not yet recognized at December 31, 2021 totals approximately $ which is expected to be recognized over a weighted average of years.
During the nine months ended December 31, 2021, the Compensation Committee of the Board of Directors approved and the Company granted stock options exercisable at $ per share with an estimated fair value of $. During the nine months ended December 31, 2020, stock options were granted. 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 and generally vest over .
| NIne Months Ended | ||||||||
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| Grant-date fair value | $ | |||||||
| Volatility factor | % | |||||||
| Dividend yield | ||||||||
| Risk-free interest rate | % | |||||||
| Expected term (in years) | ||||||||
| 7 |
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Life in Years | Intrinsic Value | |||||||||||||
| Outstanding at April 1, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited or Expired | ||||||||||||||||
| Outstanding at December 31, 2021 | $ | | $ | |||||||||||||
| Vested at December 31, 2021 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2021 | $ | $ | ||||||||||||||
During the nine months ended December 31, 2021, stock options covering shares were exercised with a total intrinsic value of $. The Company received proceeds of $ from these exercises. During the nine months ended December 31, 2020, stock options covering shares were exercised with a total intrinsic value of $. The Company received proceeds of $ from these exercises.
There were stock options forfeited or expired during the nine months ended December 31, 2021. During the nine months ended December 31, 2020, unvested stock options were forfeited due to the resignation of an employee and vested stock options expired unexercised. 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 December 31, 2021 expire between and and have exercise prices ranging from $ to $.
5. Long Term Debt
Long-term debt on the Consolidated Balance Sheets consisted of the following as of the dates indicated:
December 31, 2021 | March 31, 2021 | |||||||
| Credit facility | $ | $ | ||||||
| Unamortized debt issuance costs (1) | - | ( | ) | |||||
| Total long-term debt | $ | $ | ||||||
| (1) |
On
December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”),
which originally provided for a credit facility of $
On
February 28, 2020, the Agreement was amended to increase the credit facility to $
Under
the Agreement, interest on the credit facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal plus one-half
of one percent (
No
principal payments are anticipated to be required through the maturity date 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.
| 8 |
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 December 31, 2021. The following table is a summary of activity on the WTNB line of credit for the nine months ended December 31, 2021:
| Principal | ||||
| Balance at April 1, 2021: | $ | |||
| Borrowings | ||||
| Repayments | ( | ) | ||
| Balance at December 31, 2021: | $ | |||
6. Leases
The
Company leases approximately
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
The balance sheets classification of lease assets and liabilities was as follows:
December 31, 2021 | ||||
| Assets | ||||
| Operating lease right-of-use asset, beginning balance | $ | |||
| Current period amortization | ( | ) | ||
| Lease amendment | ||||
| Total operating lease right-of-use asset | $ | |||
| Liabilities | ||||
| Operating lease liability, current | $ | |||
| Operating lease liability, long term | ||||
| Total lease liabilities | $ | |||
| 9 |
Future minimum lease payments as of December 31, 2021 under non-cancellable operating leases are as follows:
| Lease Obligation | ||||
| Fiscal Year Ended March 31, 2022 | ||||
| Fiscal Year Ended March 31, 2023 | ||||
| Fiscal Year Ended March 31, 2024 | ||||
| Fiscal Year Ended March 31, 2025 | ||||
| Total lease payments | $ | |||
| Less: imputed interest | ( | ) | ||
| Operating lease liability | ||||
| Less: operating lease liability, current | ( | ) | ||
| Operating lease liability, long term | $ | |||
Net
cash paid for our operating lease for the nine months ended December 31, 2021 and 2020 was $
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 December 31, 2021. Our deferred tax asset is $
8. 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 three months ended December 31, 2021
and 2020 was $
The Company’s basic net income (loss) per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net income (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 income (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.
| 10 |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Shares outstanding: | ||||||||||||||||
| Weighted avg. shares outstanding – basic | ||||||||||||||||
| Effect of assumed exercise of dilutive stock options | ||||||||||||||||
| Weighted avg. shares outstanding – dilutive | ||||||||||||||||
| Income (loss) per common share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted | $ | $ | $ | $ | ( | ) | ||||||||||
For
the three and nine months ended December 31, 2021, shares relating to stock options were excluded from the computation of diluted
net income because their inclusion would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $
For
the three ended December 31, 2020, shares relating to stock options were excluded from the computation of diluted net income
because their inclusion would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $
Due to a net loss for the nine months ended December 31, 2020, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
10. Subsequent Events
In
January 2022, the Company expended $
On
February 1, 2022 the Company entered into a Purchase and Sale Agreement to acquire various overriding royalty interests in approximately
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 (“MDA”) 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 the Form 10-Q are qualified in their entirety by the cautionary statement contained in this section. We do not undertake to update, revise or correct any of the forward-looking information. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Form 10-K.
| 11 |
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 its 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 royalties and working interests and non-operated properties in areas with significant development potential.
