UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2019June 30, 2020

OR

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

For the transition period from _______ to _________

Commission File No. 1-31785

MEXCO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

(432) 682-1119

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

The number of shares outstanding of the registrant’s common stock, $0.50 par value, $.50 per share, as of February 12,August 4, 2020 was 2,040,166.

MEXCO ENERGY CORPORATION AND SUBSIDIARIES

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

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

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30,

(Unaudited)

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

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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)

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

Mexco Energy Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations

Mexco Energy Corporation (a Colorado corporation) and its wholly owned subsidiaries, Forman Energy Corporation (a New York corporation), Southwest Texas Disposal Corporation (a Texas corporation) and TBO Oil & Gas, LLC (a Texas limited liability company) (collectively, the “Company”) are engaged in the exploration, development and production of crude oil, 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, 2019,June 30, 2020, and the results of its operations and cash flows for the interim periods ended December 31, 2019June 30, 2020 and 2018.2019. The consolidated financial statements as of December 31, 2019June 30, 2020 and for the three and nine monththree-month periods ended December 31,June 30, 2020 and 2019 and 2018 are unaudited. The consolidated balance sheet as of March 31, 20192020 was derived from the audited balance sheet filed in the Company’s 20192020 annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note 2 of the “Notes to Consolidated Financial Statements” in the Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. However, the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K.

Investments.The Company accounts for investments of less than 1% in limited liability companies using the cost method. The cost of the investment is recorded as an asset on the consolidated balance sheets and when income from the investment is received, it is immediately recognized on the consolidated statements of operations.

Derivative Financial Instruments. The Company’s derivative financial instruments are used to manage commodity price risk attributable to expected oil and gas production. While there is risk the financial benefit of rising oil and gas prices may not be captured, the Company believes the benefits of stable and predictable cash flows outweigh the potential risks.

The Company accounts for derivative financial instruments using fair value accounting and recognizes gains and losses in earnings during the period in which they occur. Unsettled derivative instruments are recorded in the accompanying consolidated balance sheets as either a current or non-current asset or a liability measured at its fair value. The Company only offsets derivative assets and liabilities for arrangements with the same counterparty when right of setoff exists. Derivative assets and liabilities with different counterparties are recorded gross in the consolidated balance sheets. Derivative contract settlements are reflected in operating activities in the accompanying consolidated statements of cash flows.

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

Recently Adopted Accounting Pronouncements.In February 2016,December 2019, the FASB issued ASU 2016-02, Topic 842 Leases and subsequent amendmentsNo. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to the initial guidance:following: (i) hybrid tax regimes; (ii) the tax basis step-up in goodwill obtained in a transaction that is not a business combination; (iii) separate financial statements of entities not subject to tax; (iv) the intraperiod tax allocation exception to the incremental approach; (v) ownership changes in investments - changes from a subsidiary to an equity method investment (and vice versa); (vi) interim-period accounting for enacted changes in tax laws; and (vii) the year-to-date loss limitation in interim-period tax accounting. ASU 2018-10,2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. If an entity early adopts these amendments in an interim period, it should reflect any adjustments as of the beginning of the annual period that includes that interim period. In addition, an entity that elects to early adopt ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). The standard establishes a right-of-use (“ROU”) model that requires a lessee2019-12 is required to recognize a ROU asset and lease liability onadopt all of the balance sheet for all leases with a term greater than one year. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognitionamendments in the income statement.same period. The Company has determinedis currently assessing the effect that it has only one operating lease, which is an office lease. The Company adopted Topic 842ASU 2019-12 will have on April 1, 2019 using the modified retrospective approachits financial position, results of operations and the impact of the adoption resulted in the recognition of a ROU asset and liability on the Company’s consolidated balance sheets of $141,385. The current portion of the operating lease liability is included in Total current liabilities and the noncurrent portion of the operating lease liability is included in Total long-term liabilities on the Company’s consolidated balance sheets. Prior periods have not been adjusted. See Note 6 – Leases for additional discussion.disclosures.

3. Asset Retirement Obligations

The Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is initially incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our oil and natural gas properties. The ARO is included inon 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 ninethree months of fiscal 2020:2021:

4. Stock-based Compensation

The Company recognized stock-based compensation expense of $8,125 and $8,104 in general and administrative expense in the Consolidated Statements of Operations for the three months ended December 31, 2019 and 2018, respectively. Stock-based compensation expense recognized for the nine months ended December 31, 2019 and 2018 was $24,375 and $14,552, respectively. The total cost related to non-vested awards not yet recognized at December 31, 2019 totals approximately $87,636 which is expected to be recognized over a weighted average of 2.70 years.

