UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
August 9, 2006 was 1,743,041.
Page 1
MEXCO ENERGY CORPORATION
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of June 30, 2006
(Unaudited) and March 31, 2006 3
Consolidated Statements of Operations (Unaudited) for
the three months ended June 30, 2006 and June 30, 2005 4
Consolidated Statements of Cash Flows (Unaudited) for
the three months ended June 30, 2006 and June 30, 2005 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 13
CERTIFICATIONS
Page 2
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2006 2006
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 77,057 $ 52,768
Accounts receivable:
Oil and gas sales 391,294 429,133
Trade 9,556 336
Related parties 327 73
Prepaid costs and expenses 49,011 75,576
------------ ------------
Total current assets 527,245 557,886
Investment in GazTex, LLC 20,509 20,509
Property and equipment, at cost
Oil and gas properties, using the full cost method
($121,418 excluded from amortization
as of June 30 and March 31, 2006) 18,990,325 18,947,532
Other 40,984 39,848
------------ ------------
19,031,309 18,987,380
Less accumulated depreciation,
depletion, and amortization 10,737,980 10,587,451
------------ ------------
Property and equipment, net 8,293,329 8,399,929
------------ ------------
$ 8,841,083 $ 8,978,324
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade and accrued expenses $ 95,158 $ 118,125
Income tax payable -- --
------------ ------------
Total current liabilities 95,158 118,125
Long-term debt 400,000 600,000
Asset retirement obligation 317,015 352,416
Deferred income tax liability 879,076 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;
1,776,566 shares issued 888,283 888,283
Additional paid-in capital 3,915,085 3,893,588
Retained earnings 2,489,990 2,262,700
Treasury stock, at cost (33,525 shares) (145,575) (145,575)
------------ ------------
Total stockholders' equity 7,147,783 6,898,996
------------ ------------
$ 8,841,083 $ 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
For the Three Months Ended June 30,
(Unaudited)
2006 2005
--------- ---------
Operating revenues:
Oil and gas $ 777,412 $ 802,720
Other 167 372
--------- ---------
Total operating revenues 777,579 803,092
Operating expenses:
Production 215,629 176,445
Accretion of asset retirement obligation 4,984 5,785
Depreciation, depletion and amortization 150,529 138,679
General and administrative 261,493 195,403
--------- ---------
Total operating expenses 632,635 516,312
--------- ---------
Operating profit 144,944 286,780
Other income (expense):
Interest income 292 167
Interest expense (10,099) (29,982)
--------- ---------
Net other expense (9,807) (29,815)
Minority interest in loss of subsidiary 4,738 3,824
--------- ---------
Earnings before income taxes 139,875 260,789
Income tax expense (benefit):
Current 40,245 74,442
Deferred (127,660) 25,429
--------- ---------
(87,415) 99,871
--------- ---------
Net income $ 227,290 $ 160,918
========= =========
Net income per common share:
Basic: $ 0.13 $ 0.09
Diluted: $ 0.12 $ 0.09
The accompanying notes are an integral part of
the consolidated financial statements.
Page 4
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30,
(Unaudited)
2006 2005
--------- ---------
Cash flows from operating activities:
Net income $ 227,290 $ 160,918
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase (decrease) in deferred income taxes (127,660) 25,429
Stock-based compensation 21,497 10,235
Depreciation, depletion and amortization 150,529 138,679
Accretion of asset retirement obligations 4,984 5,785
Minority interest in loss of subsidiary (4,738) (3,824)
Decrease in accounts receivable 28,365 15,738
(Increase) decrease in prepaid expenses 26,565 (27,853)
Increase in income taxes payable -- 26,151
Increase (decrease) in accounts payable
and accrued expenses (7,047) 790
--------- ---------
Net cash provided by operating activities 319,785 352,048
Cash flows from investing activities:
Additions to oil and gas properties (123,798) (191,590)
Additions to other property and equipment (1,136) --
Proceeds from sale of oil and gas properties
and equipment 24,700 14,533
--------- ---------
Net cash used in investing activities (100,234) (177,057)
Cash flows from financing activities:
Reduction of long-term debt (200,000) (175,000)
Minority interest contributions 4,738 3,824
--------- ---------
Net cash used in financing activities (195,262) (171,176)
--------- ---------
Net increase in cash and cash equivalents 24,289 3,815
Cash and cash equivalents at beginning of year 52,768 85,209
--------- ---------
Cash and cash equivalents at end of year $ 77,057 $ 89,024
========= =========
Interest paid $ 11,522 $ 29,017
Income taxes paid $ -- $ 51,164
The accompanying notes are an integral part of
the consolidated financial statements.
