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 December 31, 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 February
9, 2007 is 1,773,841.
MEXCO ENERGY CORPORATION
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of December 31, 2006
(Unaudited) and March 31, 2006 3
Consolidated Statements of Operations (Unaudited) for the
three months and nine months ended December 31, 2006
and December 31, 2005 4
Consolidated Statements of Cash Flows (Unaudited) for
the nine months ended December 31, 2006 and
December 31, 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 14
CERTIFICATIONS
Page 2
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31 March 31
2006 2006
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 107,675 $ 52,768
Accounts receivable:
Oil and gas sales 355,332 429,133
Trade 3,876 336
Related parties -- 73
Prepaid costs and expenses 52,835 75,576
----------- -----------
Total current assets 519,718 557,886
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 December 31, 2006 and March 31, 2006 respectively) 19,568,068 18,947,532
Other 51,411 39,848
----------- -----------
19,619,479 18,987,380
Less accumulated depreciation,
depletion, and amortization 11,047,037 10,587,451
----------- -----------
Property and equipment, net 8,572,442 8,399,929
----------- -----------
$ 9,112,669 $ 8,978,324
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 167,769 $ 118,125
Long-term debt -- 600,000
Asset retirement obligation 371,679 352,416
Deferred income tax liability 1,023,102 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;
1,820,366 and 1,776,566 shares issued, respectively 910,183 888,283
Additional paid-in capital 4,173,964 3,893,588
Retained earnings 2,687,605 2,262,700
Treasury stock, at cost (44,525 and 33,525 shares, respectively) (223,684) (145,575)
----------- -----------
Total stockholders' equity 7,548,068 6,898,996
----------- -----------
$ 9,112,669 $ 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 Nine Months Ended
December 31 December 31
--------------------- -----------------------
2006 2005 2006 2005
-------- ---------- ---------- ----------
Operating revenue:
Oil and gas sales $663,031 $1,111,524 $2,214,141 $2,848,159
Other 167 387 2,224 2,755
-------- ---------- ---------- ----------
Total operating revenues 663,198 1,111,911 2,216,365 2,850,914
Operating expenses:
Production 218,774 223,169 641,371 648,844
Accretion of asset retirement obligation 5,592 6,566 17,436 18,132
Depreciation, depletion, and amortization 152,135 129,398 459,585 406,120
General and administrative 176,791 193,997 613,203 569,478
-------- ---------- ---------- ----------
Total operating expenses 553,292 553,130 1,731,595 1,642,574
-------- ---------- ---------- ----------
Operating profit 109,906 558,781 484,770 1,208,340
Other income (expense):
Interest income 336 232 2,736 594
Interest expense (2,359) (25,286) (18,817) (82,159)
-------- ---------- ---------- ----------
Net other expense (2,023) (25,054) (16,081) (81,565)
-------- ---------- ---------- ----------
Earnings before income taxes and minority
interest 107,883 533,727 468,689 1,126,775
Income tax expense (benefit):
Current (30,531) 179,287 32,253 321,230
Deferred 71,334 3,019 16,366 15,649
-------- ---------- ---------- ----------
40,803 182,306 48,619 336,879
Income before minority interest 67,080 351,421 420,070 789,896
Minority interest in loss of subsidiary -- 3,187 4,835 11,353
-------- ---------- ---------- ----------
Net income $ 67,080 $ 354,608 $ 424,905 $ 801,249
======== ========== ========== ==========
Net income per common share:
Basic: $ 0.04 $ 0.20 $ 0.24 $ 0.46
Diluted: $ 0.04 $ 0.19 $ 0.23 $ 0.43
The accompanying notes are an integral part of
the consolidated financial statements.