During the nine months ended December 31, 2019, no stock options were granted. During the nine months ended December 31, 2018, the Compensation Committee of the Board of Directors approved and the Company granted 40,000 stock options exercisable at $4.84 per share. These options are exercisable at a price not less than the fair market value of the stock at the date of grant, have an exercise period of ten years and generally vest over four years.

Included in the following table is a summary of the grant-date fair value of stock options granted and the related assumptions used in the Binomial models for stock options granted during the nine months ended December 31, 2019 and 2018. All such amounts represent the weighted average amounts.

The following table is a summary of activity of stock options for the nine months ended December 31, 2019:

During the nine months ended December 30, 2019, no stock options were exercised. During the nine months ended December 31, 2018, stock options covering 2,900 shares were exercised with a total intrinsic value of $6,575. The Company received proceeds of $18,241 from these exercises.

No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history of these types of awards. There were no stock options forfeited or expired during the nine months ended December 31, 2019 and 2018.

Outstanding options at December 31, 2019 expire between August 2020 and September 2028 and have exercise prices ranging from $4.84 to $7.00.

5. Long Term Debt

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

TheOn December 28, 2018, the Company hasentered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”), which provided for a credit facility of $1,000,000.$1,000,000 with a maturity date of December 28, 2021. The Agreement has no monthly commitment reduction and a borrowing base to be evaluated annually.

On February 28, 2020, the Agreement was amended to increase the credit facility to $2,500,000, extend the maturity date to March 28, 2023 and increase the borrowing base to $1,500,000.

Under the Agreement, interest on the facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal plus one-half of one percent (.5%(0.5%) floating daily. Interest on the outstanding amount under the Agreement is payable monthly. In addition, the Company will pay an unused commitment fee in an amount equal to one-half of one percent (.5%(0.5%) times the daily average of the unadvanced amount of the commitment. The unused commitment fee is payable quarterly in arrears on the last day of each calendar quarter. As of December 31, 2019,June 30, 2020, there was $485,000$570,000 available on the facility.

No principal payments are anticipated to be required through the maturity date of the credit facility, DecemberMarch 28, 2021.2023. Upon closing with WTNB on the original Agreement, the Company paid a .5% loan origination fee in the amount of $5,000 plus legal and recording expenses totaling $34,532, which were deferred over the life of the credit facility. Upon closing the amendment to the Agreement, the Company paid a .1% loan origination fee of $2,500 and an extension fee of $3,125 plus legal and recording expenses totaling $12,266, which were also deferred over the life of the credit facility.

Amounts borrowed under the Agreement are collateralized by the common stock of the Company’s wholly owned subsidiaries and substantially all of the Company’s oil and gas properties.

The Agreement contains customary covenants for credit facilities of this type including limitations on change in control, disposition of assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement and requires senior debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratios (Senior Debt/EBITDA) less than or equal to 4.00 to 1.00 measured with respect to the four trailing fiscal quarters and minimum interest coverage ratios (EBITDA/Interest Expense) of 2.00 to 1.00 for each quarter. The Company is in compliance with all covenants as of December 31, 2019 and believes it will remain in compliance for the next fiscal year.June 30, 2020.

In addition, thethis Agreement prohibits the Company from paying cash dividends on its common stock without prior written permission of WTNB. The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices.prices without prior WTNB approval. The Company obtained written permission prior to entering into the current hedge agreement discussed in Note 7 of this report.

The balance outstanding on the line of credit as of December 31, 2019June 30, 2020 was $515,000.$930,000. The following table is a summary of activity on the WTNB line of credit for the ninethree months ended December 31, 2019:June 30, 2020:

Subsequently, on January 9, 2020, the Company borrowed $335,000 on the WTNB line of credit; on January 16, 2020, made a payment of $115,000; and on February 10, 2020, borrowed $60,000 on the WTNB line of credit, leaving a balance of $795,000.

