UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2007June 30, 2008
OR
¨oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado | | 84-0627918 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer |
incorporation or organization) | | Identification Number) |
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
| | |
214 West Texas Avenue, Suite 1101 | | |
Midland, Texas | | 79701 |
(Address of principal executive offices) | | (Zip code) |
(432) 682-1119
(Registrant’s telephone number, including area code)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO NO o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”smaller reporting company as defined in ruleRule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o¨ | Accelerated Filer o¨ |
| |
Non-Accelerated Filer þ | Smaller reporting company ¨ |
(Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o¨ NO þ
The number of shares outstanding of the registrant’s common stock, $0.50 par value, $.50 per share, as of February14,August 12, 2008 was 1,757,366.1,874,866.
MEXCO ENERGY CORPORATION
Table of Contents
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PART I. FINANCIAL INFORMATION | |
| | | |
| Item 1. | Consolidated Balance Sheets as of December 31, 2007 | |
| | June 30, 2008 (Unaudited) and March 31, 20072008 | 3 |
| | | |
| | Consolidated Statements of Operations (Unaudited) for | |
| | the three months ended June 30, 2008 and nine months ended December 31,June 30, 2007 | |
| | and December 31, 2006 | 4 |
| | | |
| Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) as of June 30, 2008 | 5 |
| | |
| Consolidated Statements of Cash Flows (Unaudited) for | |
| | the ninethree months ended December 31,June 30, 2008 and June 30, 2007 and December 31, 2006 | 5 6 |
| | | |
| | Notes to Consolidated Financial Statements (Unaudited) | 6 7 |
| | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition | |
| | and Results of Operations | 9 |
| | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 11 |
| | | |
| Item 4. | Controls and Procedures | 12 |
| | | |
PART II. OTHER INFORMATION | 12 |
| | | |
| Item 1. | Legal Proceedings | 12 |
| Item 1A. | Risk Factors | 12 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
Item 3. | Defaults upon Senior Securities | 12 |
Item 4. | Submission of Matters to a Vote of Security Holders | 12 |
Item 5. | Other Information | 12 |
Item 6. | Exhibits | 12 |
| | | |
SIGNATURES | 13 |
| | | |
CERTIFICATIONS | |
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| | December 31, | | March 31, | | | June 30, | | March 31, | |
| | 2007 | | 2007 | | | 2008 | | 2008 | |
| | (Unaudited) | | | | | (Unaudited) | | | |
ASSETS | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 219,954 | | $ | 72,537 | | | $ | 220,713 | | $ | 303,617 | |
Accounts receivable: | | | | | | | | | | | | | | |
Oil and gas sales | | | 468,199 | | | 399,659 | | | | 1,271,406 | | | 758,459 | |
Trade | | | 310,709 | | | 2,987 | | | | 255,286 | | | 102,403 | |
Income tax receivable | | | 60,654 | | | 59,736 | | |
Related parties | | | | 1,834 | | | 12,659 | |
Prepaid costs and expenses | | | 38,046 | | | 65,986 | | | | 48,846 | | | 22,062 | |
Total current assets | | | 1,097,562 | | | 600,905 | | | | 1,798,085 | | | 1,199,200 | |
| | | | | | | | | | | | | | |
Investment in GazTex, LLC | | | 20,509 | | | 20,509 | | | | - | | | 20,509 | |
| | | | | | | | | | | | | | |
Property and equipment, at cost | | | | | | | | | | | | | | |
Oil and gas properties, using the full cost method | | | 23,622,834 | | | 20,526,431 | | | | 24,578,655 | | | 23,941,483 | |
Other | | | 51,412 | | | 51,412 | | | | 61,362 | | | 61,362 | |
| | | 23,674,246 | | | 20,577,843 | | | | 24,640,017 | | | 24,002,845 | |
| | | | | | | | | | | | | | |
Less accumulated depreciation, depletion and amortization | | | 11,771,801 | | | 11,240,277 | | | | 12,258,740 | | | 12,019,895 | |
Property and equipment, net | | | 11,902,445 | | | 9,337,566 | | | | 12,381,277 | | | 11,982,950 | |
| | $ | 13,020,516 | | $ | 9,958,980 | | | $ | 14,179,362 | | $ | 13,202,659 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable and accrued expenses | | | $ | 416,254 | | $ | 571,526 | |
| | | | | | | | |
Long-term debt | | | | 2,275,000 | | | 2,600,000 | |
Asset retirement obligation | | | | 381,901 | | | 374,789 | |
Deferred income tax liability | | | | 1,227,413 | | | 1,196,280 | |
| | | | | | | | |
| | | | | | | | |
Stockholders’ equity | | | | | | | | |
Preferred stock - $1.00 par value; 10,000,000 shares authorized; none outstanding | | | | - | | | - | |
Common stock - $0.50 par value; 40,000,000 shares authorized; 1,948,866 and 1,841,366 shares issued; 1,864,866 and 1,757,366 shares outstanding as of June 30, 2008 and March 31, 2008, respectively | | | | 974,433 | | | 920,683 | |
Additional paid-in capital | | | | 5,207,460 | | | 4,381,269 | |
Retained earnings | | | | 4,123,518 | | | 3,584,729 | |
Treasury stock, at cost (84,000 shares) | | | | (426,617 | ) | | (426,617 | ) |
Total stockholders’ equity | | | | 9,878,794 | | | 8,460,064 | |
| | | $ | 14,179,362 | | $ | 13,202,659 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities | | | | | | | |
Accounts payable and accrued expenses | | $ | 518,294 | | $ | 154,074 | |
| | | | | | | |
Long-term debt | | | 3,075,000 | | | 700,000 | |
Asset retirement obligation | | | 359,021 | | | 350,584 | |
Deferred income tax liability | | | 1,093,988 | | | 978,686 | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
| | | | | | | |
Stockholders’ equity | | | | | | | |
Preferred stock - $1.00 par value; | | | | | | | |
10,000,000 shares authorized; none outstanding | | | - | | | - | |
Common stock - $0.50 par value; | | | | | | | |
40,000,000 shares authorized; | | | | | | | |
1,841,366 and 1,840,366 shares issued; | | | | | | | |
1,757,366 and 1,780,841 shares outstanding as of | | | | | | | |
December 31 and March 31, 2007, respectively | | | 920,683 | | | 920,183 | |
Additional paid-in capital | | | 4,361,898 | | | 4,291,892 | |
Retained earnings | | | 3,118,249 | | | 2,871,085 | |
Treasury stock, at cost (84,000 and 59,525 shares, respectively) | | | (426,617 | ) | | (307,524 | ) |
Total stockholders’ equity | | | 7,974,213 | | | 7,775,636 | |
| | $ | 13,020,516 | | $ | 9,958,980 | |
The accompanying notes are an integral part of
the consolidated financial statements.
