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 September 30, 2006
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 of (IRS Employer
incorporation or organization) 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The number of shares outstanding of the registrant's common stock as of November
13, 2006 is 1,776,841.
MEXCO ENERGY CORPORATION
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of September 30, 2006
(Unaudited) and March 31, 2006 3
Consolidated Statements of Operations (Unaudited) for
the three months and six months ended September 30, 2006
and September 30, 2005 4
Consolidated Statements of Cash Flows (Unaudited) for
the six months ended September 30, 2006 and September 30, 2005 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION 14
---------------------------
Item 1. Legal Proceedings
Item 1A. Risk Factors
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 15
CERTIFICATIONS
Page 2
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2006 2006
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 120,439 $ 52,768
Accounts receivable:
Oil and gas sales 427,721 429,133
Trade 22,426 336
Related parties 139 73
Prepaid costs and expenses 39,472 75,576
------------ ------------
Total current assets 610,197 557,886
Investment in GazTex, LLC 20,509 20,509
Property and equipment, at cost
Oil and gas properties, using the full cost method
($ 0 and $121,418 excluded from amortization
as of September 30, 2006 and March 31, 2006, respectively) 19,122,094 18,947,532
Other 51,412 39,848
------------ ------------
19,173,506 18,987,380
Less accumulated depreciation,
depletion and amortization 10,894,902 10,587,451
------------ ------------
Property and equipment, net 8,278,604 8,399,929
------------ ------------
$ 8,909,310 $ 8,978,324
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade and accrued expenses $ 91,890 $ 118,125
Income tax payable 3,048 --
------------ ------------
Total current liabilities 94,938 118,125
Long-term debt 100,000 600,000
Asset retirement obligation 361,683 352,416
Deferred income tax liability 951,768 1,006,736
Minority interest 2,051 2,051
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;
1,810,366 shares issued 905,183 888,283
Additional paid-in capital 4,091,037 3,893,588
Retained earnings 2,620,525 2,262,700
Treasury stock, at cost (43,525 and 33,525 shares,
respectively) (217,875) (145,575)
------------ ------------
Total stockholders' equity 7,398,870 6,898,996
------------ ------------
$ 8,909,310 $ 8,978,324
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
Page 3
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
2006 2005 2006 2005
----------- ----------- ----------- -----------
Operating revenue:
Oil and gas sales $ 773,698 $ 933,915 $ 1,551,110 $ 1,736,635
Other 1,890 1,996 2,057 2,369
----------- ----------- ----------- -----------
Total operating revenues 775,588 935,911 1,553,167 1,739,004
Operating expenses:
Production 206,968 249,231 422,597 425,676
Accretion of asset retirement obligation 6,860 5,780 11,844 11,566
Depreciation, depletion, and amortization 156,921 138,043 307,450 276,722
General and administrative 174,919 180,079 436,412 375,482
----------- ----------- ----------- -----------
Total operating expenses 545,668 573,133 1,178,303 1,089,446
----------- ----------- ----------- -----------
Operating profit 229,920 362,778 374,864 649,558
Other income (expense):
Interest income 2,107 196 2,400 363
Interest expense (6,359) (26,891) (16,458) (56,874)
----------- ----------- ----------- -----------
Net other expense (4,252) (26,695) (14,058) (56,511)
----------- ----------- ----------- -----------
Earnings before income taxes and minority
interest 225,668 336,083 360,806 593,047
Income tax expense:
Current 22,539 67,501 62,784 141,943
Deferred 72,692 (12,799) (54,968) 12,630
----------- ----------- ----------- -----------
95,231 54,702 7,816 154,573
Income before minority interest 130,437 281,381 352,990 438,474
Minority interest in loss of subsidiary 97 4,342 4,835 8,167
----------- ----------- ----------- -----------
Net income $ 130,534 $ 285,723 $ 357,825 $ 446,641
=========== =========== =========== ===========
Net income per common share:
Basic: $ 0.07 $ 0.16 $ 0.21 $ 0.26
Diluted: $ 0.07 $ 0.15 $ 0.20 $ 0.24
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 Six Months Ended September 30,
(Unaudited)
2006 2005
--------- ---------
Cash flows from operating activities:
Net income $ 357,825 $ 446,641
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase (decrease) in deferred income taxes (54,968) 12,630
Stock-based compensation 55,598 9,748
Common stock issued to director 14,100 --
Depreciation, depletion and amortization 307,450 276,722
Accretion of asset retirement obligations 11,844 11,566
Minority interest in loss of subsidiary (4,835) (8,167)
Increase in accounts receivable (20,744) (124,735)
Decrease (increase) in prepaid expenses 36,105 (50,315)
