10-Q 1 form10-q.htm
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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 June 30, 2024

 

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)

 

Colorado   84-0627918
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification Number)

 

415 West Wall Street, Suite 475    
Midland, Texas   79701
(Address of principal executive offices)   (Zip code)

 

(432) 682-1119

(Registrant’s telephone number, including area code)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.50 per share   MXC   NYSE American

 

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 every Interactive Data File required to be submitted 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 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.

 

Large Accelerated Filer ☐   Accelerated Filer ☐
Non-Accelerated Filer   Smaller reporting company
Emerging growth company    

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.50 par value, as of August 8, 2024 was 2,085,443.

 

 

 

 
 

 

MEXCO ENERGY CORPORATION

 

Table of Contents

 

      Page
PART I. FINANCIAL INFORMATION  
   
  Item 1. Financial Statements 3
       
    Consolidated Balance Sheets as of June 30, 2024 (Unaudited) and March 31, 2024 3
       
   

Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2024 and June 30, 2023

4
       
    Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three months ended June 30, 2024 and June 30, 2023 5
       
   

Consolidated Statements of Cash Flows (Unaudited) for the three months ended June 30, 2024 and June 30, 2023

6
       
    Notes to Consolidated Financial Statements (Unaudited) 7
       
  Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
       
  Item 4. Controls and Procedures 16
       
PART II. OTHER INFORMATION  
   
  Item 1. Legal Proceedings 17
       
  Item 1A. Risk Factors 17
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
       
  Item 6. Exhibits 17
       
SIGNATURES 18
   
CERTIFICATIONS

 

Page 2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

   June 30,   March 31, 
   2024   2024 
   (Unaudited)     
ASSETS         
Current assets          
Cash and cash equivalents  $2,514,715   $2,473,484 
Accounts receivable:          
Oil and natural gas sales   955,899    1,001,709 
Trade   9,955    9,186 
Prepaid drilling   23,066    148,748 
Prepaid costs and expenses   51,447    56,193 
Total current assets   3,555,082    3,689,320 
           
Property and equipment, at cost          
Oil and gas properties, using the full cost method   48,930,971    48,304,585 
Other   121,926    121,926 
Accumulated depreciation, depletion and amortization   (34,724,533)   (34,184,837)
Property and equipment, net   14,328,364    14,241,674 
Investments – cost basis   1,300,000    1,100,000 
Operating lease, right-of-use asset   162,911    19,263 
Other noncurrent assets   7,522    8,597 
Total assets  $19,353,879   $19,058,854 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $266,512   $221,603 
Income tax payable   201,159    189,254 
Operating lease liability, current   48,711    19,263 
Total current liabilities   516,382    430,120 
Long-term liabilities          
Operating lease liability, long-term   114,200    - 
Asset retirement obligations   685,274    688,808 
Deferred income tax liabilities   386,276    311,661 
Total long-term liabilities   1,185,750    1,000,469 
Total liabilities   1,702,132    1,430,589 
           
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; 2,239,283 and 2,226,916 shares issued; and, 2,090,000 and 2,091,399 shares outstanding  as of June 30, 2024 and March 31, 2024, respectively   1,119,641    1,113,458 
Additional paid-in capital   8,691,753    8,567,856 
Retained earnings   9,204,520    9,122,481 
Treasury stock, at cost (149,283 and 135,517 shares, respectively)   (1,364,167)   (1,175,530)
Total stockholders’ equity   17,651,747    17,628,265 
Total liabilities and stockholders’ equity  $19,353,879   $19,058,854 

 

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)

 

   2024   2023 
         
Operating revenues:          
Oil sales  $1,510,304   $1,429,678 
Natural gas sales   177,752    285,412 
Other   39,779    33,329 
Total operating revenues   1,727,835    1,748,419 
           
Operating expenses:          
Production   437,420    349,407 
Accretion of asset retirement obligations   7,711    7,356 
Depreciation, depletion and amortization   539,697    486,186 
General and administrative   367,045    340,969 
Total operating expenses   1,351,873    1,183,918 
           