Page 4
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended December 31
(Unaudited)
2006 2005
---------- ----------
Cash flows from operating activities:
Net income $ 424,905 $ 801,249
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in deferred income taxes 16,366 15,649
Stock-based compensation 91,026 14,646
Common stock issued to director 14,100 --
Depreciation, depletion, and amortization 459,585 406,120
Accretion of asset retirement obligations 17,436 18,132
Minority interest in loss of OBTX, LLC (4,835) (11,353)
Decrease (increase) in accounts receivable 70,335 (141,721)
Decrease (increase) in prepaid expenses 22,741 (56,718)
Increase in income taxes payable -- 247,613
Decrease in accounts payable and accrued expenses (14,196) (13,396)
---------- ----------
Net cash provided by operating activities 1,097,463 1,280,221
Cash flows from investing activities:
Additions to oil and gas properties (582,870) (445,190)
Additions to other property and equipment (11,564) --
Proceeds from sale of oil and gas properties and equipment 28,002 14,532
---------- ----------
Net cash used in investing activities (566,432) (430,658)
Cash flows from financing activities:
Proceeds from exercise of stock options 157,150 --
Repurchase of stock (38,109) --
Reduction of long-term debt (600,000) (865,000)
Minority interest contributions 4,835 11,353
---------- ----------
Net cash used in financing activities (476,124) (853,647)
---------- ----------
Net increase (decrease) in cash and cash equivalents 54,907 (4,084)
Cash and cash equivalents at beginning of year 52,768 85,209
---------- ----------
Cash and cash equivalents at end of period $ 107,675 $ 81,125
========== ==========
Interest paid $ 22,004 $ 83,776
Income taxes paid $ -- $ 73,617
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 December 31, 2006, and the results of its operations and cash flows for the
interim periods ended December 31, 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 ("FASB") 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 $35,428 or $.02 per basic share, and $91,026 or $.05 per basic share in
General and Administrative expense in the Consolidated Statements of Operations
for the three months and the nine months ended December 31, 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 December 31, 2006 totals $175,208, which is expected to be
recognized over a weighted average of 1.75 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
nine months ended December 31, 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 Nine Months Ended
December 31 December 31
2005 2005
------------------ -----------------
Net income, as reported $354,608 $801,249
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax (15,033) (57,327)
-------- --------
Net income, pro forma $339,575 $743,922
======== ========
Basic earnings per share:
As reported $ 0.20 $ 0.46
Pro forma $ 0.20 $ 0.43
Diluted earnings per share:
As reported $ 0.19 $ 0.43
Pro forma $ 0.18 $ 0.40
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 up to approximately 30,000 shares for the treasury
account during fiscal 2007. Through the nine months ended December 31, 2006, the
Company repurchased 11,000 shares for the treasury at an aggregate cost of
$78,109. The Plan also provides for the granting of stock awards. For the nine
months ended December 31, 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. 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 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 nine
months ended
December 31,
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 nine months ended December 31, 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. During the second quarter of
fiscal 2007, 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
December 31, 2006.
The following table is a summary of activity of stock options for the nine
months ended December 31, 2006:
Weighted
Average Weighted
Exercise Average Aggregate
Number of Price Contract Intrinsic
Shares Per Share Life in Years Value
--------- --------- ------------- ---------
Outstanding at March 31, 2006 350,000 $5.89
Granted 35,000 8.24
Exercised (41,800) 4.72
Forfeited or Expired (18,200) 6.75
------- -----
Outstanding at December 31, 2006 325,000 $6.24 4.24 $(40,600)
======= ===== ==== ========
Exercisable at December 31, 2006 262,750 $5.97 3.99 $ 40,680
======= ===== ==== ========
Outstanding options at December 31, 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 December
31, 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 99,000 5.64
6.50 - 7.74 100,000 7.07
7.75 - 8.24 65,000 8.01
------- -----
$4.00 - 8.24 325,000 $6.24 4.24 $(40,600)
======= ===== ==== ========
Page 8
The following table summarizes information about options exercisable at December
31, 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 84,250 5.56
6.50 - 7.74 87,500 7.11
7.75 - 8.24 30,000 7.75
------- -----
$4.00 - 8.24 262,750 $5.97 $40,680
======= ===== =======
Stockholders' Equity. The following is a summary of the changes in the Company's
common shares outstanding for the first nine months of fiscal 2007:
For the nine months ended
December 31, 2006
-------------------------
Shares issued, beginning of period 1,776,566
Exercise of stock options 41,800
Grant of stock awards 2,000
---------
Shares issued, end of period 1,820,366
=========
During the nine months ended December 31, 2006, the Company repurchased 11,000
shares for the treasury at an aggregate cost of $78,109. During January 2007,
the Company repurchased an additional 2,000 shares for the treasury at an
aggregate cost of $12,010.