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

6.5. Leases

The Company leases approximately 4,160 rentable square feet of office space from an unaffiliated third party for theour corporate office located in Midland, Texas. This includes 1,021 square feet of office space shared with and reimbursed by theour majority shareholder. The lease is a 36-month lease that expireswas to expire in May 2021 and does not include an option to renew. In June 2020, in exchange for a reduction in rent for the months of June and July 2020, the Company agreed to a 2-month extension to its current lease agreement at the regular monthly rate extending its current lease expiration date to July 2021.

The Company determines an arrangement is a lease at inception. Operating leases are recorded in operating lease right-of-use asset, operating lease liability, current, and operating lease liability, long-term on the consolidated balance sheets.

Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate used at adoption was 6.0%. Significant judgement is required when determining the incremental borrowing rate. The Company chose not to discount because the difference is not significant. Rent expense for lease payments is recognized on a straight-line basis over the lease term.

The balance sheets classification of lease assets and liabilities was as follows:

Future minimum lease payments as of December 31,June 30, 2019 under non-cancellable operating leases are as follows:

Net cash paid for our operating lease for the ninethree months ended December 31,June 30, 2020 and 2019 was $10,600 and 2018 was $35,300 and $31,992,$11,016, respectively. Rent expense, less sublease income of $13,167$3,803 and $10,680,$3,938, respectively, is included in general and administrative expenses.

Note 6. Fair Value Measurements

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

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

Level 2:    Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.

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

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

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

Fair Value Measurements on a Recurring Basis

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

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

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

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

The following tables presents the fair value hierarchy for those derivative instruments measured at fair value on a recurring basis as of June 30, 2020.

Fair Value Measurements on a Nonrecurring Basis

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

Note 7. Derivative Financial Instruments

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

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

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

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

During the quarter ended June 30, 2020 the Company entered into a series of crude oil put option contracts.

The following table summarizes the fair value amounts of derivative contracts in the consolidated balance sheets as well as the gross recognized derivative assets in the consolidated balance sheets as of June 30, 2020.

The following tables summarizes the amounts of the Company’s realized and unrealized gains (losses) on derivative contracts in the Company’s consolidated statements of operations for the quarter ended June 30, 2020.

The periods covered, notional amounts, fixed price and related commodity pricing index of the Company’s outstanding crude oil derivative contracts as of June 30, 2020 are set forth in the table below:

8. 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, 2019.June 30, 2020. Our deferred tax asset is $1,352,437$1,374,837 as of December 31, 2019June 30, 2020 with a valuation amount of $1,352,437.$1,374,837. We believe it is more likely than not that these deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as expected future expected growth.

8.9. Related Party Transactions

Related party transactions for the Company primarily relate to shared office expenditures in addition to administrative and operating expenses paid on behalf of the principal stockholder. The total billed to and reimbursed by the stockholder for the three monthsquarters ended December 31,June 30, 2020 and 2019 was $10,102 and 2018 was $12,289 and $12,487, respectively. The total billed to and reimbursed by the stockholder for the nine months ended December 31, 2019 and 2018 was $32,232 and $39,508,$10,101, respectively. The principal stockholder pays for his share of the lease amount for the shared office space directly to the lessor. Amounts paid by the principal stockholder directly to the lessor for the three months ending December 31,June 30, 2020 and 2019 were $3,803 and 2018 were $3,981 and $3,917, respectively. Amounts paid by the principal stockholder directly to the lessor for the nine months ending December 31, 2019 and 2018 were $11,900 and $10,680,$3,938, respectively.

9. Income (loss)10. Loss Per Common Share

The Company’s basic net income (loss)loss per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net income (loss)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)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-averageweighted average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive.

The following is a reconciliation of the number of shares used in the calculation of basic and diluted net income (loss)loss per share for the three and nine monththree-month periods ended December 31, 2019June 30, 2020 and 2018:

2019.

For the three months ended December 31, 2019, 185,700 potential common shares relating to stock options were excluded in the computation of diluted net income per share because the price of the options was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $6.18 at December 31, 2019. Due to a net loss for the three months ended December 31, 2018,June 30, 2020 and 2019, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

Due to a net loss for the nine months ended December 31, 2019, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. For the nine months ended December 31, 2018, 185,700 potential common shares relating to stock options were excluded in the computation of diluted net income per share because the price of the options was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $6.18 at December 31, 2018.

10.11. Subsequent Events

In JanuaryEffective July 1, 2020, the Company made another $25,000sold its interest in the deep rights of a property in Martin County, Texas for a cash payment towards its $250,000 commitment in a limited liability company. To date, $125,000 has been funded including this payment.of $100,000.