Operating income   375,962    564,501 
           
Other income (expense):          
Interest income   22,746    23,695 
Interest expense   (1,083)   (1,081)
Net other income   21,663    22,614 
           
Income before provision for income taxes   397,625    587,115 
           
Income tax expense:          
Current    31,971    32,818 
Deferred   74,615    88,683 
Total income tax expense   106,586    121,501 
           
Net income  $291,039   $465,614 
           
Income per common share:          
Basic:  $0.14   $0.22 
Diluted:  $0.14   $0.21 
Weighted average common shares outstanding:          
Basic:   2,090,786    2,136,165 
Diluted:   2,135,421    2,182,800 

 

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

 

Page 4

 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

   Common Stock Par Value  

Additional

Paid-In Capital

   Retained Earnings   Treasury Stock   Total Stockholders’ Equity 
                     
Balance at April 1, 2024  $1,113,458   $8,567,856   $9,122,481   $(1,175,530)  $17,628,265 
Net income   -    -    291,039    -    291,039 
Dividends paid   -    -    (209,000)   -    (209,000)
Issuance of stock through options exercised   6,183    71,458              77,641 
Purchase of stock   -    -    -    (188,637)   (188,637)
Stock based compensation   -    52,439    -    -    52,439 
Balance at June 30, 2024  $1,119,641   $8,691,753   $9,204,520   $(1,364,167)  $17,651,747 

 

   Common Stock Par Value  

Additional

Paid-In Capital

   Retained Earnings   Treasury Stock   Total Stockholders’ Equity 
                     
Balance at April 1, 2023  $1,110,708   $8,321,145   $7,991,129   $(590,495)  $16,832,487 
Net income   -    -    465,614    -    465,614 
Dividends paid   -    -    (213,600)   -    (213,600)
Issuance of stock through options exercised   250    2,712    -    -    2,962 
Stock based compensation   -    54,975    -    -    54,975 
Balance at June 30, 2023  $1,110,958   $8,378,832   $8,243,143   $(590,495)  $17,142,438 
                         
SHARE ACTIVITY               
                          
Common stock shares, issued:                         
Balance at April 1, 2024        2,226,916                
Issued        12,367                
Balance at June 30, 2024        2,239,283                
                          
Common stock shares, held in treasury:                         
Balance at April 1, 2024        (135,517)               
Acquisitions        (13,766)               
Balance at June 30, 2024        (149,283)               
                          
Common stock shares, outstanding  at June 30, 2024        2,090,000                

 

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

 

Page 5

 

 

Mexco Energy Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended June 30,

(Unaudited)

 

   2024   2023 
Cash flows from operating activities:          
Net income  $291,039   $465,614 
Adjustments to reconcile net income to net cash provided by operating activities:          
Deferred income tax expense   74,615    88,683 
Stock-based compensation   52,439    54,975 
Depreciation, depletion and amortization   539,697    486,186 
Accretion of asset retirement obligations   7,711    7,356 
Amortization of debt issuance costs   1,075    1,081 
Changes in operating assets and liabilities          
Decrease in accounts receivable   45,041    469,846 
Decrease in prepaid expenses   4,747    12,528 
(Increase) decrease in right-of-use asset   (143,648)   13,894 
Increase in accounts payable and accrued expenses   61,874    32,111 
Settlement of asset retirement obligations   (11,529)   (2,185)
Increase in income taxes payable   11,905    - 
(Increase) decrease in operating lease liability   143,648    (13,894)
Net cash provided by operating activities   1,078,614    1,616,195 
           
Cash flows from investing activities:          
Additions to oil and gas properties   (517,387)   (542,840)
Investments in limited liability companies at cost   (200,000)   - 
Proceeds from sale of oil and gas properties and equipment   -    278,749 
Net cash used in investing activities   (717,387)   (264,091)
           
