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 June 30, 2005
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. 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
(Address of principal executive offices)
(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 [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [_] NO [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $0.50 par value:
1,733,041 shares outstanding at August 11, 2005
page 1
MEXCO ENERGY CORPORATION
Table of Contents
Page
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PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Balance Sheets as of June 30, 2005
(Unaudited) and March 31, 2005 3
Consolidated Statements of Operations (Unaudited) for
the three months ended June 30, 2005 and June 30, 2004 4
Consolidated Statements of Cash Flows (Unaudited) for
the three months ended June 30, 2005 and June 30, 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6
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 11
PART II. OTHER INFORMATION 12
- ---------------------------
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 12
- ----------
CERTIFICATIONS 13
- --------------
page 2
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2005 2005
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 89,024 $ 85,209
Accounts receivable:
Oil and gas sales 419,410 418,348
Trade 7,286 23,258
Related parties 1,275 2,103
Prepaid costs and expenses 35,215 7,362
------------ ------------
Total current assets 552,210 536,280
Investment in GazTex, LLC 282,126 282,126
Property and equipment, at cost
Oil and gas properties, using the full cost method
($965,018 and $983,680 excluded from amortization
as of June 30, 2005 and 2004, respectively) 18,547,694 18,376,974
Other 36,855 36,855
------------ ------------
18,584,549 18,413,829
Less accumulated depreciation,
depletion, and amortization 10,067,765 9,929,086
------------ ------------
Property and equipment, net 8,516,784 8,484,743
------------ ------------
$ 9,351,120 $ 9,303,149
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 121,535 $ 111,675
Income tax payable 74,278 48,127
Current portion of long-term debt 1,815,000 --
------------ ------------
Total current liabilities 2,010,813 159,802
Long-term debt -- 1,990,000
Asset retirement obligation 364,884 374,506
Deferred income tax liability 740,713 715,284
Minority interest 25,362 25,362
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;
1,766,566 shares issued 883,283 883,283
Additional paid-in capital 3,836,827 3,826,592
Retained earnings 1,634,813 1,473,895
Treasury stock, at cost (33,525 shares) (145,575) (145,575)
------------ ------------
Total stockholders' equity 6,209,348 6,038,195
------------ ------------
$ 9,351,120 $ 9,303,149
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
page 3
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30,
(Unaudited)
2005 2004
------------- -------------
Operating revenues:
Oil and gas $ 802,720 $ 674,995
Other 372 2,008
------------- -------------
Total operating revenues 803,092 677,003
Operating expenses:
Production 176,445 191,738
Accretion of asset retirement obligation 5,785 6,820
Depreciation, depletion, and amortization 138,679 152,772
General and administrative 195,403 164,419
------------- -------------
Total operating expenses 516,312 515,749
------------- -------------
Operating profit 286,780 161,254
Other income (expense):
Interest income 167 53
Interest expense (29,982) (16,843)
------------- -------------
Net other expense (29,815) (16,790)
Minority interest in loss of subsidiary 3,824 --
------------- -------------
Earnings before income taxes 260,789 144,464
Income tax expense:
Current 74,442 43,425
Deferred 25,429 (1,663)
------------- -------------
99,871 41,762
------------- -------------
Net income $ 160,918 $ 102,702
============= =============
Net income per common share:
Basic: $ 0.09 $ 0.06
Diluted: $ 0.09 $ 0.06
The accompanying notes are an integral part of
the consolidated financial statements.
page 4
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30,
(Unaudited)
2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 160,918 $ 102,702
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase (decrease) in deferred income taxes 25,429 (1,663)
Stock-based compensation 10,235 12,827
Depreciation, depletion, and amortization 138,679 152,772
Accretion of asset retirement obligations 5,785 6,820
Minority interest in loss of GazTex, LLC (3,824) --
(Increase) decrease in accounts receivable 15,738 (53,750)
Increase in prepaid expenses (27,853) (9,507)
Increase in income taxes payable 26,151 27,223
Increase in accounts payable
and accrued expenses 790 67,154
--------- ---------
Net cash provided by operating activities 352,048 304,578
Cash flows from investing activities:
Additions to oil and gas properties (191,590) (237,113)
Proceeds from sale of oil and gas properties
and equipment 14,533 --
--------- ---------
Net cash used in investing activities (177,057) (237,113)
Cash flows from financing activities:
Reduction of long-term debt (175,000) (100,000)
Minority interest contributions 3,824 --
--------- ---------
Net cash used in financing activities (171,176) (100,000)
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,815 (32,535)
Cash and cash equivalents at beginning of year 85,209 92,795
--------- ---------
Cash and cash equivalents at end of year $ 89,024 $ 60,260
========= =========
Interest paid $ 29,017 $ 16,754
Income taxes paid $ 51,164 $ --
The accompanying notes are an integral part of
the consolidated financial statements.