At December 31, 2021, we had working capital of $1,443,678 compared to working capital of $618,960 at March 31, 2021, an increase of $824,718 primarily due to 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 Nine Months Ended December 31, | ||||||||||||
| 2021 | 2020 | % Difference | ||||||||||
| Net cash provided by operating activities | 2,728,586 | 372,863 | 632 | % | ||||||||
| Net cash used in investing activities | (1,021,849 | ) | (818,597 | ) | 25 | % | ||||||
| Net cash (used in) provided by financing activities | (884,360 | ) | 452,369 | (295 | )% | |||||||
Cash Flow Provided by Operating Activities. Cash flow from operating activities is primarily derived from the production of our crude oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. Cash flow provided by our operating activities for the nine months ended December 31, 2021 was $2,728,586 in comparison to $372,863 for the nine months ended December 31, 2020. This increase of $2,355,723 in our cash flow operating activities consisted of an increase in our non-cash expenses of $197,738; an increase in our accounts receivable of $4,132; and, an increase in our net income for the current nine months of $2,118,279 compared to a net loss the same nine month period of the prior year. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.
Our expenditures in operating activities consist primarily of lease operating expenses and production expenses. 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 nine months ended December 31, 2021, we had net cash of $1,021,849 used for additions to oil and gas properties compared to $818,597 for the nine months ended December 31, 2020.
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 used in our financing activities was $884,360 for the nine months ended December 31, 2021 compared to cash flow provided by our financing activities of $452,369 for the nine months ended December 31, 2020. During the nine months ended December 31, 2021 and 2020, we received advances of $275,000 and $680,000, respectively, from our credit facility. During the nine months ended December 31, 2021 and 2020, we made payments of $1,455,000 and $375,000, respectively, on the credit facility. For the nine months ended December 31, 2021 and 2020, we received proceeds of $295,640 and $78,795, respectively, from the exercise of employee and director stock options. For the nine months ended December 31, 2020, we received $68,574 under the paycheck protection program (PPP).
Accordingly, net cash increased $822,377, leaving cash and cash equivalents on hand of $880,190 as of December 31, 2021.
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Oil and Natural Gas Property Development.
New Participations in Fiscal 2022. The Company currently plans to participate in the drilling and completion of 43 horizontal wells at an estimated aggregate cost of approximately $1,200,000 for the fiscal year ending March 31, 2022. All 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 Reeves County, Texas.
In November 2021, Mexco expended approximately $92,000 to participate in the completion of four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. These wells were subsequently completed in January 2022 with initial average production rates of 1,204 barrels of oil, 3,369 barrels of water and 3,141,000 cubic feet of gas per day, or, 1,728 barrels of oil equivalent per day. Mexco’s working interest in these wells is .37%.
Also in November 2021, Mexco expended approximately $59,000 to participate in the drilling of two horizontal wells in the 3rd Bone Spring formation and two horizontal wells in the Wolfcamp Sand 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 .37%.
In October 2021, Mexco expended approximately $126,000 to participate in the drilling of four horizontal wells in the Wolfcamp Sand 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 .52%.
During the nine months ended December 31, 2021, Mexco expended approximately $180,000 to participate in the drilling and completion of four horizontal wells in the Lower Wolfcamp Shale of the Delaware Basin in Eddy County, New Mexico. Mexco’s working interest in these wells is .44%.
Also during the nine months ended December 31, 2021, Mexco expended $31,500 for its share to participate in the drilling and completion of two horizontal wells in the 3rd Bone Spring Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. These wells were completed in August 2021 with initial average production rates of 1,294 barrels of oil, 3,345 barrels of water and 3,124,000 cubic feet of gas per day, or, 1,815 barrels of oil equivalent per day. Mexco’s working interest in these wells is .1%.
In September 2021, Mexco expended approximately $43,000 to participate in the drilling of three horizontal wells in the 2nd Bone Spring formation and two horizontal wells in the 3rd 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 these wells is an average of approximately .22%. These wells have been drilled and are awaiting completion operations.