Cash flows from financing activities:          
Proceeds from exercise of stock options   77,641    2,962 
Dividends paid   (209,000)   (213,600)
Acquisition of treasury stock   (188,637)   - 
Debt issuance costs   -    (750)
Net cash used in financing activities   (319,996)   (211,388)
           
Net increase in cash and cash equivalents   41,231    1,140,716 
           
Cash and cash equivalents at beginning of period   2,473,484    2,235,771 
           
Cash and cash equivalents at end of period  $2,514,715   $3,376,487 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $9   $- 
Accrued capital expenditures included in accounts payable  $4,727   $4,487 
           
Non-cash investing and financing activities:          
Asset retirement obligations  $1,130   $1,080 

 

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

 

Page 6

 

 

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 acquisition, exploration, development and production of crude oil, natural gas, 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 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 consolidated 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 consolidated 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 June 30, 2024, and the results of its operations and cash flows for the interim periods ended June 30, 2024 and 2023. The consolidated financial statements as of June 30, 2024 and for the three-month periods ended June 30, 2024 and 2023 are unaudited. The consolidated balance sheet as of March 31, 2024 was derived from the audited balance sheet filed in the Company’s 2024 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 3% in limited liability companies at cost. The Company has no control of the limited liability companies. 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.

 

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 on the consolidated balance sheets with the current portion being included in the accounts payable and other accrued expenses.

 

Page 7

 

 

The following table provides a rollforward of the AROs for the first three months of fiscal 2025:

 

      
Carrying amount of asset retirement obligations as of April 1, 2024  $718,808 
Liabilities incurred   1,130 
Liabilities settled   (12,375)
Accretion expense   7,711 
Carrying amount of asset retirement obligations as of June 30, 2024   715,274 
Less: Current portion   30,000 
Non-Current asset retirement obligation  $685,274 

 

4. 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. On March 28, 2023, the Agreement was amended to extend the maturity date to March 28, 2026.

 

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 (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 commitment. The unused commitment fee is payable quarterly in arrears on the last day of each calendar quarter. As of June 30, 2024, 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, 2026. Upon closing the second amendment to the Agreement, the Company paid a loan origination fee of $9,000 plus legal and recording expenses totaling $12,950, which were 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 quarter.

 

In addition, this Agreement prohibits the Company from paying cash dividends on its common stock without prior written permission of WTNB. The Company obtained written permission from WTNB prior to declaring the regular annual dividend on April 30, 2024 as discussed in Note 10. 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 credit facility as of June 30, 2024.

 

5. Stock-based Compensation

 

The Company recognized compensation expense of $52,439 and $54,975 related to vesting stock options in general and administrative expense in the Consolidated Statements of Operations for the first quarter of fiscal 2025 and 2024, respectively. The total cost related to non-vested awards not yet recognized at June 30, 2024 totals $433,373, which is expected to be recognized over a weighted average of 2.12 years.

 

During the three months ended June 30, 2024, no stock options were granted. During the three months ended June 30, 2023, the Compensation Committee of the Board of Directors approved and the Company granted 32,000 stock options exercisable at $12.68 per share with an estimated fair value of $279,360. 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.

 

Page 8

 

 

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 three months ended June 30, 2024 and 2023. All such amounts represent the weighted average amounts.

 

   Three Months Ended 
   June 30 
   2024   2023 
Grant-date fair value   -   $8.73 
Volatility factor   -    56.5%
Dividend yield   -    - 
Risk-free interest rate   -    3.44%
Expected term (in years)   -    6.25 

 

The following table is a summary of stock options activity for the three months ended June 30, 2024:

 

   Number of Shares   Weighted Average Exercise Price Per Share   Weighted Aggregate Average Remaining Contract Life
in Years
   Intrinsic Value 
Outstanding at April 1, 2024   165,750   $9.36    6.62   $103,275 
Granted   -    -           
Exercised   (12,367)   6.28           
Forfeited or Expired   (1,875)   14.83           
Outstanding at June 30, 2024   151,508   $9.54    6.74   $269,604 
                     
Vested at June 30, 2024   91,133   $6.82    5.82   $409,989 
Exercisable at June 30, 2024   91,133   $6.82    5.82   $409,989 

 

During the three months ended June 30, 2024, stock options covering 12,367 shares were exercised with a total intrinsic value of $92,316. The Company received proceeds of $77,641 from these exercises. During the three months ended June 30, 2023, stock options covering 500 shares were exercised with a total intrinsic value of $2,416. The Company received proceeds of $2,962 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, 2024, 1,875 unvested stock options were forfeited due to the resignation of an employee. During the three months ended June 30, 2023, there were no stock options forfeited or expired.