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30,
(Unaudited)
| | Three Months Ended | | Nine Months Ended | | | 2008 | | 2007 | |
| | December 31 | | December 31 | | | | | | |
| | 2007 | | 2006 | | 2007 | | 2006 | | |
Operating revenue: | | | | | | | | | | | | | | |
Oil and gas sales | | $ | 952,211 | | $ | 663,031 | | $ | 2,642,302 | | $ | 2,214,141 | | |
Operating revenues: | | | | | | |
Oil and gas | | | $ | 1,672,587 | | $ | 850,144 | |
Other | | | 2,869 | | | 167 | | | 4,203 | | | 2,224 | | | | 6,733 | | | 173 | |
Total operating revenues | | | 955,080 | | | 663,198 | | | 2,646,505 | | | 2,216,365 | | | | 1,679,320 | | | 850,317 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Production | | | 241,019 | | | 218,774 | | | 1,041,405 | | | 641,371 | | | | 334,988 | | | 333,050 | |
Accretion of asset retirement obligation | | | 6,368 | | | 5,592 | | | 19,691 | | | 17,436 | | | | 6,938 | | | 6,611 | |
Depreciation, depletion, and amortization | | | 174,842 | | | 152,135 | | | 531,523 | | | 459,585 | | |
Depreciation, depletion and amortization | | | | 238,844 | | | 172,884 | |
General and administrative | | | 187,648 | | | 176,791 | | | 636,191 | | | 613,203 | | | | 281,661 | | | 269,624 | |
Total operating expenses | | | 609,877 | | | 553,292 | | | 2,228,810 | | | 1,731,595 | | | | 862,431 | | | 782,169 | |
| | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 345,203 | | | 109,906 | | | 417,695 | | | 484,770 | | |
Income from operations | | | | 816,889 | | | 68,148 | |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 1,170 | | | 336 | | | 3,255 | | | 2,736 | | | | 336 | | | 338 | |
Interest expense | | | (22,791 | ) | | (2,359 | ) | | (58,484 | ) | | (18,817 | ) | | | (33,735 | ) | | (15,348 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net other expense | | | (21,621 | ) | | (2,023 | ) | | (55,229 | ) | | (16,081 | ) | | | (33,399 | ) | | (15,010 | ) |
| | | | | | | | | | | | | | | | | | | | |
Earnings before income taxes and minority interest | | | 323,582 | | | 107,883 | | | 362,466 | | | 468,689 | | |
Income before income taxes | | | | 783,490 | | | 53,138 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit): | | | | | | | | | | | | | | |
Income tax expense: | | | | | | | | |
Current | | | - | | | (30,531 | ) | | - | | | 32,253 | | | | 213,568 | | | - | |
Deferred | | | 102,468 | | | 71,334 | | | 115,302 | | | 16,366 | | | | 31,133 | | | 18,332 | |
| | | 102,468 | | | 40,803 | | | 115,302 | | | 48,619 | | | | 244,701 | | | 18,332 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings before minority interest | | | 221,114 | | | 67,080 | | | 247,164 | | | 420,070 | | |
| | | | | | | | | | | | | | |
Minority interest in loss of subsidiary | | | - | | | - | | | - | | | 4,835 | | |
| | | | | | | | | | | | | | |
Net income | | $ | 221,114 | | $ | 67,080 | | $ | 247,164 | | $ | 424,905 | | | $ | 538,789 | | $ | 34,806 | |
| | | | | | | | | | | | | | | | | | | | |
Net income per common share: | | | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | |
Basic | | | $ | 0.31 | | $ | 0.02 | |
Diluted | | | $ | 0.29 | | $ | 0.02 | |
| | | | | | | | | | | | | | | | | | | | |
Basic: | | $ | 0.13 | | $ | 0.04 | | $ | 0.14 | | $ | 0.24 | | |
Diluted: | | $ | 0.12 | | $ | 0.04 | | $ | 0.14 | | $ | 0.23 | | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | | | 1,762,190 | | | 1,776,809 | |
Diluted | | | | 1,869,075 | | | 1,789,234 | |
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)
| | | | | | Additional | | | | Total | |
| | Common Stock | | Treasury | | Paid-In | | Retained | | Stockholders’ | |
| | Par Value | | Stock | | Capital | | Earnings | | Equity | |
| | | | | | | | | | | |
Balance at March 31, 2008 | | $ | 920,683 | | $ | (426,617 | ) | $ | 4,381,269 | | $ | 3,584,729 | | $ | 8,460,064 | |
| | | | | | | | | | | | | | | | |
Net income | | | - | | | - | | | - | | | 538,789 | | | 538,789 | |
Issuance of stock through options exercised | | | 53,750 | | | - | | | 593,178 | | | - | | | 646,928 | |
Excess tax benefits from stock based compensation | | | | | | | | | 213,568 | | | | | | 213,568 | |
Stock based compensation | | | - | | | - | | | 19,445 | | | - | | | 19,445 | |
Balance at June 30, 2008 | | $ | 974,433 | | $ | (426,617 | ) | $ | 5,207,460 | | $ | 4,123,518 | | $ | 9,878,794 | |
SHARE ACTIVITY | | | |
| | | |
Common stock shares, issued: | | | | |
Balance at March 31, 2008 | | | 1,841,366 | |
Issued | | | 107,500 | |
Balance at June 30, 2008 | | | 1,948,866 | |
| | | | |
Common stock shares, held in treasury: | | | | |
Balance at March 31, 2008 | | | (84,000 | ) |
Acquisitions | | | - | |
Balance at June 30, 2008 | | | (84,000 | ) |
| | | | |
Common stock shares, outstanding at June 30, 2008 | | | 1,864,866 | |
The accompanying notes are an integral part of the consolidated financial statements.