During the nine months ended December 31, 2021, Mexco expended approximately $140,400 to participate in the drilling and completion of four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. These wells were subsequently completed in January 2022 with initial average production rates of 1,008 barrels of oil, 3,563 barrels of water and 2,980,000 cubic feet of gas per day, or, 1,505 barrels of oil equivalent per day. Mexco’s working interest in these wells is .37%.
In August 2021, Mexco expended approximately $52,000 to participate in the drilling of two horizontal wells in the Bone Spring formation of the Delaware Basin located in the western portion of the Permian Basin in Reeves County, Texas. Mexco working interest in these wells is approximately .6%. These wells have been drilled and are being completed as of December 2021.
During the quarter ended June 30, 2021, Mexco participated in the drilling and completion of two 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 $88,000. These wells were completed at the end of June 2021 with initial average production rates of 1,184 barrels of oil, 4,380 barrels of water and 1,818,000 cubic feet of gas per day, or 1,444 barrels of oil equivalent per day. Mexco’s working interest in these wells is .56%.
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Completion of Wells Drilled in Fiscal 2021. The Company expended approximately $165,000 for the additional completion costs of 12 horizontal wells located in Eddy and Lea Counties, New Mexico that the Company participated in drilling during fiscal 2021.
The Company participated in the completion of two 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 $108,000. These wells were completed at the end of June 2021 and beginning of July 2021 with initial average production rates of 1,046 barrels of oil, 3,214 barrels of water and 2,146,000 cubic feet of gas per day, or 1,403 barrels of oil equivalent per day. Mexco’s working interest in these wells is 1.2%.
The Company participated in the completion of two 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 $55,000. These wells were completed at the end of June 2021 with initial average production rates of 774 barrels of oil, 2,648 barrels of water and 973,000 cubic feet of gas per day, or 913 barrels of oil equivalent per day. Mexco’s working interest in these wells is .56%.
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 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 $43.60 per bbl in January 2021 to a high of $80.63 per bbl in October 2021. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $2.43 per MMBtu in April 2021 to a high of $23.86 per MMBtu in February 2021.
On December 31, 2021 the WTI posted price for crude oil was $71.19 per bbl and the Henry Hub spot price for natural gas was $3.82 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 December 31, 2021:
| Payments due in: | ||||||||||||||||
| Total | less than 1 year | 1 - 3 years | over 3 years | |||||||||||||
| Contractual obligations: | ||||||||||||||||
| Leases (1) | $ | 150,453 | $ | 58,240 | $ | 92,213 | $ | - | ||||||||
| (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 $24,656 1-3 years for his portion of the shared office space. |
Results of Operations – Three Months Ended December 31, 2021 and 2020. For the quarter ended December 31, 2021, there was net income of $753,302 compared to $80,497 for the quarter ended December 31, 2020, a 836% increase as a result of an increase in operating revenues due to an increase in oil and gas production and prices partially offset by an increase in operating expenses that is further explained below.
Oil and gas sales. Revenue from oil and gas sales was $1,573,984 for the third quarter of fiscal 2022, a 127% increase from $692,243 for the same period of fiscal 2021. This resulted from an increase in oil and natural gas prices and an increase in oil and natural gas production volumes.
| 2021 | 2020 | % Difference | ||||||||||
| Oil: | ||||||||||||
| Revenue | $ | 1,073,078 | $ | 520,261 | 106.3 | % | ||||||
| Volume (bbls) | 14,142 | 13,004 | 8.8 | % | ||||||||
| Average Price (per bbl) | $ | 75.88 | $ | 40.01 | 89.7 | % | ||||||
| Gas: | ||||||||||||
| Revenue | $ | 500,906 | $ | 171,982 | 191.3 | % | ||||||
| Volume (mcf) | 91,534 | 82,688 | 10.7 | % | ||||||||
| Average Price (per mcf) | $ | 5.47 | $ | 2.08 | 163.0 | % | ||||||
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Production and exploration. Production costs were $291,068 for the third quarter of fiscal 2022, a 23% increase from $235,958 for the same period of fiscal 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 $268,018 for the third quarter of fiscal 2022, a 13% increase from $237,459 for the same period of fiscal 2021, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves partially offset by a decrease in the full cost pool amortization base.
General and administrative expenses. General and administrative expenses were $272,552 for the third quarter of fiscal 2022, a 41% increase from $193,288 for the same period of fiscal 2021. This was primarily due to an increase in employee compensation and shareholder services.
Interest expense. Interest expense was $3,132 for the third quarter of fiscal 2022, a 79% decrease from $14,604 for the same period of fiscal 2021, due to a decrease in borrowings.