 

Outstanding options at June 30, 2024 expire between September 2028 and April 2033 and have exercise prices ranging from $3.34 to $18.05.

 

6. Leases

 

The Company leases approximately 4,160 rentable square feet of office space from an unaffiliated third party for our corporate office located in Midland, Texas. This includes 1,112 square feet of office space shared with and reimbursed by our 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. In June 2024, the Company agreed to extend its lease at a flat (unescalated) rate for another 36 months. The amended lease now expires on July 31, 2027.

 

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 of the renewal was 9%. 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.

 

Page 9

 

 

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

 

   June 30, 2024 
Assets     
Operating lease right-of-use asset, beginning balance  $19,263 
Current period amortization   (14,425)
Lease extension   158,073 
Total operating lease right-of-use asset  $162,911 
      
Liabilities     
Operating lease liability, current  $48,711 
Operating lease liability, long term   114,200 
Total lease liabilities  $162,911 

 

Future minimum lease payments as of June 30, 2024 under non-cancellable operating leases are as follows:

 

   Lease Obligation 
Fiscal Year Ended March 31, 2025  $45,066 
Fiscal Year Ended March 31, 2026   60,320 
Fiscal Year Ended March 31, 2027   60,320 
Fiscal Year Ended March 31, 2028   20,107 
      
Total lease payments  $185,813 
Less: imputed interest   (22,902)
Operating lease liability   162,911 
Less: operating lease liability, current   (48,711)
Operating lease liability, long term  $114,200 

 

Net cash paid for our operating lease for the three months ended June 30, 2024 and 2023 was $10,667. Rent expense, less sublease income of $3,893 is included in general and administrative expenses.

 

7. Income Taxes

 

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”). The IRA 2022, among other tax provisions, imposes a 15% corporate alternative minimum tax on corporations with book financial statement income in excess of $1.0 billion, effective for tax years beginning after December 31, 2022. The IRA 2022 also establishes a 1% excise tax on stock repurchases made by publicly traded U.S. corporations, effective for stock repurchases in excess of an annual limit of $1.0 million after December 31, 2022. The IRA 2022 did not impact the Company’s current year tax provision or the Company’s financial statements.

 

The income tax provision consists of the following for the three months ended June 30, 2024 and 2023:

 

   2024   2023 
   Three Months Ended 
   June 30 
   2024   2023 
Current income tax expense:          
Federal  $11,905   $- 
State   20,066    32,818 
Total current income tax expense   31,971    32,818 
Deferred income tax expense:          
Federal   74,615    88,683 
State   -    - 
Total deferred income tax expense   74,615    88,683 
Total income tax expense:  $106,586   $121,501 

 

Federal income tax for the three months ended June 30, 2024 was $86,520. Federal income tax for the three months ended June 30, 2023 was $88,683.

 

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A reconciliation of the provision for income taxes to income taxes computed using the federal statutory rate for the three months ended June 30 follows:

 

   2024   2023 
Income tax expense   $106,586   $121,501 
Effective income tax rate (1)   26.8%   20.7%

 

  (1) The federal statutory rate was 21% for three months ended June 30, 2024 and 2023.

 

Total income tax expense from continuing operations for the three months ended June 30, 2024 and 2023 differed from amounts computed by applying the U.S. federal statutory tax rate to pre-tax income primarily due to state income taxes, net of federal benefit, and the impact of permanent differences between book and taxable income.