Increase in income taxes payable 3,048 83,260
Increase (decrease) in accounts payable
and accrued expenses (14,860) 13,219
--------- ---------
Net cash provided by operating activities 690,563 670,569
Cash flows from investing activities:
Additions to oil and gas properties (213,213) (356,492)
Additions to other property and equipment (11,564) --
Proceeds from sale of oil and gas properties and equipment 24,700 14,533
--------- ---------
Net cash used in investing activities (200,077) (341,959)
Cash flows from financing activities:
Proceeds from exercise of stock options 104,650 --
Repurchase of stock (32,300) --
Reduction of long-term debt (500,000) (390,000)
Minority interest contributions 4,835 8,167
--------- ---------
Net cash used in financing activities (422,815) (381,833)
--------- ---------
Net increase (decrease) in cash and cash equivalents 67,671 (53,223)
Cash and cash equivalents at beginning of year 52,768 85,209
--------- ---------
Cash and cash equivalents at end of period $ 120,439 $ 31,986
========= =========
Interest paid $ 19,317 $ 60,770
Income taxes paid $ -- $ 58,683
Supplemental disclosure of non-cash financing activities:
Cashless exercise of stock options and repurchase
of treasury shares $ 40,000 --
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). 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 September 30, 2006, and the results of its operations and cash flows for the
interim periods ended September 30, 2006 and 2005. 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.
Estimates and Assumptions. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make informed judgments and estimates that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and affect the reported amounts of revenues and expenses during the
reporting period. Although management believes its estimates and assumptions are
reasonable, actual results may differ materially from those estimates.
Significant estimates affecting these financial statements include the estimated
quantities of proved oil and gas reserves, the related present value of
estimated future net cash flows and the future development, dismantlement and
abandonment costs.
Stock-based Compensation. On December 16, 2004, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123(R)"). Among other items, SFAS
123(R) eliminates the use of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and the intrinsic value
method of accounting for equity compensation and requires companies to recognize
the cost of employee services received in exchange for awards of equity
instruments based on the grant date fair value of those awards in their
financial statements. We elected to use the modified prospective method for
adoption, which requires compensation expense to be recorded for all unvested
stock options and other equity-based compensation beginning in the first quarter
of adoption. For all unvested options outstanding as of April 1, 2006 (the first
day of the Company's fiscal year), the previously measured but unrecognized
compensation expense based on the fair value at the original grant date, will be
recognized in our financial statements over the remaining vesting period. For
equity-based compensation awards granted or modified subsequent to April 1,
2006, compensation expense based on the fair value at the date of grant or
modification will be recognized in our financial statements over the vesting
period. The Company recognizes the fair value of stock-based compensation awards
as wages in the Consolidated Statements of Operations based on a graded-vesting
schedule over the vesting period. We utilize the Binomial option pricing model
to measure the fair value of stock options. Prior to the adoption of SFAS 123(R)
we followed the intrinsic value method in accordance with APB 25 to account for
employee stock-based compensation.
The adoption of SFAS 123(R) resulted in the recognition of compensation expense
of $21,497 or $.01 per share, and $34,101 or $.01 per share in General and
Administrative expense in the Consolidated Statements of Operations for the
three months and the six months ended September 30, 2006. In accordance with the
modified prospective application method of SFAS 123(R), prior period amounts
have not been restated to reflect the recognition of stock-based compensation
costs. The total cost related to non-vested awards not yet recognized at
September 30, 2006 totals approximately $210,636 which is expected to be
recognized over a weighted average of 2.01 years.
Page 6
In periods ending prior to April 1, 2006 the income tax benefits from the
exercise of stock options were classified as net cash provided by operating
activities pursuant to Emerging Issues Task Force Issue No. 00-15. However, for
periods beginning after April 1, 2006 pursuant to SFAS 123(R), the excess tax
benefits are required to be reported in net cash provided by financing
activities.