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the NineThree Months Ended December 31,June 30,
(Unaudited)
| | 2008 | | 2007 | |
Cash flows from operating activities: | | | | | |
Net income | | $ | 538,789 | | $ | 34,806 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Increase in deferred tax liabilities | | | 31,133 | | | 18,332 | |
Excess tax benefit from share based payment arrangement | | | (213,568 | ) | | - | |
Stock-based compensation | | | 19,445 | | | 33,387 | |
Depreciation, depletion and amortization | | | 238,844 | | | 172,884 | |
Accretion of asset retirement obligations | | | 6,938 | | | 6,611 | |
Changes in assets and liabilities: | | | | | | | |
Increase in accounts receivable | | | (655,004 | ) | | (79,388 | ) |
(Increase) decrease in prepaid expenses | | | (26,785 | ) | | 25,409 | |
Increase in income taxes payable | | | 213,568 | | | - | |
Increase (decrease) in accounts payable and accrued expenses | | | 232,841 | | | (17,085 | ) |
| | | | | | | |
Net cash provided by operating activities | | | 386,201 | | | 194,956 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Additions to oil and gas properties | | | (1,023,675 | ) | | (311,820 | ) |
Proceeds from Investment in GazTex, LLC | | | 18,700 | | | - | |
Proceeds from sale of oil and gas properties and equipment | | | 374 | | | 507 | |
| | | | | | | |
Net cash used in investing activities | | | (1,004,601 | ) | | (311,313 | ) |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Acquisition of treasury stock | | | - | | | (24,247 | ) |
Proceeds from exercise of stock options | | | 646,928 | | | - | |
Reduction of long-term debt | | | (700,000 | ) | | (50,000 | ) |
Proceeds from long-term debt | | | 375,000 | | | 225,000 | |
Excess tax benefit from share based payment arrangement | | | 213,568 | | | - | |
| | | | | | | |
Net cash provided by financing activities | | | 535,496 | | | 150,753 | |
| | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (82,904 | ) | | 34,396 | |
| | | | | | | |
Cash and cash equivalents at beginning of period | | | 303,617 | | | 72,537 | |
| | | | | | | |
Cash and cash equivalents at end of period | | $ | 220,713 | | $ | 106,933 | |
| | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | |
Cash paid for interest | | $ | 35,243 | | $ | 22,736 | |
| | | | | | | |
Non-cash investing and financing activities: | | | | | | | |
Asset retirement obligations | | $ | 433 | | $ | 8,088 | |
| | 2007 | | 2006 | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 247,164 | | $ | 424,905 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Increase in deferred tax liabilities | | | 115,302 | | | 16,366 | |
Excess tax benefit from share based payment arrangement | | | (1,100 | ) | | - | |
Stock-based compensation | | | 66,506 | | | 91,026 | |
Depreciation, depletion and amortization | | | 531,523 | | | 459,585 | |
Common stock issued to director | | | - | | | 14,100 | |
Accretion of asset retirement obligations | | | 19,691 | | | 17,436 | |
Minority interest in loss of GazTex, LLC | | | - | | | (4,835 | ) |
Decrease (increase) in accounts receivable | | | (436,916 | ) | | 70,335 | |
Decrease in prepaid expenses | | | 87,676 | | | 22,741 | |
Increase (decrease) in accounts payable | | | | | | | |
and accrued expenses | | | 28,395 | | | (14,196 | ) |
| | | | | | | |
Net cash provided by operating activities | | | 658,241 | | | 1,097,463 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Additions to oil and gas properties | | | (2,810,831 | ) | | (582,870 | ) |
Additions to other property and equipment | | | - | | | (11,564 | ) |
Proceeds from sale of oil and gas properties and equipment | | | 39,000 | | | 28,002 | |
| | | | | | | |
Net cash used in investing activities | | | (2,771,831) | ) | | (566,432 | ) |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Proceeds from exercise of stock options | | | 4,000 | | | 157,150 | |
Acquisition of treasury stock | | | (119,093 | ) | | (38,109 | ) |
Reduction of long-term debt | | | (50,000 | ) | | (600,000 | ) |
Proceeds from long-term debt | | | 2,425,000 | | | - | |
Excess tax benefit from share based payment arrangement | | | 1,100 | | | | |
Minority interest contributions | | | - | | | 4,835 | |
| | | | | | | |
Net cash provided by (used in) financing activities | | | 2,261,007 | | | (476,124 | ) |
| | | | | | | |
Net increase in cash and cash equivalents | | | 147,417 | | | 54,907 | |
| | | | | | | |
Cash and cash equivalents at beginning of year | | | 72,537 | | | 52,768 | |
| | | | | | | |
Cash and cash equivalents at end of period | | $ | 219,954 | | $ | 107,675 | |
| | | | | | | |
Interest paid | | $ | 54,854 | | $ | 22,004 | |
Income taxes paid | | $ | - | | $ | - | |
| | | | | | | |
Supplemental disclosure of non-cash financing activities: | | | | | | | |
Cashless exercise of stock options and repurchase | | | | | | | |
of treasury shares | | $ | - | | $ | 40,000 | |
Percentage of royalty interest purchase issued as payment | | | | | | | |
for finder’s fee | | $ | 46,250 | | $ | - | |
The accompanying notes are an integral part of
the consolidated financial statements.
MEXCO ENERGY CORPORATION AND SUBSIDIARYSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Mexco Energy Corporation (a Colorado Corporation)corporation), its wholly owned subsidiaries, Forman Energy Corporation (a New York Corporation)corporation) and OBTX, LLC (a Delaware Limited Liability Company)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)(“NGLs”). Although most of the Company’s oil and gas interests are centered in West Texas, the Company owns producing properties and undeveloped acreage in ten states. Although most of the Company’s oil and gas interests are operated by others, the Company operates several properties in which it owns an interest.