page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Mexco Energy Corporation (a Colorado Corporation), its wholly owned subsidiary,
Forman Energy Corporation, and its 90% owned subsidiary, OBTX, LLC (a Delaware
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). OBTX, LLC was formed on April 8, 2004, and is
included in the consolidated financial statements since its date of formation.
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 June 30, 2005, and the results of its operations and cash flows for the
interim periods ended June 30, 2005 and 2004. 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 A 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 and majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates. 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 and the future development, dismantlement and
abandonment costs.
Stock-based Compensation. The Company accounts for employee stock option grants
in accordance with Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"), as amended by Financial Accounting
Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of APB Opinion No.
25. The Company applies the intrinsic value method in accounting for its
employee stock options and records no compensation costs for its stock option
awards to employees. The Company recognizes compensation cost related to stock
options awarded to independent consultants based on fair value of the options at
date of grant.
For the quarter ending June 30, 2005, the Company recognized $10,235 related to
these stock options for independent consultants.
The following pro forma information, as required by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"), as amended by Statement of Financial Accounting Standards No. 148 ("SFAS
148"), presents net income and earnings per share information as if expense
relating to stock options issued had been determined based on the fair value at
the grant dates for all employee awards under the plan:
page 6
Three Months Ended
June 30,
2005 2004
--------------- ---------------
Net income, as reported $ 160,918 $ 102,702
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax $ (29,098) $ (22,341)
--------------- ---------------
Net income, pro forma $ 131,820 $ 80,361
=============== ===============
Basic earnings per share:
As reported $ 0.09 $ 0.06
Pro forma $ 0.08 $ 0.05
Diluted earnings per share:
As reported $ 0.09 $ 0.06
Pro forma $ 0.07 $ 0.04
Asset Retirement Obligations. The Company's asset retirement obligations relate
to the plugging and abandonment of oil and gas properties. The fair value of a
liability for an asset retirement obligation is required 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 asset retirement obligations are recorded at fair value and accretion
expense, recognized over the life of the property, increases the liability to
its expected settlement value. If the fair value of the estimated asset
retirement obligation changes, an adjustment is recorded for both the asset
retirement obligation and the asset retirement cost.
The following table provides a rollforward of the asset retirement obligations
for the current period:
Carrying amount of asset retirement obligations
as of April 1, 2005 $ 395,046
Liabilities incurred --
Liabilities settled (15,407)
Accretion expense 5,785
Revisions in estimated liabilities --
Carrying amount of asset retirement obligations
---------------
as of June 30, 2005 $ 385,424
===============
The asset retirement obligation, which is included on the consolidated balance
sheet, was $385,424 at June 30, 2005. The current portion of the asset
retirement obligation as of June 30, 2005, was $20,540 and is included on the
consolidated balance sheet in accounts payable and other accrued expenses.
Accretion expense was $5,785 and $6,820 as of June 30, 2005 and 2004,
respectively.
Oil and Gas Costs. The cost of certain oil and gas leases that the Company has
acquired, but not evaluated has been excluded in computing amortization of the
full cost pool. The Company will begin to amortize these properties when the
projects are evaluated, which is currently estimated to be within this fiscal
year. Costs excluded from amortization at June 30, 2005 total $965,018 for U.S.
properties.