Prior to April 1, 2006, we accounted for our employee stock options utilizing
the intrinsic value method prescribed by APB 25 and related interpretations. The
following pro forma information, as required by SFAS 123(R), as amended by SFAS
148, presents net income and earnings per share information as if the stock
options issued since February 2, 1999 were accounted for using the fair value
method. The fair value of stock options issued for each year was estimated at
the date of grant using the Binomial option pricing model.
The following are pro forma net income and earnings per share for the three and
six months ended September 30, 2005, as if stock-based compensation had been
recorded at the estimated fair value of stock awards at the grant date, as
prescribed by SFAS No. 123, Accounting for Stock-Based Compensations:
Three Months Ended Six Months Ended
September 30 September 30
2005 2005
------------ ------------
Net income, as reported $ 285,723 $ 446,641
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax (13,196) (42,294)
------------ ------------
Net income, pro forma $ 272,527 $ 404,347
============ ============
Basic earnings per share:
As reported $ 0.16 $ 0.26
Pro forma $ 0.16 $ 0.23
Diluted earnings per share:
As reported $ 0.15 $ 0.24
Pro forma $ 0.14 $ 0.21
The Company adopted the 1997 Incentive Stock Plan during fiscal 1998 which
provides options to purchase 350,000 shares of authorized but unissued common
stock of the Company. The option price is the market value of the Company's
common stock at date of grant. Options are exercisable 25% annually from the
date of the grant and the options expire 10 years from the date of grant. The
1997 Plan provides that restricted stock awards may be granted with a condition
to attain a specified goal. The purchase price will be at least $5.00 per share
of restricted stock.
In fiscal 2005, the Company adopted the 2004 Incentive Stock Plan to replace,
modify and extend the termination date of the 1997 Incentive Stock Plan to
September 14, 2009. This new plan provides for the award of stock options up to
375,000 shares of which 125,000 may be the subject of stock grants without
restrictions and without payment by the recipient and stock awards of up to
125,000 shares with restrictions including payment for the shares and employment
of not less than three years from the date of the award. The terms of the stock
options are similar to those of the 1997 Plan except that the term of the Plan
is five years from the date of its adoption.
In accordance with both Plans, upon the exercise of stock options new shares
will be issued. The Company can repurchase shares exercised under these Plans
and anticipates repurchasing approximately 30,000 shares for the treasury
account during fiscal 2007. Through the six months ended September 30, 2006, the
Company repurchased 10,000 shares for the treasury at an aggregate cost of
$72,300. The Plan also provides for the granting of stock awards. During the
quarter ended September 30, 2006, the Company granted a stock award of 2,000
shares to a director of the Company.
Page 7
The fair value of each stock option is estimated on the date of grant using the
Binomial valuation model that uses the assumptions noted in the following table.
Because the Binomial valuation model incorporates ranges of assumptions for
inputs, those ranges are disclosed. Expected volatilities are based on
historical volatility of the Company's stock over the expected vesting term of
48 months and other factors. The Company uses historical data to estimate option
exercise and employee termination within the valuation model; separate groups of
individuals that have similar historical exercise behavior are considered
separately for valuation purposes. The expected term of options granted is
derived from the output of the option valuation model and represents the period
of time that options granted are expected to be outstanding; the range given
below results from certain groups of individuals exhibiting different behavior.
The risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant. As the
Company has never declared dividends, no dividend yield is used in the
calculation. Actual value realized, if any, is dependent on the future
performance of the Company's common stock and overall stock market conditions.
There is no assurance the value realized by an optionee will be at or near the
value estimated by the Binomial model.
Included in the following table is a summary of the grant-date fair value of
stock options granted and the related assumptions. All such amounts represent
the weighted average amounts for each period.
For the six months
ended September 30,
2006
-------
Grant-date fair value $ 5.15
Volatility factor 71.46%
Dividend yield --
Risk-free interest rate 5.07%
Expected term (in years) 5
No options were granted during the six months ended September 30, 2005.
No forfeiture rate is assumed for stock options granted to directors or
employees due to the forfeiture rate history for these types of awards. Option
awards are generally granted with an exercise price equal to the fair market
price of the Company's stock at the date of grant. For the quarter ended
September 30, 2006, 18,200 stock options were forfeited due to the termination
of consulting agreements with two of our consultants. The Company has no present
expectation for this to occur in the future on the options outstanding as of
September 30, 2006.