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, 2007,June 30, 2008, and the results of its operations and cash flows for the interim periods ended December 31, 2007June 30, 2008 and 2006.2007. 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 2A of the “Notes to Consolidated Financial Statements” in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). 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 Securities and Exchange Commission. 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.
2. Summary of 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, management is required to make informed judgments and estimates 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. Although management believes its estimates and assumptions are reasonable, actual results may differ materially from those estimates. Significant estimates affecting these financial statements include the estimated quantities of proved oil and gas reserves, the related present value of estimated future net cash flows asset retirement obligation, fair value of stock options and income taxes.the future development, dismantlement and abandonment costs.
Stock-based Compensation. Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”) resulted in the recognition ofThe Company recognized compensation expense of $13,989 or $.01 per basic share$19,445 and diluted share$33,387 in general and administrative expense in the Consolidated Statements of Operations for the three months ended December 31,June 30, 2008 and 2007, and $66,506 or $.04 per basic share and diluted share for the nine months ended December 31, 2007. Due to an employee’s forfeiture of unvested stock options, the three months’ expense amount was adjusted $1,543. Compensation expense recognized for the three months and nine months ended December 31, 2006 was $35,428 or $.02 per basic share and diluted share and $91,026 or $.05 per basic share and diluted share, respectively.
Included in the following table is a summary of the grant-date fair value of stock options granted and the related assumptions.
| | For the nine months | | For the nine months | |
| | ended December 31, 2007 | | ended December 31, 2006 | |
Grant-date fair value | | $ | 2.20 | | $ | 5.15 | |
Volatility factor | | | 56.06 | % | | 71.46 | % |
Dividend yield | | | - | | | - | |
Risk-free interest rate | | | 3.54 | % | | 5.07 | % |
Expected term (in years) | | | 5 | | | 5 | |
During the nine months ended December 31, 2007 and 2006, stock options covering 25,000 and 35,000 shares, respectively, were granted.
Stock options covering 1,000 shares were exercised during the nine months ended December 31, 2007. Stock options covering 41,800 shares were exercised during the nine months ended December 31, 2006.
The following table is a summary of activity of stock options for the ninethree months ended December 31, 2007:June 30, 2008:
| | | | | | | | | |
| | Number of | | Exercise Price | | Average Remaining | | Intrinsic | |
| | Shares | | Per Share | | Contract Life in Years | | Value | |
Outstanding at March 31, 2008 | | | 290,000 | | $ | 6.06 | | | 3.30 | | $ | (535,750 | ) |
Granted | | | - | | | - | | | | | | | |
Exercised | | | 107,500 | | | 6.02 | | | | | | | |
Forfeited or Expired | | | 20,000 | | | 7.75 | | | | | | | |
Outstanding at June 30, 2008 | | | 162,500 | | $ | 5.88 | | | 3.78 | | $ | 5,571,278 | |
| | | | | | | | | | | | | |
Vested at June 30, 2008 | | | 107,500 | | $ | 5.69 | | | 3.73 | | $ | 3,705,553 | |
Exercisable at June 30, 2008 | | | 107,500 | | $ | 5.69 | | | 3.73 | | $ | 3,705,553 | |
| | | | Weighted Average | | Weighted Average | | Aggregate | |
| | Number of | | Exercise Price | | Contract Life | | Intrinsic | |
| | Shares | | Per Share | | in Years | | Value | |
Outstanding at March 31, 2007 | | | 305,000 | | $ | 6.35 | | | | | | | |
Granted | | | 25,000 | | | 4.35 | | | | | | | |
Exercised | | | (1,000 | ) | | 4.00 | | | | | | | |
Forfeited or Expired | | | (39,000 | ) | | 7.31 | | | | | | | |
Outstanding at December 31, 2007 | | | 290,000 | | $ | 6.06 | | | 3.55 | | $ | (602,450 | ) |
| | | | | | | | | | | | | |
Exercisable at December 31, 2007 | | | 235,000 | | $ | 6.02 | | | 3.35 | | $ | (478,275 | ) |
There were no stock options granted during the quarters ended June 30, 2008 and 2007.
Prior to April 1, 2007, notice of termination was sent to a consultant and his remaining 30,000 vested options forfeited on June 20, 2007.During the second quarter thethree months ended June 30, 2008, employees and directors exercised a total of 107,500 options at exercise prices between $4.00 and $8.24 per share. The Company received noticeproceeds of resignation$646,928 from an employeethese exercises. The total intrinsic value of the exercised options was $3,901,840. No tax deduction is recorded when options are awarded. Of these exercised options, 44,500 shares resulted in a disqualifying disposition and her remaining 5,250 vested and 3,750 unvested options forfeited on November 30, 2007.Duringa tax benefit for the ninecompany of $213,568 for the three months ended DecemberJune 30, 2006,18,2002008. The Company issued new shares of common stock to settle these option exercises.
No forfeiture rate is assumed for stock options were forfeitedgranted to directors or employees due to the terminationforfeiture rate history for these types of consulting agreements with two of our consultants. However, these are all isolated events which the Company doesawards. On April 2, 2008, 20,000 stock options expired because they were not expect in the future. The Company has assumed no options will be forfeited before vesting dueexercised prior to the limited numberend of employees at the executive and senior management level who receive stock options, past employment history and current stock price projections.their ten-year term.
Outstanding options at December 31, 2007June 30, 2008 expire between April 2008September 2009 and July 2014 and have exercise prices ranging from$4.00 $4.00 to $8.24.
CompensationThe total cost related to non-vested awards not yet recognized at December 31, 2007June 30, 2008 totals approximately$111,783 $72,967 which is expected to be recognized over a weighted average of 2.912.41 years.