Earnings Per Share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares and dilutive potential common shares (stock
options and warrants) outstanding during the period. The following is a
reconciliation of the number of shares used in the calculation of basic earnings
per share and diluted earnings per share for the three month periods ended June
30, 2005 and 2004.
page 7
Three Months Ended
June 30
2005 2004
------------- -------------
Weighted average number of
common shares outstanding 1,733,041 1,736,041
Incremental shares from the
assumed exercise of dilutive
stock options and warrants 143,662 120,938
------------- -------------
Dilutive potential common shares 1,876,703 1,856,979
Options and warrants to purchase 70,000 shares at an average exercise price of
$7.54 outstanding at June 30, 2004 were not included in the computation of
diluted net income per share because the exercise price of the options and
warrants was greater than the average market price of the common stock of the
Company and, therefore, the effect would be antidilutive. No options outstanding
at June 30, 2005 were excluded in the computation of diluted net income per
share.
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 is recognized in net income in
the period that includes the enactment date. The effective income tax rate for
the three months ended June 30, 2005, was 38%. This increased rate over the
statutory rate is a result of a revision of an estimate of statutory depletion.
Investment in GazTex, LLC. The Company's long-term assets consist 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 Mexco owns 90% 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 geological and geophysical costs associated with the evaluation
of Russian properties have been paid 90% by Mexco Energy Corporation and 10% by
the other three owners of OBTX, LLC. GazTex, LLC was formed during fiscal 2005
and through June 30, 2005 has no operations other than the evaluation activity.
Through June 30, 2005, the Company has $282,126 classified as a long-term
investment in GazTex, LLC. The 10% interest in OBTX, LLC is included in the
Company's financial statements as a minority interest. OBTX, LLC, plans to
participate in any Russian venture entered into and own a 50% interest. For the
quarter ended June 30, 2005, the Company has expensed approximately $38,000 in
consulting costs for the evaluation of projects. No costs were expensed during
the first quarter of fiscal 2005.
Long Term Liabilities. Long term debt consists of 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. On July 29, 2004, the
borrowing base was redetermined and set at $2,500,000. As of June 30, 2005, the
balance outstanding under this agreement was $1,815,000 and matures on April 1,
2006. The borrowing base is currently being re-evaluated and upon completion of
the evaluation the note will be extended. Amounts borrowed under this agreement
are collateralized by the common stock of the Company's wholly owned subsidiary
and all oil and gas properties.
Recent Accounting Pronouncements. Share based payment - In December 2004, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R),
Share-Based Payment, which establishes accounting standards for all transactions
in which an entity exchanges its equity instruments for goods and services. SFAS
No. 123(R) focuses primarily on accounting for transactions with employees, and
carries forward without change to prior guidance for share-based payments for
transactions with non employees.
SFAS No. 123(R) eliminates the intrinsic value measurement objective in APB
Opinion 25 and generally requires the Company to measure the cost of employee
services received in exchange for an award of equity instruments based on the
fair value of the award on the date of the grant. The standard requires grant
date fair value to be estimated using either an option-pricing model which is
consistent with the terms of the award or a market observed price, if such a
price exists. Such cost must be recognized over the period during which an
employee is required to provide service in exchange for the award (which is
usually the vesting period). The standard also requires the Company to estimate
page 8
the number of instruments that will ultimately be issued, rather than accounting
for forfeitures as they occur.
The Company is required to apply SFAS No. 123(R) to all awards granted, modified
or settled in our first annual reporting period under U.S. GAAP beginning after
June 15, 2005. The Company will adopt SFAS No. 123(R) on April 1, 2006. The
Company has not yet completed the analysis of the impact of SFAS No. 123(R).
FASB Statement No. 154 - In May 2005, the FASB issued FASB Statement No. 154,
Accounting Changes and Error Corrections ("Statement 154"). Statement 154
requires companies to recognize changes in accounting principle, including
changes required by a new accounting pronouncement when the pronouncement does
not include specific transition provisions, retrospectively to prior periods'
financial statements. Statement 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not believe that the adoption of Statement 154 will have a
material effect on its financial position or results of operations.
MEXCO ENERGY CORPORATION AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 can be identified with words and phrases such as
"believes," "expects," "anticipates," "should," "estimates," "foresees" or other
words and phrases of similar meaning. Forward-looking statements appear
throughout this Form 10-Q and include statements regarding Company plans,
beliefs or current expectations with respect to, among other things:
profitability, planned capital expenditures; estimates of oil and gas
production, estimates of future oil and gas prices; estimates of oil and gas
reserves; future financial condition or results of operations; and 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 the Company has made assumptions that it believes are
reasonable, the assumptions that support its 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. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Unless the context otherwise requires, references to the 'Company", "Mexco",
"we", "us" or "our" mean Mexco Energy Corporation and its consolidated
subsidiaries.