No changes were made to the common shares issued during the nine months ended
December 31, 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 nine months of fiscal 2007:
Carrying amount of asset retirement obligations
as of April 1, 2006 $372,956
Liabilities incurred 44,058
Liabilities settled (42,231)
Accretion expense 17,436
--------
Carrying amount of asset retirement obligations
as of December 31, 2006 392,219
Less: Current portion 20,540
--------
Non-current asset retirement obligation $371,679
========
The non-current portion of the asset retirement obligation, which is included on
the consolidated balance sheet, was $371,679 at December 31, 2006. The current
portion of the asset retirement obligation as of December 31, 2006 was $20,540
and is included on the consolidated balance sheet in accounts payable and other
accrued expenses. Accretion expense was $17,436 and $18,132 for the nine months
ended December 31, 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. Prior to September 30, 2006, the amount related to the
Stark County, North Dakota project was being excluded from the full cost
amortization base. For the quarter ended December 31, 2006, there are no costs
currently being excluded from the full cost amortization base.
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 nine month periods ended December 31, 2006
and 2005.
Page 9
Three Months Ended Nine Months Ended
December 31 December 31
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Weighted average number of
common shares outstanding 1,774,189 1,733,041 1,757,178 1,733,041
Incremental shares from the assumed
exercise of dilutive stock options 29,157 126,211 72,090 150,181
--------- --------- --------- ---------
Dilutive potential common shares 1,803,346 1,859,252 1,829,268 1,883,222
========= ========= ========= =========
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 nine-month periods ended December 31, 2006, 214,000 and 105,000
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 nine-months ended December 31, 2005.
Income Taxes. In accordance with SFAS No. 109, Accounting for 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 under SFAS No. 109 is recognized in net
income in the period that includes the enactment date. The effective income tax
rate for the nine months ended December 31, 2005 was 30%. The effective income
tax rate for the nine months ended December 31, 2006 was 10% 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. Current tax expense decreased
as a result of an increase of intangible development costs and a write-off of
expired acreages.
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
nine months ended December 31, 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 per annum with a maturity date of September 30, 2008. As of December
31, 2006, there was no outstanding balance under this agreement. 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 July 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109. 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 SFAS No. 157, Fair Value Measurements, 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 nine months of fiscal 2007, cash flow from operations was
$1,097,463 compared to $1,280,221 for the first nine months of fiscal 2006. The
cash flow from operations for the first nine months of fiscal 2007 included the
effects of a decrease in net income, accounts receivable, prepaid expenses, and
accounts payable and accrued expenses. Cash of $594,434 was used for additions
to property and equipment, cash of $38,109 was used for a stock repurchase for
the treasury account, cash of $600,000 was used to pay on the line of credit and
cash of $157,150 was received as proceeds from exercises of stock options.
Accordingly, net cash increased $54,907.
Through December 31, 2006, we reviewed a number of possible projects in Russia.
Any projects reviewed have been discontinued and expensed. We expensed
approximately $114,000 for the first nine months of fiscal 2006 and $48,000 for
the first nine 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
$275,000 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.
Effective December 1, 2006, we purchased an additional mineral interest in the
Barnett Shale Field in Denton County, Texas for approximately $120,000. There
are five current wells producing with three additional development locations.
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.
Page 11
At December 31, 2006, we had working capital of approximately $351,949 compared
to working capital of $439,761 at March 31, 2006, a decrease of $87,812 due to
an increase in cash and cash equivalents offset by a decrease in oil and gas
receivables and an increase 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.
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
December 31, 2006, there was no outstanding balance under this agreement. 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 7.25% at December 31,
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 December 31, 2006 and 2005. Net
income decreased from $354,608 for the quarter ended December 31, 2005 to
$67,080 for the quarter ended December 31, 2006, a decrease of $287,528 or 81%.
Oil and gas sales decreased from $1,111,524 for the third quarter of fiscal 2006
to $663,031 for the same period of fiscal 2007. This decrease of 40% or $448,493
resulted from a decrease in oil and gas prices and oil and gas production.
Average gas prices decreased from $9.67 per mcf for the third quarter of fiscal
2006 to $5.34 per mcf for the same period of fiscal 2007 and average oil prices
decreased from $55.14 per bbl for the third quarter of fiscal 2006 to $49.35 for
the same period of fiscal 2007. Oil and gas production quantities were 4,463
barrels ("bbls") and 89,461 thousand cubic feet ("mcf") for the third quarter of
fiscal 2006 and 4,212 bbls and 85,244 mcf for the same period of fiscal 2007, a
natural decline decrease of 6% in oil production and 5% in gas production.