Stockholders’ Equity. The following is a summary of the changes in the Company’s common shares outstanding for the first nine months of fiscal 2008:
| | For the nine months ended | |
| | December 31, 2007 | |
Shares outstanding, beginning of period | | | 1,780,841 | |
Exercise of stock options | | | 1,000 | |
Grant of stock awards | | | - | |
Purchase of shares for treasury | | | (24,475 | ) |
Shares outstanding, end of period | | | 1,757,366 | |
During the nine months ended December 31, 2007, the Company repurchased 24,475 shares for the treasury at an aggregate cost of $119,093.
Asset Retirement Obligations. The Company’s asset retirement obligations relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recorded in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset.
The following table provides a rollforward of the asset retirement obligations for the first ninethree months of fiscal 2008:2009:
Carrying amount of asset retirement obligations as of April 1, 2007 | | $ | 400,584 | | |
Carrying amount of asset retirement obligations as of April 1, 2008 | | | $ | 424,789 | |
Liabilities incurred | | | 26,076 | | | | 433 | |
Liabilities settled | | | (37,330 | ) | | | (259 | ) |
Accretion expense | | | 19,691 | | | | 6,938 | |
Carrying amount of asset retirement obligations as of December 31, 2007 | | | 409,021 | | |
Carrying amount of asset retirement obligations as of June 30, 2008 | | | | 439,901 | |
Less: Current portion | | | 50,000 | | | | 50,000 | |
Non-current asset retirement obligation | | $ | 359,021 | | |
Non-Current asset retirement obligation | | | $ | 381,901 | |
The asset retirement obligation is included on the consolidated balance sheets with the current portion being included in the accounts payable and other accrued expenses.
Income Per Common Share. Basic net income per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share 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. The following is a reconciliation of the number of shares used in the calculation of basic income per share and diluted income per share for the three and nine month periods ended December 31, 2007June 30, 2008 and 2006.2007.
| | 2008 | | 2007 | |
Weighted average common shares outstanding – basic | | | 1,762,190 | | | 1,776,809 | |
Effect of the assumed exercise of dilutive stock options | | | 106,885 | | | 12,425 | |
Weighted average common shares outstanding – dilutive | | | 1,869,075 | | | 1,789,234 | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Basic | | $ | 0.31 | | $ | 0.02 | |
Diluted | | $ | 0.29 | | $ | 0.02 | |
| | Three Months Ended | | Nine Months Ended | |
| | December 31 | | December 31 | |
| | 2007 | | 2006 | | 2007 | | 2006 | |
Weighted average number of | | | | | | | | | | | | | |
common shares outstanding | | | 1,764,649 | | | 1,774,189 | | | 1,771,222 | | | 1,757,178 | |
Incremental shares from the assumed | | | | | | | | | | | | | |
exercise of dilutive stock options | | | 7,934 | | | 29,157 | | | 6,786 | | | 72,090 | |
Dilutive potential common shares | | | 1,772,583 | | | 1,803,346 | | | 1,778,008 | | | 1,829,268 | |
For the three months and nine monthsquarter ended December 31, 2007,June 30, 2008, no potential common shares of 240,000 shares relating to stock options were excluded in the computation of diluted net income per share becauseshare. For the quarter ended June 30, 2007, 184,000 stock options are anti-dilutive. During the three and nine month periods ending December 31, 2006, 214,000 and 105,000shares, respectively, were excluded fromin the computation of diluted net income per share calculations. Anti-dilutivebecause the options were anti-dilutive. The June 30, 2007 anti-dilutive stock options havehad aweighted average exercise price of $6.49 at December 31, 2007.$7.08.
Income Taxes. The Company recognizes deferred tax assets and liabilities for future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable to the years in which those differences are expected to be settled. The effect on deferred tax assets and liabilities of a change in tax rates under SFAS No. 109 is recognized in net income in the period that includes the enactment date. For the three months ended June 30, 2008, current income tax is $213,568 and deferred income tax is $31,133, resulting in an effective tax rate of 31%. The deferred income tax for the three months ended June 30, 2007 was $18,332, an effective tax rate of 34%. There iswas no current income tax expense for the three and nine months ending December 31, 2007. The effective income tax rate for the nine months ended December 31, 2007 was32%. The effective income tax rate for the nine months ended December 31, 2006 was 10% as a result of the decrease of deferred income taxes due to a revision of an estimate of statutory depletion and a net operating loss carryforward.June 30, 2007.
Effective April 1, 2007, we adopted Financial Accounting Standards Bulletin (“FASB”) InterpretationUnder FIN No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in a tax return. Anyany interest and penalties related to uncertain tax positions are recorded as interest expense and general and administrative expense, respectively. AtFor the timequarter ended June 30, 2008, the amount of adoption and as of December 31,unrecognized tax benefits was $754,000. For the quarter ended June 30, 2007, we did not have any uncertainthere were no unrecognized tax positions.benefits.
Investment in GazTex, LLC. The Company’sCompany's long-term assets consistasset consisted of an investment in GazTex, LLC, a Russian company owned 50% by OBTX, LLC, accounted for by the equity method. OBTX, LLC is a Delaware limited liability company in which throughfrom January 15,16, 2007, Mexco owned 90%100% of the interest, with the remaining 10% divided equally among three individuals, one of whom is Arden Grover, a director of Mexco Energy Corporation. All geologicalinterest. In May 2008, we dissolved GazTex, LLC and geophysical costs associated with the evaluation of Russian properties were paid 90% by Mexcoreceived our initial cash investment less related fees and 10% by the other three owners of OBTX, LLC. On January 16, 2007, the Company purchased all of the outstanding stock of OBTX, LLC for $2,051. The investment balance of $20,509 represents the cash balance of the investment in GaxTex, LLC. The 10% interest in OBTX, LLC prior to this purchase is included in the financial statements as a minority interest. There have not been any expenses for the nine months ended December 31, 2007 and no expenses are expected in the foreseeable future.a net amount of $18,700.