Liquidity and Capital Resources. Historically, the Company's sources of funding
have been from operating activities and bank financing.
The Company's focus is on increasing profit margins while concentrating on
obtaining gas reserves with low cost operations by acquiring and developing
primarily gas properties with potential for long-lived production.
For the first three months of fiscal 2006, cash flow from operations was
$352,048 compared to $304,578 for the first three months of fiscal 2005. The
increase was primarily due to an increase in net income. The cash flow from
operations for the first three months of fiscal 2006 included the effects of a
decrease in accounts receivable and an increase in accounts payable and accrued
expenses. Cash of $191,590 was used for additions to property and equipment and
cash of $175,000 was used to pay on the line of credit. Accordingly, net cash
increased $3,815.
Through June 30, 2005, we have reviewed a number of possible projects in Russia.
We established a long-term investment in GazTex, LLC for our capital costs of
these projects of $282,126. Any projects reviewed that we have decided not to
continue studying or develop have been expensed. We expensed approximately
$38,000 for the first quarter of fiscal 2006 related to Russian projects. No
costs were expensed during the first quarter of fiscal 2005.
page 9
In February 2005, we purchased a mineral interest in Devon's Aycock Gas Unit
containing 160 acres for approximately $56,000. The unit currently has one
producing well with plans to drill two additional wells in 2006. This unit is
located in Freestone County, Texas where the Company has purchased other royalty
interests.
Effective February 2005, we purchased for $550,000 partially developed royalty
interests primarily located in Freestone and Limestone Counties, Texas and
operated by Anadarko Petroleum, XTO, and Devon Energy. These properties contain
75 producing wells and an additional nine permitted and/or drilling wells in the
Cotton Valley formation. This acreage contains approximately 83 potential
undeveloped locations, which are principally Cotton Valley infill wells.
We continue to focus our efforts on the acquisition of royalties in areas with
significant development potential.
We are reviewing several other 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 discussed below.
At June 30, 2005, the Company had a working capital deficit of approximately
$1,458,603 compared to a working capital of approximately $376,478 at March 31,
2005, a decrease of $1,835,081 due to the current classification of the
long-term debt.
Long-Term Debt. The Company has 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. Effective August 15, 2004, the credit
agreement was amended with a maturity date of April 1, 2006. On July 29, 2004,
the borrowing base was redetermined and set at $2,500,000 with no monthly
commitment reductions. As of June 30, 2005, the balance outstanding under this
agreement was $1,815,000. The borrowing base is currently being re-evaluated and
upon completion of the evaluation the note is expected to be extended. Amounts
borrowed under this agreement are collateralized by the common stock of the
Company's wholly owned subsidiary and all oil and gas properties. A letter of
credit for $50,000, in lieu of a plugging bond with the Texas Railroad
Commission covering the properties the Company operates, is also outstanding
under the facility. Interest under this agreement is payable monthly at prime
rate (6.00% and 4.00% at June 30, 2005 and 2004, respectively). This agreement
generally restricts the Company's ability to transfer assets or control of the
Company, incur debt, extend credit, change the nature of the Company's business,
substantially change management personnel or pay cash dividends. The balance
outstanding on the line of credit as of August 1, 2005 was $1,775,000.
The prices of natural gas and crude oil have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price have a significant
impact on the Company's 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 expenditures for the current fiscal year.
Results of Operations - Three Months Ended June 30, 2005 and 2004. Net income
increased from $102,702 for the quarter ended June 30, 2004 to $160,918 for the
quarter ended June 30, 2005, an increase of $58,216 or 57%.