Page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Mexco Energy Corporation (a Colorado Corporation), its wholly owned subsidiary,
Forman Energy Corporation, and its 90% owned subsidiary, OBTX, LLC (a Delaware
Limited Liability Company) (collectively, the "Company") are engaged in the
exploration, development and production of natural gas, crude oil, condensate
and natural gas liquids (NGLs). OBTX, LLC was formed on April 8, 2004, and is
included in the consolidated financial statements since its date of formation.
Although most of the Company's oil and gas interests are centered in West Texas,
the Company owns producing properties and undeveloped acreage in ten states.
Although most of the Company's oil and gas interests are operated by others, the
Company operates several properties in which it owns an interest.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of the Company as
of June 30, 2006, and the results of its operations and cash flows for the
interim periods ended June 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
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 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, in wages in the Statement of Operations for the
three months ended June 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 June 30, 2006 totals
approximately $63,470 which is expected to be recognized over a weighted average
of 1.47 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 SFAS 123 pro forma information for the quarter ended June 30, 2005 is as
follows:
Three Months Ended
June 30, 2005
------------------
Net income, as reported $ 160,918
Deduct: Stock-based employee compensation expense
determined under fair value based method
(SFAS 123), net of tax $ (29,098)
------------------
Net income, pro forma $ 131,820
==================
Basic earnings per share:
As reported $ 0.09
Pro forma $ 0.08
Diluted earnings per share:
As reported $ 0.09
Pro forma $ 0.07
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.
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.
Page 7
The following table summarizes the assumptions used to determine fair value:
For the three months ended
June 30
2006 2005
----------- -----------
Expected volatility 60% - 134% 27% - 134%
Weighted-average volatility 92% 80%
Expected dividends -- --
Expected term (in years) 5 - 7 7 - 10
Risk-free rate 3.4% - 5.4% 3.4% - 5.4%
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. There were no stock options
granted, exercised, forfeited or expired during the quarter ended June 30, 2006.
Outstanding options at June 30, 2006 expire between April 2008 and July 2014 and
have exercise prices ranging from $4.00 to $7.75.
The following table is a summary of activity of stock options for the three
months ended June 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 4.75
Granted -- --
Exercised -- --
Forfeited or Expired -- --
---------------- ----------------
Outstanding at June 30, 2006 350,000 $ 5.89 4.75 $ 1,235,800
================ ================ ================ ================
Exercisable at June 30, 2006 303,000 $ 5.82 4.41 $ 1,091,835
================ ================ ================ ================
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 three months of fiscal 2007:
Carrying amount of asset retirement obligations
as of April 1, 2006 $ 372,956
Liabilities incurred 1,515
Liabilities settled (41,900)
Accretion expense 4,984
---------
Carrying amount of asset retirement obligations
as of June 30, 2006 337,555
Less: Current portion 20,540
---------
Non-Current asset retirement obligation $ 317,015
=========
The non-current portion of the asset retirement obligation, which is included on
the consolidated balance sheet, was $317,015 at June 30, 2006. The current
portion of the asset retirement obligation as of June 30, 2006 was $20,540 and
is included on the consolidated balance sheet in accounts payable and other
accrued expenses. Accretion expense was $4,984 and $5,785 for the three months
ended June 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, which is currently estimated to be within the following
year. Costs excluded from amortization at June 30, 2006 total $121,418 for U.S.
properties.
Page 8
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 month periods ended June 30, 2006 and 2005.
Three Months Ended
June 30
2006 2005
--------- ---------
Weighted average number of common
shares outstanding 1,743,041 1,733,041
Incremental shares from the assumed exercise
of dilutive stock options 135,467 143,662
--------- ---------
Dilutive potential common shares 1,878,508 1,876,703
No options outstanding at June 30, 2005 or 2006 were excluded in the computation
of diluted net income per share.
Income Taxes. The Company recognizes deferred tax assets and liabilities for
future tax consequences of temporary differences between the carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applicable to the years in
which those differences are expected to be settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in net income in
the period that includes the enactment date. The effective income tax rate for
the three months ended June 30, 2005 was 38%. The Company had a net tax benefit
of $87,415 for the three months ended June 30, 2006. This is a result of a
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
three months ended June 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 28, 2005,
the borrowing base was redetermined and set at $3,250,000. As of June 30, 2006,
the balance outstanding under this agreement was $400,000 and matures on August
1, 2007. Amounts borrowed under this agreement are collateralized by the common
stock of the Company's wholly owned subsidiary and all of the Company's oil and
gas properties.