Long Term Liabilities. Long term debt consistsliabilities consist of a revolving credit agreement with Bank of America, N.A. (“Bank”), which provides for a credit facility of $5,000,000 subject to awith no monthly commitment reductions. The borrowing base determinationis evaluated annually, on or about September 1. Amounts borrowed under this agreement are collateralized by the common stock of one of the Company’s wholly owned subsidiaries and all of the Company’s oil and gas properties. On September 26, 2007, the borrowing base was redetermined and set at $4,225,000 bearing interest at prime rate per annum with a maturity date of October 31, 2009. On September 26, 2007,Two letters of credit for $50,000 each, in lieu of a plugging bond covering the borrowing base was redeterminedproperties we operate, are outstanding under the facility, one with the Texas Railroad commission and set at $4,225,000. Amounts borrowedone with the State of New Mexico. Interest under this agreement are collateralized by the common stock of the Company’s wholly owned subsidiaryis payable monthly at prime rate (5.0% and all of the Company’s oil8.25% at June 30, 2008 and gas properties.As of February 14, 2008, the2007, respectively). The balance outstanding under this agreementon the line of credit as of June 30, 2008 was $2,925,000.$2,275,000.
Recent Accounting Pronouncements. In September 2006,Effective April 1, 2008, the FASB issued SFASCompany implemented Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“(“SFAS 157”), which provides guidance for usingdefines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. Mexco elected to measureimplement this Statement with the one-year deferral permitted by FASB Staff Position (“FSP”) 157-2 for nonfinancial assets and liabilities.nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually). The pronouncement clarifies (1) the extentdeferral applies to which companies measurenonfinancial assets and liabilities at fair value; (2) the information used to measure fair value; and (3) the effect that fair value measurements have on earnings. SFAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which the Company uses fair value. Management does not expect any significant impact to the consolidated financial statements when SFAS 157 is effective as of the beginning of our 2009 fiscal year. Management is currently evaluating the impact, if any, of SFAS 157 on our financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities - Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financialthese assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management does not anticipate that the adoption of SFAS 159 will have a material effect on our consolidated financial statements.implemented.
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 caninclude statements regarding our plans, beliefs or current expectations and my be identified withsignified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and phrases such as “believe,” “expect,” “anticipate,” “should,” “estimate,” “foresee” or other words and phrases of similar meaning. 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,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.
Liquidity and Capital Resources. Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings and issuance of common stock. Our primary financial resource is our base of oil and gas reserves. We pledge our producing oil and gas properties to secure our revolving line of credit.
Our long term strategy is on increasing profit margins while concentrating on obtaining reserves with low cost operations by acquiring and developing primarily gas properties and secondarily oil properties with potential for long-lived production.
For the first ninethree months of fiscal 2008,2009, cash flow from operations was $658,241$386,201 compared to $1,097,463$194,956 for the first ninethree months of fiscal 2007 partially2008. This increase was primarily due to a decreasean increase in net income. We also had a decrease in cash payments from working interest partners which resulted in an increase in accounts receivable. Cash of $2,810,831$1,023,675 was used for additions to propertyoil and equipmentgas properties and cash$325,000 for net reduction in long term debt. Cash of $119,093$646,928 was used to repurchasereceived from exercises of stock for the treasury account.Net proceeds provided from long-term debt was $2,375,000.options. Accordingly, net cash increased $147,417.decreased $82,904.
During the first nine months of fiscal 2008, we participated in the drilling of a well in Crane County, Texas of which our costs are approximately $161,000. The well is currently producing but further testing and possible new pay zones may be added.
We also participated in the drilling of a well in Lea County, New Mexico. The initial well failed due to mechanical reasons; however, other methods are being evaluated for the exploration and development of this project. Costs incurred related to this project are approximately $237,000 for the nine month period. A lawsuit is being filed against the drilling company to recover damages due to this failure.
We are currently participating in the drilling and completion of a well in Borden County, Texas. Costs incurred related to this project are approximately $316,000. The results of this well are currently being evaluated.
We are currently participating in the drilling and completion of aan exploratory well in San Patricio County, Texas. This well has been completed and began producing natural gas as well as oil in April 2008. Costs incurred for this project are approximately $166,000. The results of this well are currently being evaluated.$178,000.
We are in the process of acquiring mineral, royalty and surface interests in several counties, mainly in Texas. Purchases incurred related to this project to datethrough June 2008 are approximately $34,000.
During the third quarter of fiscal 2008, we acted as operator and drilled aan exploratory well in Loving County, Texas. This well has been completed and based on a four point test by an independent testing firm, was calculated to produce at an absolute open flow rate of 12,773,000 cubic feet of natural gas per day. During this test which lasted four hours, the well actually produced 1,366,000 cubic feet of natural gas, 26 barrels of 63 gravity condensate and 12 barrels of water on chokes ranging from 11/64 to 15/64 inches. Previously the well had been shut in for a period in excess of 72 hours. The rates at which this will be produced and sold have not yet been determined and may be substantially different from these potential tests, based on regulatory and engineering considerations as well is currently being completed.as performance of the well over longer periods of time. We are in the process of acquiring a right-of-way and preparing to build a pipeline to enable production and sales of natural gas from this well. Our share of the costs incurred for this project through July 31, 2008 is approximately $142,000.$408,000.
On December 31, 2007, we purchased 118122 mineral acres amounting to approximately 22%21.45% royalty interest in Tarrant County, Texas for $1,850,000. ThisAt the time of purchase, this property containscontained one producing well in the Newark East (Barnett Shale) Field and twoField. Two additional wells have been completed and all three wells are now producing natural gas into a sales pipeline. One additional well is planned for a portion of this acreage.
During the fourth quarter of fiscal 2008, we drilled a gas well in Reeves County, Texas. This well has been completed and began producing in April 2008. Our working interest in this well is 32.5% before payout and 24.375% after payout (respectively, net revenue interests of 23.875% and 17.9063%).
On June 6, 2008 we purchased mineral and royalty interests contained in an aggregate of 522 acres with royalties varying from .126% to .385% in 6 producing natural gas wells and 5 proven undeveloped well locations in the Newark East (Barnett-Shale) Field of Tarrant County, Texas for approximately $429,000. There are being prepared for production. A director and employee of the Company received a finder’s fee of 2.5% ORRI in lieu of a cash payment as disclosedan additional 6 potential drill sites on Form 8-K dated December 31, 2007.this acreage.