 

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 quarters ended June 30, 2024 and 2023 was $4,038 and $9,382, 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 June 30, 2024 and 2023 were $3,893.

 

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 per share for the three-month periods ended June 30, 2024 and 2023.

 

   2024   2023 
Net income  $291,039   $465,614 
           
Shares outstanding:          
Weighted average common shares outstanding – basic   2,090,786    2,136,165 
Effect of the assumed exercise of dilutive stock options   44,635    46,635 
Weighted average common shares outstanding – dilutive   2,135,421    2,182,800 
Income per common share:          
Basic  $0.14   $0.22 
Diluted  $0.14   $0.21 

 

For the three months ended June 30, 2024, 61,125 shares relating to stock options were excluded from the computation of diluted net income because their inclusion would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $15.34 at June 30, 2024. For the three months ended June 30, 2023, 63,000 shares relating to stock options were excluded from the computation of diluted net income because their inclusion would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $15.32 at June 30, 2023.

 

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10. Stockholders’ Equity

 

In April 2024, the Board of Directors authorized the use of up to $1,000,000 to repurchase shares of the Company’s common stock, par value $0.50, for the treasury account. This program does not have an expiration date and may be modified, suspended or terminated at any time by the Board. Under the repurchase program, shares of common stock may be purchased from time to time through open market purchases or other transactions. The amount and timing of repurchases will be subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance and other conditions. Repurchases may also be made from time-to-time in connection with the settlement our share-based compensation awards. Repurchases will be funded from cash flow.

 

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”). The IRA 2022, among other tax provisions, establishes a 1% excise tax on stock repurchases made by publicly traded U.S. corporations, effective for stock repurchases in excess of an annual limit of $1,000,000 after December 31, 2022.

 

During the three months ended June 30, 2024, the Company repurchased 13,766 shares for the treasury account at an aggregate cost of $188,637, an average price of $13.70 per share. During the three months ended June 30, 2023, there were no shares of common stock repurchased for the treasury account. Subsequently, in July 2024, the Company repurchased 4,557 shares for the treasury at an aggregate cost of $53,684.

 

On April 30, 2024, the Board of Directors declared a regular annual dividend of $0.10 per common share. The Company paid the dividend of $209,000 on June 4, 2024 to the stockholders of record at the close of business on May 21, 2024. On April 10, 2023, the Board of Directors declared a special dividend of $0.10 per common share. The Company paid the special dividend of $213,600 on May 15, 2023 to the stockholders of record at the close of business on May 1, 2023. The Company can provide no assurance that dividends will be declared in the future or as to the amount of any future dividend.

 

Dividends declared by the Board and stock repurchased during the period are presented in the Company’s consolidated statements of changes in stockholders’ equity as dividends paid and purchases of treasury stock, respectively. Dividends paid and stock repurchased during the period are presented as cash used in financing activities in the Company’s consolidated statements of cash flows. Stock repurchases are included as treasury stock in the consolidated balance sheets.

 

11. Subsequent Events

 

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.

 

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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 credit facility. We do not have any delivery commitments to provide a fixed and determinable quantity of our oil and gas under any existing contract or agreement.

 

Our long-term strategy is on increasing profit margins while concentrating on obtaining reserves with low-cost operations by acquiring and developing oil and gas properties with potential for long-lived production. We focus our efforts on the acquisition of royalty and working interests and non-operated properties in areas with significant development potential.

 

At June 30, 2024, we had working capital of $3,038,700 compared to working capital of $3,259,200 at March 31, 2024, a decrease of $220,500 for the reasons set forth below.