The following table is a summary of activity of stock options for the six months
ended September 30, 2006:
Weighted Average
Exercise Weighted Aggregate
Number of Price Average Contract Intrinsic
Shares Per Share Life in Years Value
--------- ---------------- ----------------- ----------
Outstanding at March 31, 2006 350,000 $ 5.89
Granted 35,000 8.24
Exercised (31,800) 4.55
Forfeited or Expired (18,200) 6.75
--------- ----------------
Outstanding at September 30, 2006 335,000 $ 6.22 4.46 $ 25,050
========= ================ ================= ==========
Exercisable at September 30, 2006 270,250 $ 5.93 4.19 $ 97,523
========= ================ ================= ==========
Outstanding options at September 30, 2006 expire between April 2008 and July
2014 and have exercise prices ranging from $4.00 to $8.24.
The following table summarizes information about options outstanding at
September 30, 2006:
Weighted Average Weighted Average Aggregate
Number of Exercise Price Remaining Contractual Intrinsic
Range of Exercise Prices Options Per Share Life in Years Value
------------------------ --------- ---------------- --------------------- ---------
$ 4.00 - 5.24 61,000 $ 4.00
5.25 - 6.49 109,000 5.60
6.50 - 7.74 100,000 7.07
7.75 - 8.24 65,000 8.01
-------- -----------
$ 4.00 - 8.24 335,000 $6.22 4.46 $ 25,050
======== =========== ============= =========
Page 8
The following table summarizes information about options exercisable at
September 30, 2006:
Weighted Average Aggregate
Number Exercise Price Intrinsic
Range of Exercise Prices Exercisable Per Share Value
------------------------ ----------- ----------------- ---------
$ 4.00 - 5.24 61,000 $ 4.00
5.25 - 6.49 94,250 5.53
6.50 - 7.74 85,000 7.11
7.75 - 8.24 30,000 7.75
---------- -----------
$ 4.00 - 8.24 270,250 $ 5.93 $ 97,523
========== =========== =========
Stockholders' Equity. The following is a summary of the changes in the Company's
common shares outstanding for the first half of 2006:
For the six months ended
September 30, 2006
------------------------
Shares outstanding, beginning of period 1,776,566
Exercise of stock options 31,800
Grant of stock awards 2,000
---------
Shares outstanding, end of period 1,810,366
=========
During the six months ended September 30, 2006, the Company repurchased 10,000
shares for the treasury at an aggregate cost of $72,300.
No changes were made to the common shares outstanding during the six months
ended September 30, 2005.
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 first six months of fiscal 2007:
Carrying amount of asset retirement obligations as of April 1, 2006 $ 372,956
Liabilities incurred 39,323
Liabilities settled (41,900)
Accretion expense 11,844
---------
Carrying amount of asset retirement obligations as of September 30, 2006 382,223
Less: Current portion 20,540
---------
Non-current asset retirement obligation $ 361,683
=========
The non-current portion of the asset retirement obligation, which is included on
the consolidated balance sheet, was $361,683 at September 30, 2006. The current
portion of the asset retirement obligation as of September 30, 2006 was $20,540
and is included on the consolidated balance sheet in accounts payable and other
accrued expenses. Accretion expense was $11,844 and $11,566 for the six months
ended September 30, 2006 and 2005, 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. For the quarter ended September 30, 2006, the Company
has decided not to pursue the project in Stark County, North Dakota due to the
high costs and risks related to this area. Prior to September 30, 2006, the
amount related to the project was being excluded from the full cost amortization
base. This amount has been added to the full cost amortization base during the
second quarter and is included in the amortization calculation therefore; no
costs are currently being excluded from the full cost amortization base.
Page 9
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) 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 and six month periods ended September 30, 2006
and 2005.
Three Months Ended Six Months Ended
September 30 September 30
2006 2005 2006 2005
--------- --------- --------- ---------
Weighted average number of
common shares outstanding 1,751,755 1,733,041 1,737,422 1,733,041
Incremental shares from the assumed
exercise of dilutive stock options 51,645 180,669 63,129 162,166
--------- --------- --------- ---------
Dilutive potential common shares 1,803,400 1,913,710 1,800,551 1,895,207
========= ========= ========= =========
Certain options to purchase shares of Mexco's common stock are excluded from the
dilution calculations because the options are antidilutive. During the
three-month and six-month periods ended September 30, 2006, 125,000 and 45,000
shares, respectively, were excluded from the diluted earnings per share
calculations. No options were excluded from the diluted earnings per share
calculations during the three-months and six-months ended September 30, 2005.