We continue to focus a substantial portion of our efforts on the acquisition of royalties and minerals in areas with significant development potential.
We are participating in several other projects and are reviewing several other projects for potential participation.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.
At December 31, 2007,June 30, 2008, we had working capital of approximately $579,268$1,381,831 compared to working capital of $446,831$627,674 at March 31, 2007,2008, an increase of $132,437due to$754,157. This was mainly as a result of an increase in accounts receivable and accounts payable trade. These increases wereaccount receivables related to drilling costs on our welloil and gas sales and a decrease in Loving County.accounts payable.
Crude oil and natural gas prices have fluctuated significantly in recent years as well as in recent months. Fluctuations in price have a significant impact on our financial condition and liquidity. However, management is of the opinion that cash flow from operations and funds available from financing will be sufficient to provide for its working capital requirements and capital expendituresadequate liquidity for the current fiscal year.
Long-Term Debt. We have a revolving credit agreement with Bank of America, N.A. (“Bank”), which provides for a credit facility of $5,000,000, subject to a borrowing base determination bearing interest at prime rate per annum with a maturity date of October 31, 2009.determination. On September 26, 2007, the borrowing base was redetermined and set at $4,225,000. Asof December 31, 2007, the balance outstanding under this agreement was $3,075,000.increased to $4,225,000 with no monthly commitment reductions. The borrowing base is evaluated annually, on or about AugustSeptember 1. Amounts borrowed under this agreement are collateralized by the common stock of one of our wholly owned subsidiarysubsidiaries and all of our oil and gas properties. Two letters of credit for $50,000 each, in lieu of a plugging bond covering the properties we operate, are outstanding under the facility, one with the Texas Railroad Commissioncommission and one with the State of New Mexico. Interest under this agreement is payable monthly at the prime rate (7.25%(5.0% and 8.25% atDecember 31, June 30, 2008 and 2007, and 2006, respectively). This agreement generally restricts our ability to transfer assets or control of the Company, incur debt, extend credit, change the nature of our business, substantially change management personnel or pay cash dividends. The balance outstanding on the line of creditunder this agreement as of February 14,June 30, 2008 was $2,925,000.$2,275,000 and $1,500,000 as of August 8, 2008.
Results of Operations - Three Months Ended December 31, 2007 and 2006. Net income increased from $67,080 for the quarter ended December 31, 2006 to $221,114 for the quarter ended December 31, 2007, an increase of $154,034 or 230%.
Oil and gas sales increasedfrom $663,031 for the third quarter of fiscal 2007 to $952,211 for the same period of fiscal 2008. This increase of 44% or $289,180 resulted from an increase in oil and gas prices and production. Average gas prices increased from $5.34 per mcf for the third quarter of fiscal 2007 to $6.36 per mcf for the same period of fiscal 2008. Average oil prices also increased from $49.35 per bbl for the third quarter of fiscal 2007 to $86.05 for the same period of fiscal 2008. Oil and gas production quantities were 4,212 barrels (“bbls”) and 85,244 thousand cubic feet (“mcf”) for the third quarter of fiscal 2007 and 4,515 bbls and 88,630 mcf for the same period of fiscal 2008, an increase of 7% in oil production and 4% in gas production.
Production costs increased 10% from $218,774 for the third quarter of fiscal 2007 to $241,019 for the same period of fiscal 2008. This was the result of increased production taxes due to the increase in oil and gas sales.
General and administrative expenses increased 6% from $176,791 for the third quarter of fiscal 2007 to $187,648 for the same period of fiscal 2008. This was due to an increase in salaries, consulting services and fees.
Depreciation, depletion and amortization based on production increased 15%, from $152,135 for thethird quarter of fiscal 2007 to $174,842 for the same period of fiscal 2008, primarily due to an increase to the full cost pool amortization base.
Interest expense increased 867% from $2,359 for the third quarter of fiscal 2007 to $22,791 for the same period of fiscal 2008, due to an increase in borrowings.
Effective tax rate decreasedResults of Operations – Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007. Net income increased from 38%$34,806 for the thirdquarter ended June 30, 2007 to $538,789 for the quarter ended June 30, 2008; an increase of $503,983 as a result of an increase in operating revenues partially offset by an increase in depreciation, depletion and amortization and interest expense.
Oil and gas sales. Revenue from oil and gas sales increased from $850,144 for the first quarter of fiscal 20072008 to 32%$1,672,587 for the same period of fiscal 2008.
Results of Operations - Nine Months Ended December 31, 2007 and 2006. Net income decreased from $424,905 for the nine months ended December 31, 2006 to $247,164 for the same period of fiscal 2008, a decrease of $177,741 or 42%.
Oil and gas sales increased from $2,214,141 for the nine months ended December 31, 2006 to $2,642,302 for the same period of fiscal 2008.2009. This increase of 19%,97% or $428,161,$822,443 resulted from increasesan increase in oil and gas prices as well asand gas production offset partially by a decrease in oil production. Revenues from oil and gas production.royalty interests accounted for approximately 37% of our total revenues for the first quarter of fiscal 2009 compared to 24% for the first quarter of fiscal 2008. Average gas prices increased from $5.67$6.74 per mcf for the first nine months ended December 31, 2006quarter of fiscal 2008 to $6.35$9.70 per mcf for the same period of fiscal 2008.2009. Average oil prices also increased from $60.06$59.32 per bbl for the first nine monthsquarter of fiscal 20072008 to $72.09$118.57 for the same period of fiscal 2008.2009. Oil and gas production quantities were 12,7424,392 barrels (“bbls”) and 255,31487,539 thousand cubic feet (“mcf”) for the first nine months ended December 31, 2006quarter of fiscal 2008 and 13,3484,107 bbls and 264,435122,286 mcf for the same period of fiscal 2008,2009, a decrease of 6% in oil production and an increase of 4%40% in gas production and 5% in oil production.
Production and exploration. Production costs increased $1,938 or .6% from $641,371$333,050 for the first nine months ended December 31, 2006quarter of fiscal 2008 to $1,041,405$334,988 for the same period of fiscal 2008.2009. This was the result of an increase in repairs and maintenance to operated wells in the El Cinco field and increased production taxes due to the increase in oil and gas sales.sales partially offset by a decrease in lease operating expenses.
