UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2021June 30, 2022

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 ☒ 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 ☒ 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 ☒

The number of shares outstanding of the registrant’s common stock, $0.50 par value, $.50 per share, as of February 8,August 15, 2022 was 2,121,6662,149,416.

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)

3. Asset Retirement Obligations

The Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our oil and natural gas properties. The ARO is included 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 2022:

Schedule of Rollforward of Asset Retirement Obligations 

4.Stock-based Compensation

The Company recognized stock-based compensation expense of $25,570 and $13,865 in general and administrative expense in the Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020, respectively. Stock-based compensation expense recognized for the nine months ended December 31, 2021 and 2020 was $62,003 and $41,813, respectively. The total cost related to non-vested awards not yet recognized at December 31, 2021 totals approximately $239,677 which is expected to be recognized over a weighted average of 2.57 years.

During the nine months ended December 31, 2021, the Compensation Committee of the Board of Directors approved and the Company granted 31,000 stock options exercisable at $8.51 per share with an estimated fair value of $187,550. During the nine months ended December 31, 2020, 0 stock options were granted. These options are exercisable at a price not less than the fair market value of the stock at the date of grant, have an exercise period of 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, 2021 and 2020. All such amounts represent the weighted average amounts.

Summary of Grant-date Fair Value of Stock Options Granted and Assumptions Used Binomial Models

The following table is a summary of activity of stock options for the nine months ended December 31, 2021:

Summary of Activity of Stock Options

During the nine months ended December 31, 2021, stock options covering 45,000 shares were exercised with a total intrinsic value of $241,226. The Company received proceeds of $295,640 from these exercises. During the nine months ended December 31, 2020, stock options covering 1,500 shares were exercised with a total intrinsic value of $135. The Company received proceeds of $9,435 from these exercises.

There were 0 stock options forfeited or expired during the nine months ended December 31, 2021. During the nine months ended December 31, 2020, 1,000 unvested stock options were forfeited due to the resignation of an employee and 34,200 vested stock options expired unexercised. No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history of these types of awards.

Outstanding options at December 31, 2021 expire between April 2023 and July 2031 and have exercise prices ranging from $3.34 to $8.51.

5. Long Term Debt

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

Schedule of Long-Term Debt

On December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”), which originally provided for a credit facility of $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 credit facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal plus one-half of one percent (0.5%) floating daily. Interest on the outstanding amount under the Agreement is payable monthly. In addition, the Company will pay an unused commitment fee in an amount equal to one-half of one percent (0.5%) times the daily average of the unadvanced amount of the commitmentcommitment.. The unused commitment fee is payable quarterly in arrears on the last day of each calendar quarter. As of December 31, 2021,June 30, 2022, there was $1,500,000 available for borrowing by the Company on the facility.

No principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2023. Upon closing with WTNB on the original Agreement, the Company paid a .5%.5% loan origination fee in the amount of $5,000 plus legal and recording expenses totaling $34,532, which were deferred over the original life of the credit facility. Upon closing the amendment to the Agreement, the Company paid a .1%.1% loan origination fee of $2,500 and an extension fee of $3,125 plus legal and recording expenses totaling $12,266, which were also deferred over the life of the credit facility.

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

The Agreement contains customary covenants for credit facilities of this type including limitations on change in control, disposition of assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement and requires senior debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratios (Senior Debt/EBITDA) less than or equal to 4.00 to 1.00 measured with respect to the four trailing quarters and minimum interest coverage ratios (EBITDA/Interest Expense) of 2.00 to 1.00 for each quarterquarter..

In addition, this 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 without prior WTNB approval.

There was no balance outstanding on the line of credit facility as of December 31, 2021. June 30, 2022.

5. Stock-based Compensation

The Company recognized compensation expense of $25,571 and $13,865 related to vesting stock options in general and administrative expense in the Consolidated Statements of Operations for the first quarter of fiscal 2023 and 2022, respectively. The total cost related to non-vested awards not yet recognized at June 30, 2022 totals $188,537, which is expected to be recognized over a weighted average of 2.14 years.