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 six months ended September 30, 2005 was 26%. The effective income tax rate
for the six months ended September 30, 2006 was 2% as a result of the decrease
of deferred income taxes due to a revision of an estimate of statutory depletion
and a net operating loss carryforward.
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. The investment balance of $20,509 represents the cash balance of
our investment in GaxTex, 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
six months ended September 30, 2006, the Company expensed approximately $48,000
in consulting costs for the evaluation of potential Russian projects. No further
expenses are expected in the foreseeable future.
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 September 26, 2006,
the borrowing base was redetermined and set at $4,225,000 bearing interest at
prime rate plus zero percent, per annum. As of September 30, 2006, the balance
outstanding under this agreement was $100,000 and matures on September 30, 2008.
Amounts borrowed under this agreement are collateralized by the common stock of
the Company's wholly owned subsidiary and substantially all of the Company's oil
and gas properties.
Recent Accounting Pronouncements. In June 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48). FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes in interim periods and income tax disclosures. This interpretation is
effective for the Company as of April 1, 2007. Management is currently
evaluating the impact of FIN 48 on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS 157"), which provides guidance for
using fair value to measure assets and liabilities. The pronouncement clarifies
(1) the extent to which companies measure assets and liabilities at fair value;
(2) the information used to measure fair value; and (3) the effect that fair
value measurements have on earnings. SFAS 157 will apply whenever another
standard requires (or permits) assets or liabilities to be measured at fair
value. SFAS 157 is effective as of the beginning of our 2009 fiscal year. The
Company does not expect the adoption of SFAS 157 to have a material impact on
its consolidated financial position or results of operations.
Page 10
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides guidance for quantifying and assessing
the materiality of misstatements of financial statements, including uncorrected
misstatements that were not material to prior years' financial statements. SAB
108 is effective for fiscal years ending after November 15, 2006. The Company
does not expect SAB 108 to have a material effect on its consolidated financial
statements and related disclosures.
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 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 our 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 we have
made assumptions that we believe are reasonable, the assumptions that support
our forward-looking statements are based upon information that is currently
available and is subject to change. All forward-looking statements in the Form
10-Q are qualified in their entirety by the cautionary statement contained in
this section. We do not undertake to update, revise or correct any of the
forward-looking information.
Liquidity and Capital Resources. Historically, our sources of funding have been
from operating activities and bank financing.
Our long term strategy is on increasing profit margins while concentrating on
obtaining reserves with low cost operations by acquiring and developing
primarily gas properties and secondarily oil properties with potential for
long-lived production.
For the first six months of fiscal 2007, cash flow from operations was $690,563
compared to $670,569 for the first six months of fiscal 2006. The cash flow from
operations for the first six months of fiscal 2007 included the effects of an
increase in accounts receivable and a decrease in prepaid expenses and accounts
payable and accrued expenses. Cash of $224,777 was used for additions to
property and equipment, cash of $32,300 was used for a stock repurchase for the
treasury account, cash of $500,000 was used to pay on the line of credit and
cash of $104,650 was received as proceeds from exercises of stock options.
Accordingly, net cash increased $67,671.
Through September 30, 2006, we reviewed a number of possible projects in Russia.
Any projects reviewed have been discontinued and expensed. We expensed
approximately $83,000 for the first six months of fiscal 2006 and $48,000 for
the first six months of fiscal 2007 related to Russian projects. No further
expenses are expected in the foreseeable future.
In September 2006, we purchased a wellbore for reentry in Roosevelt County, New
Mexico for approximately $25,000. We have spent approximately an additional
$170,000 on this well and are in the process of testing the well.
In October 2006, we purchased various royalty and working interests in
Freestone, Leon and Panola Counties, Texas containing approximately 21,950 gross
acres and 86 net acres for approximately $65,000.
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 September 30, 2006, we had working capital of approximately $515,259 compared
to working capital of $439,761 at March 31, 2006, an increase of $75,498 due to
an increase in cash and cash equivalents and a decrease in accounts payable and
accrued expenses.
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 our financial condition and liquidity. However, management is of the
opinion that cash flow from operations and funds available from financing will
be sufficient to provide for its working capital requirements and capital
expenditures for at least the next twelve months.