The Company completed a review and analysis of all events that occurred after the consolidated balance sheet date to determine if any such events must be reported and has determined that there are no other subsequent events to be disclosed.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, references to the “Company”, “Mexco”, “we”, “us” or “our” mean Mexco Energy Corporation and its consolidated subsidiaries.

Cautionary Statements Regarding Forward-Looking Statements. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements regarding our plans, beliefs or current expectations and may be signified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and other similar expressions. Forward-looking statements appear throughout this Form 10-Q with respect to, among other things: profitability; planned capital expenditures; estimates of oil and gas production; future project dates; estimates of future oil and gas prices; estimates of oil and gas reserves; our future financial condition or results of operations; and our business strategy and other plans and objectives for future operations. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement.

While we have made assumptions that we believe are reasonable, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. All forward-looking statements in the Form 10-Q are qualified in their entirety by the cautionary statement contained in this section. We do not undertake to update, revise or correct any of the forward-looking information. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K.

Liquidity and Capital Resources. Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings, sales of non-core properties and issuance of common stock. Our primary financial resource is our base of oil and gas reserves. We have pledged our producing oil and gas properties to secure our revolving line of credit. We do not have any delivery commitments to provide a fixed and determinable quantity of itsour oil and gas under any existing contract or agreement.

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

Our long termlong-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 royaltiesroyalty and working interests and non-operated properties in areas with significant development potential.

For the first ninethree months of fiscal 2020,2021, cash flow from operations was $543,584,$66,472, a 34% decrease of 64% when compared to the corresponding period of fiscal 2019 primarily as a result of a decrease in natural gas revenues2020 primarily due to a 43%56% decrease in crude oil price and a 29% decrease in natural gas price partially offset by ana 9% increase in oil sales as well asproduction and an 11% increase in accounts receivable compared to a decrease in accounts receivable during fiscal 2019.gas production. Net cash of $515,000$204,000 was received from the line of credit,long-term borrowings and net cash of $1,023,541$251,890 was used for additionsaddition to oil and gas properties, and cash of $100,000 was used for an investment at cost basis.properties. Accordingly, net cash decreased $64,957,increased $18,157 leaving cash and cash equivalents on hand of $63,295$52,537 as of December 31, 2019.June 30, 2020.

At December 31, 2019,June 30, 2020, we had working capital of $324,391$102,065 compared to working capital of $395,895$186,785 at March 31, 2019,2020, a decrease of $71,504 primarily due to a decrease in cash resulting from property development as described$84,720 for the reasons set forth below.

Oil and Natural Gas Property Development.In addition to an indeterminate number of wells to be drilled by other operators on Mexco’s royalty interests, the Company currently plans to participate in the drilling and completion of approximately 5020 horizontal wells at an estimated aggregate cost of approximately $1,500,000$950,000 for the fiscal year ending March 31, 2020.2021 of which, $205,000 has already been expended. The operators of these wells include Concho Resources, Inc., Devon Energy, Marathon Oil Company, Mewbourne Oil Company, and others.

The Company also plans to expend approximately $280,000 for the additional completion costs of 22 horizontal wells located in Eddy and Lea Counties, New Mexico that the Company participated in drilling during fiscal 2020 that were delayed due to the depressed oil and gas prices in March 2020. Of these wells, 4 were completed in April 2020 and are currently producing at an aggregate average rate of 3,298 barrels of oil 6,486 barrels of water; and 6,154,000 cubic feet of gas per day, or 4,324 barrels of oil equivalent per day. Mexco’s working interest in these wells is .48%. Another 3 of these wells were completed in May 2020 and are currently producing at an aggregate average rate of 1,801 barrels of oil and 6,626,000 cubic feet of gas per day, or 2,905 barrels of oil equivalent per day. Mexco’s interest in these wells is .006%.

During the first nine monthsquarter of fiscal 2020,2021, Mexco participated with various percentage interests in the drilling and completion of the first 36 of these2 horizontal wells in the Wolfcamp formation of the Delaware Basin located in the western portion of the Permian Basin in Eddy and Lea Counties,County, New Mexico with aggregate costs of approximately $850,000.