Recent Accounting Pronouncements. In May 2005, the FASB issued SFAS No. 154,
"Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3." SFAS No. 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. This statement applies to all voluntary changes
in accounting principle as well as to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. SFAS No. 154 further requires a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets to be accounted for as a change in accounting estimate effected by a
change in accounting principle. Corrections of errors in the application of
accounting principles will continue to be reported by retroactively restating
the affected financial statements. The Company adopted the provisions of SFAS
No. 154 on April 1, 2006. The adoption did not have a material impact on the
Company's financial position and results of operations.
In June 2006, the Financial Accounting Standards Board 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.
Page 9
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 three months of fiscal 2007, cash flow from operations was
$319,785 compared to $352,048 for the first three months of fiscal 2006. The
decrease was primarily due to an increase in general and administrative expenses
and production costs. The cash flow from operations for the first three months
of fiscal 2007 included the effects of a decrease in accounts receivable and an
increase in net income. Cash of $124,934 was used for additions to property and
equipment and cash of $200,000 was used to pay on the line of credit.
Accordingly, net cash increased $24,289.
Through June 30, 2006, we have reviewed a number of possible projects in Russia.
Any projects reviewed that we have decided not to continue studying or develop
have been expensed. We expensed approximately $38,000 for the first quarter of
fiscal 2006 and $48,000 for the first quarter of fiscal 2007 related to Russian
projects. No further expenses are expected in the foreseeable future.
In June 2006, we purchased royalty interests in Coke County, Texas containing
approximately 2,795 gross acres for approximately $22,000.
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 June 30, 2006, we had working capital of approximately $432,088 compared to
working capital of $439,761 at March 31, 2006, a decrease of $7,673 due to a
decrease in accounts receivable and prepaid expenses and partially offset by 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 the current fiscal year.
Page 10
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 28, 2005, the borrowing base was
redetermined and set at $3,250,000 with no monthly commitment reductions. As of
June 30, 2006, the balance outstanding under this agreement was $400,000. 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 6.00% at June 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. The balance outstanding on the line of credit as of August 4, 2006
was $375,000.
Results of Operations - Three Months Ended June 30, 2006 and 2005. Net income
increased from $160,918 for the quarter ended June 30, 2005 to $227,290 for the
quarter ended June 30, 2006, an increase of $66,372 or 41% as a result of a
deferred tax benefit related to an increase in the depletion carryforward.
Oil and gas sales decreased from $802,720 for the first quarter of fiscal 2006
to $777,412 for the same period of fiscal 2007. This decrease of 3% or $25,308
resulted from a decrease in gas price and production offset partially by an
increase in oil price and production. Average gas prices decreased from $6.24
per mcf for the first quarter of fiscal 2006 to $5.86 per mcf for the same
period of fiscal 2007, while average oil prices increased from $48.37 per bbl
for the first quarter of fiscal 2006 to $64.66 for the same period of fiscal
2007. Oil and gas production quantities were 4,250 barrels ("bbls") and 95,722
thousand cubic feet ("mcf") for the first quarter of fiscal 2006 and 4,631 bbls
and 81,537 mcf for the same period of fiscal 2007, an increase of 9% in oil
production and a natural decline decrease of 15% in gas production.
Production costs increased from $176,445 for the first quarter of fiscal 2006 to
$215,629 for the same period of fiscal 2007. This was the result of increased
repairs to operated wells during the quarter.
General and administrative expenses increased 34% from $195,403 for the first
quarter of fiscal 2006 to $261,493 for the same period of fiscal 2007. This is
due to an increase in consulting services related to our Russian activities, an
increase in Director's fees and the effects of applying FAS 123(R) for employee
stock option compensation.
Depreciation, depletion and amortization based on production and other methods
increased 9%, from $138,679 for the first quarter of fiscal 2006 to $150,529 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 66% from $29,982 for the first quarter of fiscal 2006
to $10,099 for the same period of fiscal 2007, due to a decrease in borrowings
partially offset by increased interest rates.
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 June 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 June 30, 2006, we had an outstanding loan balance of $400,000 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
$4,000, based on the outstanding balance at June 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 June 30, 2006, our largest credit risk
associated with any single purchaser was $55,676. 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.
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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 June 30, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
Exhibits
31.1 Certification of the Chief Executive Officer of Mexco Energy
Corporation
31.2 Certification of the Chief Financial Officer of Mexco Energy
Corporation
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer of Mexco Energy Corporation pursuant to 18 U.S.C. ss.1350
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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 9, 2006 /s/ Nicholas C. Taylor
-------------------------------------------------
Nicholas C. Taylor
President
Dated: August 9, 2006 /s/ Tamala L. McComic
-------------------------------------------------
Tamala L. McComic
Vice President, Treasurer and Assistant Secretary
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