Income taxes. There was no income tax expense for the quarter ended December 31, 2021 and the quarter ended December 31, 2020. The effective tax rate for the three months ended December 31, 2021 and December 31, 2020 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 – Nine Months Ended December 31, 2021 and 2020. For the nine months ended December 31, 2021, there was a net income of $1,857,136 compared to a net loss of $261,143 for the nine months ended December 31, 2020. This was a result of an increase in operating revenues due to an increase in oil and gas production and prices partially offset by an increase in operating expenses that is further explained below.
Oil and gas sales. Revenue from oil and gas sales was $4,370,720 for the nine months ended December 31, 2021, a 159% increase from $1,686,386 for the same period of fiscal 2021. This resulted from an increase in oil and natural gas prices and an increase in oil and natural gas production volumes.
| 2021 | 2020 | % Difference | ||||||||||
| Oil: | ||||||||||||
| Revenue | $ | 3,193,315 | $ | 1,307,588 | 144.2 | % | ||||||
| Volume (bbls) | 45,857 | 37,681 | 21.7 | % | ||||||||
| Average Price (per bbl) | $ | 69.64 | $ | 34.70 | 100.7 | % | ||||||
| Gas: | ||||||||||||
| Revenue | $ | 1,177,405 | $ | 378,798 | 210.8 | % | ||||||
| Volume (mcf) | 274,204 | 251,094 | 9.2 | % | ||||||||
| Average Price (per mcf) | $ | 4.29 | $ | 1.51 | 184.1 | % | ||||||
Production and exploration. Production costs were $903,643 for the nine months ended December 31, 2021, a 45% increase from $624,741 for the nine months ended December 31, 2020. This increase is primarily the result of an increase in production taxes as a result of the increase in oil and gas revenues and an increase in lease operating expenses over last year 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 during the pandemic.
Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $812,398 for the nine months ended December 31, 2021, an 16% increase from $697,698 for the nine months ended December 31, 2020, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves partially offset by a decrease in the full cost pool amortization base.
General and administrative expenses. General and administrative expenses were $794,961 for the nine months ended December 31, 2021, a 25% increase from $634,526 for the nine months ended December 31, 2020. This was primarily due to an increase in bonuses and director’s fees which were significantly reduced last year due to the pandemic and an increase in accounting fees and employee stock option compensation expense.
Interest expense. Interest expense was $23,381 for the nine months ended December 31, 2021, a 40% decrease from $39,174 for the nine months ended December 31, 2020 due to a decrease in borrowings.
Income taxes. There was no income tax for the nine months ended December 31, 2021 and for the nine months ended December 31, 2020. The effective tax rate for the nine months ended December 31, 2021 and December 31, 2020 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.
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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.
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 December 31, 2021, our largest credit risk associated with any single purchaser was $530,696 or 71% of our total oil and gas receivables. We have not experienced any significant credit losses.
Energy Price Risk. Our most significant market risk is the pricing applicable to our crude oil and natural gas production. 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 production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future.
For example, in the last twelve months, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $43.60 per bbl in January 2021 to a high of $80.63 per bbl in October 2021. The Henry Hub Spot Market Price (“Henry Hub”) posted price for natural gas has ranged from a low of $2.43 per MMBtu in April 2021 to a high of $23.86 per MMBtu in February 2021. On December 31, 2021, the WTI posted price for crude oil was $71.19 and the Henry Hub posted price for natural gas was $3.83. See Results of Operations above for the Company’s realized prices during the three and nine months. Subsequently, on January 25, 2022, the WTI posted price for crude oil was $81.58 and the Henry Hub posted price for natural gas was $4.24.
Similarly, any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources. If the average oil price had increased or decreased by ten dollars per barrel for the first nine months of fiscal 2022, pretax income or loss would have changed by $458,570. If the average gas price had increased or decreased by one dollar per mcf for the first nine months of fiscal 2022, pretax income or loss would have changed by $274,204.
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 December 31, 2021, 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 nine months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 2021 Annual Report on Form 10-K.
Item 6. Exhibits
| 101.INS | Inline XBRL Instance Document |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extenstion Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
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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: February 8, 2022 | /s/ Nicholas C. Taylor |
| Nicholas C. Taylor | |
| Chairman of the Board and Chief Executive Officer | |
| Dated: February 8, 2022 | /s/ Tamala L. McComic |
| Tamala L. McComic | |
| President, Chief Financial Officer, Treasurer and Assistant Secretary |
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