Page 11
Long-Term Debt. We have a revolving credit agreement with Bank of America, N.A.
("Bank"), which provides for a credit facility of $5,000,000, subject to a
borrowing base determination. On September 26, 2006, the borrowing base was
redetermined and set at $4,225,000 with no monthly commitment reductions. As of
September 30, 2006, the balance outstanding under this agreement was $100,000.
The borrowing base is evaluated annually, on or about August 1. Amounts borrowed
under this agreement are collateralized by the common stock of our 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 we operate, is also outstanding under the facility. Interest under
this agreement is payable monthly at prime rate (8.25% and 6.75% at September
30, 2006 and 2005, respectively). This agreement generally restricts our ability
to transfer assets or control of the Company, incur debt, extend credit, change
the nature of our business, substantially change management personnel or pay
cash dividends.
Results of Operations - Three Months Ended September 30, 2006 and 2005. Net
income decreased from $285,723 for the quarter ended September 30, 2005 to
$130,534 for the quarter ended September 30, 2006, a decrease of $155,189 or
54%.
Oil and gas sales decreased from $933,915 for the second quarter of fiscal 2006
to $773,701 for the same period of fiscal 2007. This decrease of 17% or $160,214
resulted from a decrease in gas price and oil and gas production offset
partially by an increase in oil price. Average gas prices decreased from $7.25
per mcf for the second quarter of fiscal 2006 to $5.76 per mcf for the same
period of fiscal 2007, while average oil prices increased from $58.59 per bbl
for the second quarter of fiscal 2006 to $66.09 for the same period of fiscal
2007. Oil and gas production quantities were 4,227 barrels ("bbls") and 94,609
thousand cubic feet ("mcf") for the second quarter of fiscal 2006 and 3,664 bbls
and 88,442 mcf for the same period of fiscal 2007, a natural decline decrease of
13% in oil production and 7% in gas production.
Production costs decreased from $249,231 for the second quarter of fiscal 2006
to $206,968 for the same period of fiscal 2007. This was the result of decreased
repairs to operated wells during the second quarter and decreased production
taxes due to the decrease in oil and gas sales.
General and administrative expenses decreased 3% from $180,079 for the second
quarter of fiscal 2006 to $174,919 for the same period of fiscal 2007. This is
due to discontinuing the Russian venture partially offset by an increase in
director's fees.
Page 12
Depreciation, depletion and amortization based on production and other methods
increased 14%, from $138,043 for the second quarter of fiscal 2006 to $156,921
for the same period of fiscal 2007 primarily due to an increase to the full cost
pool amortization base and a decrease in reserves.
Interest expense decreased 76% from $26,891 for the second quarter of fiscal
2006 to $6,359 for the same period of fiscal 2007, due to a decrease in
borrowings partially offset by increased interest rates.
Effective tax rate increased from 16% for the second quarter of fiscal 2006 to
42% for the same period of fiscal 2007, an increase of $40,529 as a result of an
increase in the deferred income tax expense due to the exercise of stock
options.
Results of Operations - Six Months Ended September 30, 2006 and 2005. Net income
decreased from $446,641 for the six months ended September 30, 2005 to $357,825
for the same period of fiscal 2007, a decrease of $88,816 or 20%.
Oil and gas sales decreased from $1,736,635 for the six months ended September
30, 2005 to $1,551,110 for the same period of fiscal 2007. This decrease of 11%,
or $185,525, resulted from a decrease in gas price and gas production offset
partially by an increase in oil price and oil production. Average gas prices
decreased from $6.74 per mcf for the first six months ended September 30, 2005
to $5.84 per mcf for the same period of fiscal 2007, while average oil prices
increased from $53.46 per bbl for the first six months of fiscal 2006 to $65.34
for the same period of fiscal 2007. Oil and gas production quantities were 8,478
barrels ("bbls") and 190,331 thousand cubic feet ("mcf") for the first six
months ended September 30, 2005 and 8,530 bbls and 171,625 mcf for the same
period of fiscal 2007, an increase of 1% in oil production. Gas production
decreased 10% as a result of natural decline.
Production costs decreased from $425,676 for the first six months ended
September 30, 2005 to $422,597 for the same period of fiscal 2007. This was the
result of decreased production taxes due to the decrease in oil and gas sales.