 

Cash Flows

 

Changes in the net funds provided by or (used in) each of our operating, investing and financing activities are set forth in the table below:

 

   For the Three Months Ended
June 30,
     
   2024   2023   Change 
Net cash provided by operating activities  $1,078,614   $1,616,195   $(537,581)
Net cash used in investing activities  $(717,387)  $(264,091)  $453,296 
Net cash used in financing activities  $(319,996)  $(211,388)  $108,608 

 

Cash Flow Provided by Operating Activities. Cash flow from operating activities is primarily derived from the production of our crude oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. Cash flow provided by our operating activities for the three months ended June 30, 2024 was $1,078,614 in comparison to $1,616,195 for the three months ended June 30, 2023. This decrease of $537,581 in our cash flow from operating activities consisted of an increase in our non-cash expenses of $51,324; a decrease in our accounts receivable of $424,805; an increase of $41,668 in our accounts payable and accrued expenses; a decrease of $14,068 in deferred income tax expense; and, a decrease in our net income for the current quarter of $174,575. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.

 

Our expenditures in operating activities consist primarily of drilling expenses, production expenses and engineering services. Our expenses also consist of employee compensation, accounting, insurance and other general and administrative expenses that we have incurred in order to address normal and necessary business activities of a public company in the crude oil and natural gas production industry.

 

Cash Flow Used in Investing Activities. Cash flow from investing activities is derived from changes in oil and gas property balances. For the three months ended June 30, 2024, we had net cash of $517,387 used for additions to oil and gas properties and a $200,000 investment in a limited liability company compared to $264,091 for the three months ended June 30, 2023.

 

Cash Flow Provided by Financing Activities. Cash flow from financing activities is derived from our changes in long-term debt and in equity account balances. Net cash flow used in our financing activities was $319,996 for the three months ended June 30, 2024 compared to cash flow provided by our financing activities of $211,388 for the three months ended June 30, 2023. During the three months ended June 30, 2024, we expended $209,000 to pay the regular annual dividend, expended $188,637 to purchase 13,766 shares of our stock for the treasury account, and received proceeds of $77,641 from the exercise of employee stock options. During the three months ended June 30, 2023, we expended $213,600 to pay the special dividend.

 

Accordingly, net cash increased $41,231, leaving cash and cash equivalents on hand of $2,514,715 as of June 30, 2024.

 

Oil and Natural Gas Property Development

 

New Participations in Fiscal 2025. The Company currently plans to participate in the drilling and completion of 30 horizontal wells at an estimated cost of approximately $1,900,000 for the fiscal year ending March 31, 2025. Twenty-six of these wells are in the Delaware Basin located in the western portion of the Permian Basin in Lea and Eddy Counties, New Mexico. The remaining 4 wells are in Reagan County, Texas.

 

In April 2024, Mexco expended approximately $80,000 to participate in the drilling of five horizontal wells in the Bone Spring formation of the Delaware Basin in Lea County, New Mexico.

 

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In April 2024, Mexco expended approximately $127,800 to drill four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin in Lea County, New Mexico.

 

In October 2022, the Company made an approximately 2% equity investment commitment in a limited liability company amounting to $2,000,000 of which $1,000,000 has been funded as of June 30, 2024. The limited liability company is capitalized at approximately $100 million to purchase mineral interests in the Utica and Marcellus areas in the state of Ohio. Subsequently, in July 2024, the Company funded another $200,000 toward this investment. To date, this LLC has returned $98,637 or 8% of the total investment.

 

Completion of Wells Drilled in Fiscal 2024. The Company also expects to expend approximately $300,000 in the completion of 19 horizontal wells in which the Company participated during fiscal 2024.

 

The Company expended approximately $90,000 for the completion costs of two horizontial wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico that the Company participated in drilling during fiscal 2024. Mexco’s working interest in these wells is .53%. Subsequently, in July 2024, these wells were completed with initial average production rates of 1,402 barrels of oil, 2,009 barrels of water and 2,168,000 cubic feet of gas per day, or 1,763 BOE per day.

 

Five horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico in which the Company participated during fiscal 2024 were completed in April 2024 with initial average production rates of 732 barrels of oil, 1,481 barrels of water and 657,000 cubic feet of gas per day, or 842 of oil equivalent per day. Mexco’s working interest in these wells is approximately 1.16%.