Subsequently,$101,000. Mexco’s working interest in January 2020, Mexco expended an additional $348,000 for participation in the completion of four of these wells and the drilling and completion of an additional 2 wells. In February 2020, Mexco expended another $47,250 for the drilling of 2 more wells. Thus, for the 40 wells to date, the total expended is approximately $1,200,000.1.2%.

Also during the first quarter of fiscal 2020,2021, Mexco expended $186,000 for the completion of 4 wells in which the Company participated in drilling during fiscal 2019. These wells began producing in June 2019.

During the first nine months of fiscal 2020, Mexco also participated$99,000 to participate in the drilling and completion of 6 vertical5 horizontal wells in Winkler County, Texas at an aggregate costthe Upper Avalon formation of approximately $20,000.

In April 2019, the Company made a less than 1% cost basis investment commitment in a limited liability company amounting to $250,000 of which $100,000 has been funded through December 31, 2019. This amount is classified as an investment at cost basis on the Company’s consolidated balance sheets less any payments received. The limited liability company is capitalized at approximately $50 million to purchase royalty interests consisting of mineralsDelaware Basin located in the statewestern portion of Ohio with 144 grossthe Permian Basin in Lea County, New Mexico. Mexco’s working interest in these wells of which 136 are Utica gas wells and 8 are Marcellus oil wells either producing, drilling or in process. Subsequently, in January 2020, the Company made an additional $25,000 payment towards its commitment.is .5%.

In June 2019,The Company also expended $5,000 during the Company received $30,894first quarter of fiscal 2021 for its share to participate in payment for a promissory note1 horizontal well in connection with the settlementBone Spring formation of a lawsuit from September 2016.the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in this well is .14%.

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.

CrudeBeginning in March 2020, crude oil and natural gas prices generally remained volatile during the last year.decreased significantly through May 2020. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, in the last twelve months, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $42.75on March 31, 2020 was $16.75 per bbl in January 2019 to a high of $62.75and averaged $14.68 and $24.67 per bbl infor the months of April 2019.and May, respectively. The WTI posted price for crude oil was $35.25 on June 30, 2020. The Henry Hub Spot Market Price (“Henry Hub”) posted price for natural gas has ranged from a low ofon March 31, 2020 was $1.71 per MMBtu and averaged $1.74 and $1.75 per MMBtu in December 2019 to a highfor the months of $4.25 per MMBtu in March 2019. On December 31, 2019 the WTI posted price for crude oil was $57.50 per bblApril and theMay, respectively. The Henry Hub spotposted price for natural gas was $2.09 per MMBtu. See Results$1.67 on June 30, 2020.

Paycheck Protection Program (PPP) Loan. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act. One component of Operations belowthe CARES Act was the paycheck protection program (“PPP”) which provides small businesses with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the United States Small Business Administration (“SBA”) with support from the Department of the Treasury. The PPP provides funds to pay up to 24 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The Company applied for, realized prices which are substantially belowand was accepted to participate in this program. On May 5, 2020, the Henry Hub Spot Market Price.Company received funding for approximately $68,574.

The loan is a two-year loan with a maturity date of May 5, 2022. The loan bears an annual interest rate of 1%. The loan shall be payable monthly with the first six monthly payments deferred. It is the Company’s intent to apply for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness is subject to the sole approval of the SBA. The Company is eligible for loan forgiveness in an amount equal to payments made during the 24-week period beginning on the Loan date, with the exception that no more than 40.0% of the amount of loan forgiveness may be for expenses other than payroll expenses. The Company used all loan proceeds to partially subsidize direct payroll expenses and rent for our corporate office space.

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, 2019:June 30, 2020:

Results of Operations – Three Months Ended December 31, 2019 and 2018.June 30, 2020 Compared to Three Months Ended June 30, 2019. For the quarter ended December 31, 2019,June 30, 2020, there was a net incomeloss of $35,196$299,670, compared to a net loss of $13,076$54,186 for the quarter ended December 31, 2018 asJune 30, 2019. This was a result of an increasea decrease in operating revenues due to a decrease in oil and gas prices partially offset by an increasea decrease in operating expenses that is further explained below.

Oil and gas salessales.. Revenue from oil and gas sales was $766,223$364,179 for the third quarter of fiscalended June 30, 2020, a 20% increase47% decrease from $640,143$691,694 for the same period of fiscalquarter ended June 30, 2019. This primarily resulted from a decrease in oil and gas prices partially offset by an increase in oil and gas production volumes and an increase in oil prices partially offset by a decrease in gas prices.production.