Oil and gas sales increased from $674,995 for the first quarter of fiscal 2005
to $802,720 for the same period of fiscal 2006. This increase of 19% or $127,725
resulted from an increase in oil production and increases in both oil and gas
prices offset partially by a decrease in gas production. Average gas prices
increased from $5.08 per mcf for the first quarter of fiscal 2005 to $6.24 per
mcf for the same period of fiscal 2006, while average oil prices increased from
$36.19 per bbl for the first quarter of fiscal 2005 to $48.37 for the same
period of fiscal 2006. Oil and gas production quantities were 3,867 barrels
("bbls") and 105,347 thousand cubic feet ("mcf") for the first quarter of fiscal
2005 and 4,250 bbls and 95,722 mcf for the same period of fiscal 2006, an
increase of 10% in oil production, partially due to the addition of certain oil
producing interests acquired during the fourth quarter of fiscal 2005. Gas
production decreased 9% as a result of natural decline.
Production costs decreased from $191,738 for the first quarter of fiscal 2005 to
$176,445 for the same period of fiscal 2006. This was the result of decreased
repairs to operated wells during the quarter partially offset by increased
production taxes due to the increase in oil and gas sales.
page 10
General and administrative expenses increased 19% from $164,419 for the first
quarter of fiscal 2005 to $195,403 for the same period of fiscal 2006. This is
primarily the result of an increase in consulting services related to our
Russian activities. These expenses were approximately $38,000 for the quarter.
Depreciation, depletion and amortization based on production and other methods
decreased 9%, from $152,772 for the first quarter of fiscal 2005 to $138,679 for
the same period of fiscal 2006 primarily due to a decrease in production.
Interest expense increased 78% from $16,843 for the first quarter of fiscal 2005
to $29,982 for the same period of fiscal 2006, due to increased borrowings and
increased interest rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary sources of market risk for the Company include fluctuations in
commodity prices and interest rate fluctuations. At June 30, 2005, the Company
had not entered into any hedge arrangements, commodity swap agreements,
commodity futures, options or other similar agreements relating to crude oil and
natural gas.
At June 30, 2005, the Company had an outstanding loan balance of $1,815,000
under its $5.0 million revolving credit agreement, which bears interest at the
prime rate, which varies from time to time. If the interest rate on the
Company's bank debt increases or decreases by one percentage point, the
Company's annual pretax income would change by $18,150, based on the outstanding
balance at June 30, 2005.
Credit Risk. Credit risk is the risk of loss as a result of nonperformance by
other parties of their contractual obligations. The Company's primary credit
risk is related to oil and gas production sold to various purchasers and the
receivables generally are uncollateralized. At June 30, 2005, the Company's
largest credit risk associated with any single purchaser was $68,592. The
Company has not experienced any significant credit losses.
Volatility of Oil and Gas Prices. The Company's 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 commodity prices are subject to wide
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 exporting countries, weather
conditions, the price and availability of alternative fuels, and overall
economic conditions, both foreign and domestic. The Company cannot predict
future oil and gas prices with any degree of certainty. Sustained weakness in
oil and gas prices may adversely affect the Company's ability to obtain capital
for the Company's exploration and development activities and may require a
reduction in the carrying value of the Company's oil and gas properties.
Similarly, an improvement in oil and gas prices can have a favorable impact on
the Company's financial condition, results of operations and capital resources.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. At the end of the period covered by this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that its disclosure
controls and procedures are effective.
No changes in the Company's internal control over financial reporting occurred
during the Current Quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
We are a defendant in a lawsuit that has arisen in the ordinary course
of business related to the oil and gas leases on the Campbell 15-1 well
in Hemphill County, Texas. While the outcome of this lawsuit cannot be
predicted with certainty, management does not expect this lawsuit to
have a material adverse effect on our consolidated financial condition
or results of operations.
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. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None.
Exhibits
31.1 Certification of the Chief Executive Officer of Mexco Energy Corporation
31.2 Certification of the Chief Financial Officer of Mexco Energy Corporation
32.1 Certification by the Chief Executive Officer of Mexco Energy Corporation
pursuant to 18 U.S.C. ss.1350
32.2 Certification by the Chief Financial Officer of Mexco Energy Corporation
pursuant to 18 U.S.C. ss.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)
Dated: August 11, 2005 /s/ Nicholas C. Taylor
------------------------------------------------
Nicholas C. Taylor
President
Dated: August 11, 2005 /s/ Tamala L. McComic
------------------------------------------------
Tamala L. McComic
Vice President, Treasurer and Assistant
Secretary
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