 

A horizontal well in the Penn Shale formation of the Delaware Basin in Lea County, New Mexico was completed in May 2024 with the initial production rate of 964 barrels of oil, 2,441 barrels of water and 626,000 cubic feet of gas per day, or 1,068 of oil equivalent per day. Mexco’s working interest in this well is .165%.

 

Subsequently, in July 2024, the Company expended approximately $21,000 for the completion costs of four horizontial wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico that the Company participated in drilling during fiscal 2024. Mexco’s working interest in these wells is .45%.

 

In May 2024, Mexco expended approximately $27,000 for additional drilling costs in an exploratory well in the Fusselman Formation of Irion County, Texas. This well was later determined to be noncommercial and will be plugged and abandoned.

 

Acquisitions. In April 2024, the Company acquired small royalty (mineral) interests in 21 wells operated by Anadarko Petroleum Corporation and Cimarex Energy Company and located in Reeves County, Texas for a purchase price of $158,000.

 

We are participating in other projects and are reviewing projects in which we may participate. The cost of such projects would be funded, to the extent possible, from existing cash balances and cash flow from operations. The remainder may be funded through borrowings on the credit facility and, if appropriate, sales of non-core properties.

 

Crude oil and natural gas prices generally remained volatile during the last year. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, in the last twelve months, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $64.59 per bbl in December 2023 to a high of $89.66 per bbl in September 2023. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $1.25 per MMBtu in March 2024 to a high of $3.34 per MMBtu in October 2023.

 

On June 30, 2024, the WTI posted price for crude oil was $77.52 and the Henry Hub spot price for natural gas was $2.42 per MMBtu. See Results of Operations below for realized prices.

 

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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 June 30, 2024:

 

   Payments due in: 
   Total   less than 1 year   1 - 3 years   over 3 years 
Contractual obligations:                    
Leases (1)  $185,813   $60,146   $125,667   $- 

 

  (1) The lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a 38 month lease agreement effective May 15, 2018, extended another 36 months to July 31, 2024 and extended another 36 to July 31, 2027. Of this total obligation for the remainder of the lease, our majority shareholder will pay $10,625 less than 1 year and $21,198 1-3 years for his portion of the shared office space.

 

Results of Operations – Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023. For the quarter ended June 30, 2024, net income was $291,039 compared to net income of $465,614 for the quarter ended June 30, 2023. This was primarily the result of a decrease in operating revenues and an increase in operating expenses, which is further explained below.

 

Oil and gas sales. Revenue from oil and gas sales was $1,688,056 for the quarter ended June 30, 2024, a 2% decrease from $1,715,090 for the quarter ended June 30, 2023. This primarily resulted from a decrease in oil and gas production and a decrease in gas prices partially offset by an increase in oil prices. The decrease in the natural gas price was, in part, due to temporary pipeline constraints on certain properties and at certain times, prices were negative. The following table sets forth our oil and natural gas revenues, production quantities and average prices received during the three months ended June 30:

 

   2024   2023   % Difference 
Oil:               
Revenue  $1,510,304   $1,429,678    5.6%
Volume (bbls)   18,909    19,528    (3.2)%
Average Price (per bbl)  $79.87   $73.21    9.1%
                
Gas:               
Revenue  $177,752   $285,412    (37.7)%
Volume (mcf)   136,307    141,578    (3.7)%
Average Price (per mcf)  $1.30   $2.02    (35.6)%

 

Production and exploration. Production costs were $437,420 for the three months ended June 30, 2024, a 25% increase from $349,407 for the three months ended June 30, 2023. This increase is primarily the result of an increase in gathering, processing and transportation expenses as well as lease operating expenses on new wells in which we own a working interest.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) expense was $539,697 for the first quarter of fiscal 2025, an 11% increase from $486,186 for the first quarter of fiscal 2024, primarily due to a decrease in gas reserves and an increase in the full cost pool amortization base partially offset by a decrease in oil and gas production volumes and an increase in oil.

 

General and administrative expenses. General and administrative expenses were $367,045 for the three months ended June 30, 2024, an 8% increase from $340,969 for the three months ended June 30, 2023. This was primarily due to an increase in engineering and contract services.