GeneralDepreciation, depletion and administrative expensesamortization. Depreciation, depletion and amortization expense increased 4%38%, from $613,203$172,884 for the first nine months ended December 31, 2006quarter of fiscal 2008 to $636,191$238,844 for the same period of fiscal 2008. This was due to an increase in salaries, consulting services and fees.
Depreciation, depletion and amortization based on production increased 16%, from $459,585 for the firstnine months ended December 31, 2006 to $531,523 for the same period of fiscal 20082009 primarily due to an increase to the full cost pool amortization base.base and an increase in gas production partially offset by an increase in oil and gas reserves.
Interest expenseGeneral and administrative expenses. General and administrative expenses increased 211%4% from $18,817$269,624 for the first nine months ended December 31, 2006quarter of fiscal 2008 to $58,484$281,661 for the same period of fiscal 20082009. This was due to an increase in borrowings.engineering fees.
Effective tax rateInterest expense. Interest expense increased 120% from 10%$15,348 for the nine months ended December 31, 2006first quarter of fiscal 2008 to 32%$33,735 for the same period of fiscal 2008. This lower effective tax rate in fiscal 2007 was the result of the decrease of deferred income taxes2009, due to an increase in borrowings partially offset by a revision of an estimate of statutory depletion and a net operating loss carryforward.decrease in interest rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary sources of market risk for us include fluctuations in commodity prices and interest rate fluctuations. At December 31, 2007,June 30, 2008, we had not entered into any hedge arrangements, commodity swap agreements, commodity futures, options or other similar agreements relating to crude oil and natural gas.
Interest Rate Risk. At December 31, 2007June 30, 2008, we had an outstanding loan balance of $3,075,000$2,275,000 under our $5.0 million revolving credit agreement, which bears interest at the prime rate, which varies from time to time. If the interest rate on our bank debt increases or decreases by one percentage point our annual pretax income would change by $30,750$22,750, based on the outstanding balance at December 31, 2007.June 30, 2008.
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 are uncollateralized.not collateralized. At December 31, 2007,June 30, 2008, our largest credit risk associated with any single purchaser was $49,375.$385,716. We are also exposed to credit risk in the event of nonperformance from any of our working interest partners. At December 31, 2007,June 30, 2008, our largest credit risk associated with any working interest partner was $96,339.$39,808. We have not experienced any significant credit losses.
Volatility of Oil and Gas Prices. Our revenues, operating results and future rate of growth are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodityPrices for oil and natural gas fluctuate widely. We cannot predict future oil and natural gas prices with any certainty. Historically, the markets for oil and gas have been volatile, and they are subjectlikely to widecontinue to be volatile. Factors that can cause price fluctuations and market uncertainties due to a variety of factors that are beyond our control. These factors include the level of global demand for petroleum products, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil exportingoil-exporting countries, weather conditions, the price and availability of alternative fuels and overall political and economic conditions both foreign and domestic. We cannot predict futurein oil and gas prices with any degree of certainty and expect energy prices to remain volatile and unpredictable. Sustained weaknessproducing countries.
Changes in oil and gas prices may also reduceimpact both estimated future net revenue and the amountestimated quantity of net oil and gas reserves that we can produce economically.proved reserves. Any reduction in reserves, including reductions due to price fluctuations, can reduce the borrowing base under our revolving credit facility and adversely affect our liquiditythe amount of cash flow available for capital expenditures and our ability to obtain additional capital for our exploration and development activities. In addition, we may have ceiling test writedowns when prices decline. Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically. Thus, we may experience material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well performance.
Similarly, any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources. Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. Our financial results are more sensitive to movements in natural gas prices than oil prices because most of our production and reserves are natural gas. If the average oil price had increased or decreased by one dollar per barrel for the first nine months of fiscalquarter ended June 30, 2008, our pretax income would have changed by $13,348.$4,107. If the average gas price had increased or decreased by ten centsone dollar per mcf for the first nine months of fiscalquarter ended June 30, 2008, our pretax income would have changed by $26,444.$122,286.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that the information required to be disclosed by uswe must disclose in reports filed or submitted underour filings with the Securities Exchange Act of 1934SEC is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.on a timely basis. At the end of the period covered by this report, we carried out an evaluation, underour principal executive officer and principal financial officer have reviewed and evaluated the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Securitiesas defined in Exchange Act Rule 13a-15(b)Rules 13a-15(e) and 15d-15(e). Based upon thaton such evaluation, the Chief Executive Officer and Chief Financial Officersuch officers have concluded that, itsas of June 30, 2008, our disclosure controls and procedures are effective.were effective in timely alerting them to material information relating to us (and our consolidated subsidiaries) required to be included in our periodic SEC filings.
No changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2007June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 a party to a lawsuit that is being filed against the drilling company of a well in which we have a working interest of approximately 6.5%. 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.
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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 currently a party to a lawsuit that is being filed against the drilling company of a well in which we have a working interest of approximately 6.5%. 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 2007
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There have been no material changes to the information previously disclosed in Item 1A. “Risk Factors” in our 2008 Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. | None. Other Information |
None.
Item 6. | Exhibits and Reports on Form 8-K Current report on Form 8-K filed on December 31, 2007, pursuant to Item 8.01, announcing the purchase of royalty interest properties.
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Exhibits
Exhibits | |
31.1 | Certification of the Chief Executive Officer of Mexco Energy Corporation |
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31.2 | Certification of the Chief Financial Officer of Mexco Energy Corporation |
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32.1 | Certification of the Chief Executive Officer and Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C. §1350 |
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) |
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Dated: August 12, 2008 |
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Date: February 14, 2008 | | /s/ Nicholas C. Taylor | |
| Nicholas C. Taylor |
| Nicholas C. Taylor
President |
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Dated: August 12, 2008 |
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Date: February 14, 2008 | | /s/ Tamala L. McComic | |
| Tamala L. McComic |
| Tamala L. McComic
Vice President, Treasurer and Assistant Secretary |