General and administrative expenses increased 16% from $375,482 for the first
six months ended September 30, 2005 to $436,412 for the same period of fiscal
2007. This is primarily the result of an increase in consulting services related
to our Russian activities, an increase in director's fees and the effects of
applying SFAS 123(R) for employee stock option compensation.
Depreciation, depletion and amortization based on production and other methods
increased 11%, from $276,722 for the first six months ended September 30, 2005
to $307,450 for the same period of fiscal 2007 primarily due to an increase to
the full cost pool amortization base and a decrease in reserves.
Interest expense decreased 71% from $56,874 for the first six months ended
September 30, 2005 to $16,458 for the same period of fiscal 2007 due to a
decrease in borrowings.
Effective tax rate decreased from 26% for the first six months ended September
30, 2005 to 2% for the same period of fiscal 2007, a decrease of $146,757 as a
result of the decrease of deferred income taxes due to a revision of an estimate
of statutory depletion and a net operating loss carryforward.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary sources of market risk for us include fluctuations in commodity
prices and interest rate fluctuations. At September 30, 2006, we had not entered
into any hedge arrangements, commodity swap agreements, commodity futures,
options or other similar agreements relating to crude oil and natural gas.
At September 30, 2006, we had an outstanding loan balance of $100,000 under our
$5.0 million revolving credit agreement, which bears interest at the prime rate,
which varies from time to time. If the interest rate on our bank debt increases
or decreases by one percentage point, our annual pretax income would change by
$1,000 based on the outstanding balance at September 30, 2006.
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
generally are uncollateralized. At September 30, 2006, our largest credit risk
associated with any single purchaser was $53,001. We have not experienced any
significant credit losses.
Volatility of Oil and Gas Prices. Our revenues, operating results and future
rate of growth are highly dependent upon the prevailing market prices of, and
demand for, oil and natural gas. These 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. We cannot predict future oil and
gas prices with any degree of certainty. Sustained weakness in oil and gas
prices may adversely affect our ability to obtain capital for our exploration
and development activities and may require a reduction in the carrying value of
our oil and gas properties. Similarly, an improvement in oil and gas prices can
have a favorable impact on our financial condition, results of operations and
capital resources. If the average oil price had increased or decreased by one
dollar per barrel for the first six months of fiscal 2007, our pretax income
would have changed by $8,530. If the average gas price had increased or
decreased by ten cents per mcf for the first six months of fiscal 2007, our
pretax income would have changed by $17,163.
Item 4. Controls and Procedures
We maintain controls and procedures designed to ensure that information required
to be disclosed by us 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, we carried out an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to 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 quarter ended September 30, 2006 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Page 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Although we may, from time to time, be involved in litigation and claims
arising out of our operations in the normal course of business, we are not
currently a party to any material legal proceedings. In addition, we are
not aware of any legal or governmental proceedings against us, or
contemplated to be brought against us, under various environmental
protection statutes or other regulations to which we are subject.
Item 1A.Risk Factors
There have been no material changes to the information previously
disclosed in Item 1A. "Risk Factors" in our 2006 Annual Report on Form
10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting was held on September 14, 2006. Following are the two
proposals voted on at the meeting and the results of each:
Proposal #1 was the election of the following directors: Votes For: Votes Withheld:
Thomas R. Craddick 1,505,261 1,804
Thomas Graham, Jr. 1,504,883 2,182
Arden R. Grover 1,505,037 2,028
Jeffry A. Smith 1,494,295 12,770
Donna Gail Yanko 1,505,305 1,760
Jack D. Ladd 1,505,437 1,628
Nicholas C. Taylor 1,505,283 1,782
Proposal #2 was to ratify the selection of Grant Thornton, LLP as
independent registered public accounting firm for the Company for the
fiscal year ended March 31, 2007. Votes for were 1,504,795, votes against
were 124 and votes abstained were 2,146.
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 of the Chief Executive Officer and Chief Financial Officer
of Mexco Energy Corporation pursuant to 18 U.S.C. ss.1350
Page 14
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: November 13, 2006 /s/ Nicholas C. Taylor
----------------------------------
Nicholas C. Taylor
President
Dated: November 13, 2006 /s/ Tamala L. McComic
----------------------------------
Tamala L. McComic
Vice President, Treasurer and
Assistant Secretary
Page 15