 

Interest expense. Interest expense, which consisted of debt issuance costs, was $1,083 for the first quarter of fiscal 2025, an increase of 0.2% from $1,081 for the first quarter of fiscal 2024.

 

Income taxes. Federal income tax for the three months ended June 30, 2024 was $86,520. Federal income tax for the three months ended June 30, 2023 was $88,683. State income tax was $20,066 for the three months ended June 30, 2024, a 39% decrease from $32,818 for the three months ended June 30, 2023 due to the decrease in oil and natural gas sales in the State of New Mexico. The effective tax rate for state and federal taxes combined for the three months ended June 30, 2024 and 2023 was 27% and 21%, respectively.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The primary source of market risk for us includes fluctuations in commodity prices and interest rates. All of our financial instruments are for purposes other than trading.

 

Credit Risk. Credit risk is the risk of loss as a result of nonperformance by other parties of their contractual obligations. Our primary credit risk is related to oil and gas production sold to various purchasers and the receivables are generally not collateralized. At June 30, 2024, our largest credit risk associated with any single purchaser was $551,457 or 58% of our total oil and gas receivables. We have not experienced any significant credit losses.

 

Energy Price Risk. Our most significant market risk is the pricing applicable to our crude oil and natural gas production. Our financial condition, results of operations, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. Prices for oil and natural gas production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future.

 

Currently, prices for natural gas have been adversely effected by temporary pipeline capacity constraints primarily in the Permian Basin.

 

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 and consuming countries.

 

For example, in the last twelve months, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $64.59 per bbl in December 2023 to a high of $89.66 per bbl in September 2023. The Henry Hub Spot Market Price (“Henry Hub”) posted price for natural gas has ranged from a low of $1.25 per MMBtu in March 2024 to a high of $3.34 per MMBtu in October 2023. On June 30, 2024, the WTI posted price for crude oil was $77.52 and the Henry Hub posted price for natural gas was $2.42. 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 quarter ended June 30, 2024, our oil sales would have changed by $189,090. If the average gas price had increased or decreased by one dollar per mcf for the quarter ended June 30, 2024, our natural gas sales would have increased or decreased by $136,307.

 

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 June 30, 2024, 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 quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We may, from time to time, be a party to various proceedings and claims incidental to our business. While many of these matters involve inherent uncertainty, we believe that the amount of the liability, if any, ultimately incurred with respect to these proceedings and claims will not have a material adverse effect on our consolidated financial position as a whole or on our liquidity, capital resources or future results of operations.

 

Item 1A. Risk Factors

 

There have been no material changes to the information previously disclosed in Item 1A. “Risk Factors” in our 2024 Annual Report on Form 10-K.

 

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

 

c. Issuer Purchases of Equity Securities

 

The following table provides information related to repurchases of our common stock for the treasury account during the three months ended June 30, 2024:

 

   Total Number of Shares Purchased   Average Price Paid per Share   Total Number of Shares Purchased as Part of Publicly Announced Program   Approximate Dollar Value of Shares that May Yet be Purchased Under the Program 
April 1-30, 2024   13,766   $13.70    13,766   $811,363 
May 1-31, 2024   -    -    -   $811,363 
June 1-30, 2024   -    -    -   $811,363 

 

Item 6. 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 of the Chief Executive Officer and Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C. §1350
       
  101.INS   XBRL Instance Document
       
  101.SCH   XBRL Taxonomy Extension Schema Document
       
  101.CAL   XBRL Taxonomy Extenstion Calculation Linkbase Document
       
  101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
       
  101.LAB   XBRL Taxonomy Extension Label Linkbase Document
       
  101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
       
  104   Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

 

Page 17

 

 

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 8, 2024 /s/ Nicholas C. Taylor
  Nicholas C. Taylor
  Chairman of the Board and Chief Executive Officer
   
Dated: August 8, 2024 /s/ Tamala L. McComic
  Tamala L. McComic
  President, Chief Financial Officer, Treasurer and Assistant Secretary

 

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