The following table is a summary of stock options activity on the WTNB line of credit for the ninethree months ended December 31, 2021:June 30, 2022:

Summary of LineActivity of Credit ActivityStock Options 

During the three months ended June 30, 2022 and 2021, 0 stock options were granted.

During the three months ended June 30, 2022, 0 stock options were exercised. During the three months ended June 30, 2021, stock options covering 5,000 shares were exercised with a total intrinsic value of $15,036. The Company received proceeds of $34,000 from these exercises.

No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history for these types of awards. During the three months ended June 30, 2022 and 2021, there were 0 stock options forfeited or expired.

Outstanding options at June 30, 2022 expire between August 2024 and July 2031 and have exercise prices ranging from $3.34 to $8.51.

6. 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 1,112 square feet of office space shared with and reimbursed by theour majority shareholder. The lease does not include an option to renew and is a 36-month lease that was to expire in May 2021. In June 2020, in exchange for a reduction in rent for the months of June and July 2020, the Company agreed to a 2-month extension to its current lease agreement at the regular monthly rate extending its current lease expiration date to July 2021.In June 2021, the Company agreed to extend its current lease at a flat (unescalated) rate for 36 months. The amended lease now expires on July 31, 2024.

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

Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate used at adoption was 3.75%. Significant judgement is required when determining the incremental borrowing rate. Rent expense for lease payments is recognized on a straight-line basis over the lease term.

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

Schedule of Operating Lease Assets and Liabilities

Future minimum lease payments as of December 31, 2021June 30, 2022 under non-cancellable operating leases are as follows:

Schedule of Future Minimum Lease Payments

Net cash paid for our operating lease for the ninethree months ended December 31,June 30, 2022 and 2021 and 2020 was $31,57010,667 and $34,12110,929, respectively. Rent expense, less sublease income of $14,6623,893 and $14,3155,200, respectively, is included in general and administrative expenses.

7. Income Taxes

A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry.

Based on the material write-downs of the carrying value of our oil and natural gas properties during fiscal 2016, we are in a net deferred tax asset position as of December 31, 2021.June 30, 2022. Our deferred tax asset is $887,701526,846 as of December 31, 2021June 30, 2022 with a valuation amount of $887,701526,846. We believe it is more likely than not that these deferred tax assets will not be realized. Management assessesconsiders the likelihood that the Company’s net operating losses and other deferred tax attributes will be utilized prior to their expiration, if applicable. The determination to record a valuation allowance was based on management’s assessment of all available evidence, both positive and negative, evidence to estimate whether sufficient future taxable income will be generated to permitsupporting realizability of the useCompany deferred tax asset as required by applicable accounting standards. In light of those criteria for recognizing the tax benefit of deferred tax assets. The amountassets, the Company’s assessment resulted in application of a valuation allowance against the deferred tax asset considered realizable, however, could be adjusted if estimatesas of future taxable income are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as future expected growth.June 30, 2022.

8. Related Party Transactions

Related party transactions for the Company primarily relate to shared office expenditures in addition to administrative and operating expenses paid on behalf of the principal stockholder. The total billed to and reimbursed by the stockholder for the three monthsquarters ended December 31,June 30, 2022 and 2021 and 2020 was $12,27610,085 and $9,122, respectively. The total billed to and reimbursed by the stockholder for the nine months ended December 31, 2021 and 2020 was $35,332 and $27,44312,768, 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 less sublease income for the three months ending December 31,June 30, 2022 and 2021 and 2020 were $3,893 and $4,045, respectively. Amounts paid by the principal stockholder directly to the lessor for the nine months ending December 31, 2021 and 2020 were $11,882 and $11,694, respectively.

9. Income (loss) Per Common Share

The Company’s basic net income (loss) per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share assumes the exercise of all stock options having exercise prices less than the average market price of the common stock during the period using the treasury stock method and is computed by dividing net income (loss) by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive.

9. Income Per Common Share

The following is a reconciliation of the number of shares used in the calculation of basic and diluted net income (loss) per share for the three and nine monththree-month periods ended December 31, 2021June 30, 2022 and 2020:2021.

Schedule of Reconciliation of Basic and Diluted Net Income (loss) Per Share