Production costs decreased from $223,169 for the third quarter of fiscal 2006 to
$218,774 for the same period of fiscal 2007. This was the result of decreased
oil and gas sales partially offset by an increase in lease operating expenses in
the third quarter.
General and administrative expenses decreased 9% from $193,997 for the third
quarter of fiscal 2006 to $176,791 for the same period of fiscal 2007. This is
due to discontinuing the Russian venture partially offset by an increase in
director's fees.
Depreciation, depletion and amortization based on production and other methods
increased 18%, from $129,398 for the third quarter of fiscal 2006 to $152,135
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 91% from $25,286 for the third quarter of fiscal 2006
to $2,359 for the same period of fiscal 2007, due to a decrease in borrowings.
Effective tax rate increased from 34% for the third quarter of fiscal 2006 to
38% for the same period of fiscal 2007, but due to lower income this resulted in
a decrease of $141,503.
Results of Operations - Nine Months Ended December 31, 2006 and 2005. Net income
decreased from $801,249 for the nine months ended December 31, 2005 to $424,905
for the same period of fiscal 2007, a decrease of $376,344 or 47%.
Oil and gas sales decreased from $2,848,159 for the nine months ended December
31, 2005 to $2,214,141 for the same period of fiscal 2007. This decrease of 22%,
or $634,018, 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
$7.68 per mcf for the nine months ended December 31, 2005 to $5.67 per mcf for
the same period of fiscal 2007, while average oil prices increased from $54.05
per bbl for the nine months of fiscal 2006 to $60.06 for the same period of
fiscal 2007. Oil and gas production quantities were 12,939 barrels ("bbls") and
279,792 thousand cubic feet ("mcf") for the nine months ended December 31, 2005
and 12,742 bbls and 255,314 mcf for the same period of fiscal 2007, a decrease
of 1% in oil production. Gas production decreased 9% as a result of natural
decline and repairs on some of our wells.
Page 12
Production costs decreased from $648,844 for the nine months ended December 31,
2005 to $641,371 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 8% from $569,478 for the nine
months ended December 31, 2005 to $613,203 for the same period of fiscal 2007.
This is primarily the result of an increase in director's fees of approximately
$14,000 and the effects of applying SFAS 123(R) for employee stock option
compensation of approximately $64,000.
Depreciation, depletion and amortization based on production and other methods
increased 13%, from $406,120 for the nine months ended December 31, 2005 to
$459,585 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 77% from $82,159 for the nine months ended December
31, 2005 to $18,817 for the same period of fiscal 2007 due to a decrease in
borrowings.
Effective tax rate decreased from 30% for the nine months ended December 31,
2005 to 10% for the same period of fiscal 2007, 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. This lower effective tax rate and reduced
net income resulted in a decrease of $288,260.
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 December 31, 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 December 31, 2006, we did not have an outstanding loan balance 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 not change
based on the outstanding balance at December 31, 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 December 31, 2006, our largest credit risk
associated with any single purchaser was $37,982. 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 nine months of fiscal 2007, our pretax income
would have changed by $12,742. If the average gas price had increased or
decreased by ten cents per mcf for the first nine months of fiscal 2007, our
pretax income would have changed by $25,531.
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 December 31, 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
None.
Item 5. Other Information
Effective January 1, 2007, Ambassador Thomas Graham ceased being an
employee of the company and was appointed to serve as a member of the
Audit, Compensation and Nominating Committees of the Company. He will
continue his role as Chairman of the Board of Directors, with primary
responsibilities to preside at corporate meetings and act as a liaison
between the Board of Directors and Company management.
On this same date, Jeffry A. Smith resigned from membership of each such
committees while remaining a member of the Board of Directors of the
Company.
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. Section 1350
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
(Registrant)
Dated: February 9, 2007 /s/ Nicholas C. Taylor
----------------------------------------
Nicholas C. Taylor
President
Dated: February 9, 2007 /s/ Tamala L. McComic
----------------------------------------
Tamala L. McComic
Vice President, Treasurer and
Assistant Secretary
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