Production and exploration.Production costs were $249,921$171,666 for the third quarter of fiscalthree months ended June 30, 2020, an 18% increasea 22% decrease from $211,788$219,395 for the same period of fiscalthree months ended June 30, 2019. This decrease is primarily the result of an increasea decrease in production taxes as a result of a decrease in oil and gas revenues and a decrease in lease operating expenses on newdue to numerous wells in which we participatedbeing 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 increased production.gas prices.

Depreciation, depletion and amortization.Depreciation, depletion and amortization (“DD&A”) expense was $228,762$224,105 for the thirdfirst quarter of fiscal 2020, an 17%2021, a 7% increase from $196,206$210,238 for the same periodfirst quarter of fiscal 2019,2020, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves from natural decline. This is partially offset by a decrease in the full cost pool amortization base primarily due to a decrease in future development costs.base.

General and administrative expenses.General and administrative expenses were $239,346$248,878 for the third quarter of fiscalthree months ended June 30, 2020, a 2% increase20% decrease from $234,987$311,061 for the same period of fiscalthree months ended June 30, 2019. This was primarily due to an increase in accounting fees partially offset by a decrease in legal fees.engineering and accounting fees and salaries.

Interest expense.Interest expense was $10,203$11,055 for the thirdfirst quarter of fiscal 2021, an increase of 74% from $6,356 for the first quarter of fiscal 2020 a 106% increase from $4,951 for the same period of fiscal 2019, due to an increase in borrowings partially offset by a decrease in interest rate.

Income taxes.There was no income tax expense for the quarterthree months ended December 31, 2019June 30, 2020 and for the quarterthree months ended December 31, 2018.June 30, 2019. The effective tax rate for the three months ended December 31,June 30, 2020 and June 30, 2019 and December 31, 2018 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, 2019 and 2018. For the nine months ended December 31, 2019, there was a net loss of $101,777 compared to net income $23,375 for the nine months ended December 31, 2018. This was a result of an increase in operating expenses and a decrease in operating revenues that is further explained below.

Oil and gas sales. Revenue from oil and gas sales was $2,083,667 for the nine months ended December 31, 2019, a .3% increase from $2,076,742 for the same period of fiscal 2019. This resulted from an increase in oil and gas production volumes partially offset by a decrease in oil and gas prices.

Prices for natural gas were adversely affected by temporary pipeline capacity constraints primarily in the Permian Basin. This limitation has been currently alleviated by commencement of operations of a new 42-inch natural gas pipeline capable of transporting 2 Bcf per day to the Gulf Coast which began in September 2019. We cannot predict future disruptions to, capacity constraints in or other limitations on the pipeline systems.future.

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

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

In addition, prices for natural gas have been adversely effected by temporary pipeline capacity constraints in the Permian Basin. We are unable to predict exactly how long this limitation will continue.

For example, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil on March 31, 2020 was $16.75 per bbl and averaged $14.68, $24.67 and $34.35 per bbl for the months of April, May and June 2020, respectively. The WTI posted price for crude oil was $35.25 on June 30, 2020. The Henry Hub Spot Market Price (“Henry Hub”) posted price for natural gas on March 31, 2020 was $1.71 per MMBtu and averaged $1.74, $1.75 and $1.63 per MMBtu for the months of April, May and June 2020, respectively. The Henry Hub posted price for natural gas was $1.67 on June 30, 2020. See Results of Operations above for the Company’s realized prices during the quarter.

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

Similarly, any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources. Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. If the average oil price had increased or decreased by ten dollars per barrel for the first nine months of fiscalquarter ended June 30, 2020, our pretax income or loss would have changedincreased or decreased by $322,060.$115,340. If the average gas price had increased or decreased by one dollar per mcf for the first nine months of fiscalquarter ended June 30, 2020, our pretax income or loss would have changedincreased or decreased by $221,116.$79,516.

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, 2019,June 30, 2020, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting.No changes in our internal control over financial reporting occurred during the nine monthsquarter ended December 31, 2019June 30, 2020 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 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 20192020 Annual Report on Form 10-K.

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

NoneNone.

Item 3.Defaults Upon Senior Securities

NoneNone.

Item 4.Mine Safety Disclosures

None

Item 5.Other Information

None

Item 6. Exhibits

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.