fp0000479_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

[Ö] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2008

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)
(Zip code)

(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 and (2) has been subject to such filing requirements for the past 90 days.  YES [Ö]  NO [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company as defined in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer [  ]
Accelerated Filer [  ]
   
Non-Accelerated Filer [  ]
Smaller reporting company [√]
 (Do not check if a smaller reporting company)
  

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

The number of shares outstanding of the registrant’s common stock, par value $.50 per share, as of February 11, 2009 was 1,874,866.
 
Page 1
 
MEXCO ENERGY CORPORATION
 
Table of Contents

 


   
Page
PART I.  FINANCIAL INFORMATION
  
     
Item 1.
Consolidated Balance Sheets as of December 31, 2008
  
 
(Unaudited) and March 31, 2008
3
     
 
Consolidated Statements of Operations (Unaudited) for
  
 
the three months and nine months ended December 31, 2008
  
 
and December 31, 2007
4
     
 
Consolidated Statements of Changes in Stockholders’ Equity
  
 
(Unaudited) as of December 31, 2008
5
     
 
Consolidated Statements of Cash Flows (Unaudited) for
  
 
the nine months ended December 31, 2008 and December 31, 2007
6
     
 
Notes to Consolidated Financial Statements (Unaudited)
7
     
Item 2.
Management's Discussion and Analysis of Financial Condition
  
 
and Results of Operations
10
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
13
     
Item 4.
Controls and Procedures
14
     
     
PART II.  OTHER INFORMATION
14
     
Item 1.
Legal Proceedings
  
Item 1A.
Risk Factors
  
Item 4.
Submission of Matters to a Vote of Security Holders
  
Item 6.
Exhibits
  
     
     
SIGNATURES
14
     
     
EXHIBITS
  
 
Page 2
 
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS

   
December 31,
2008
    
March 31,
2008
  
   
(Unaudited)
        
ASSETS
            
             
Current assets
            
Cash and cash equivalents
   $ 256,872     $ 303,617  
Accounts receivable:
                
Oil and gas sales
     573,028       758,459  
Trade
     155,501       102,403  
Related Parties
     -       12,659  
Prepaid costs and expenses
     41,000       22,062  
Total current assets
     1,026,401       1,199,200  
                 
Investment in GazTex, LLC
     -       20,509  
                 
Property and equipment, at cost
                
Oil and gas properties, using the full cost method
     26,430,616       23,941,483  
Other
     61,362       61,362  
      26,491,978       24,002,845  
                 
Less accumulated depreciation, depletion and amortization
     12,771,232       12,019,895  
Property and equipment, net
     13,720,746       11,982,950  
    $ 14,747,147     $ 13,202,659  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Current liabilities
                
Accounts payable and accrued expenses
   $ 528,842     $ 571,526  
                 
Long-term debt
     1,650,000       2,600,000  
Asset retirement obligation
     418,343       374,789  
Deferred income tax liabilities
     1,238,450       1,196,280  
                 
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; 1,958,866 and 1,841,366 shares issued; 1,874,866 and 1,757,366 shares outstanding as of December 31 and March 31, 2008, respectively
     979,433       920,683  
Additional paid-in capital
     5,592,562       4,381,269  
Retained earnings
     4,766,134       3,584,729  
Treasury stock, at cost (84,000 shares)
     (426,617 )     (426,617 )
Total stockholders’ equity
     10,911,512       8,460,064  
    $ 14,747,147     $ 13,202,659  
 
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
December 31
    
Nine Months Ended
December 31
  
   
2008
    
2007
    
2008
    
2007
  
Operating revenue:
                        
Oil and gas sales
   $ 908,253     $ 952,211     $ 4,176,050     $ 2,642,302  
Other
     19,391       2,869       32,721       4,203  
Total operating revenues
     927,644       955,080       4,208,771       2,646,505  
                                 
Operating expenses:
                                
Production
     237,736       241,019       930,477       1,041,405  
Accretion of asset retirement obligation
     7,291       6,368       21,495       19,691  
Depreciation, depletion, and amortization
     271,530       174,842       751,337       531,523  
General and administrative
     193,102       187,648       674,002       636,191  
Total operating expenses
     709,659       609,877       2,377,311       2,228,810  
                                 
Operating profit
     217,985       345,203       1,831,460       417,695  
                                 
Other income (expense):
                                
Interest income
     110       1,170       1,117       3,255  
Interest expense
     (17,226 )     (22,791 )     (70,815 )     (58,484 )
                                 
Net other expense
     (17,116 )     (21,621 )     (69,698 )     (55,229 )
                                 
Earnings before income taxes
     200,869       323,582       1,761,762       362,466  
                                 
Income tax expense:
                                
Current
     67,057       -       538,187       -  
Deferred
     2,311       102,468       42,170       115,302  
      69,368       102,468       580,357       115,302  
                                 
Net income
   $ 131,501     $ 221,114     $ 1,181,405     $ 247,164  
                                 
Earnings per common share:
                                
Basic
   $ 0.07     $ 0.13     $ 0.64     $ 0.14  
Diluted
   $ 0.07     $ 0.12     $ 0.61     $ 0.14  
                                 
Weighted average common shares outstanding:
                                
Basic
     1,874,866       1,764,649       1,836,999       1,771,222  
Diluted
     1,938,746       1,772,583       1,928,029       1,778,008  
 
The accompanying notes are an integral part of
the consolidated financial statements.
 
Page 4
 
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

                                                        
                                                                                          
                                                                     

   
Common Stock Par Value
    
Treasury Stock
    
Additional Paid-In Capital
    
Retained Earnings
    
Total Stockholders’ Equity
  
                               
Balance at March 31, 2008
   $ 920,683     $ (426,617 )   $ 4,381,269     $ 3,584,729     $ 8,460,064  
Net income
     -       -       -       538,789       538,789  
Issuance of stock through
                                        
     options exercised
     53,750       -       593,178       -       646,928  
Excess tax benefits from
                                        
stock-based compensation
                     213,568               213,568  
Stock-based compensation
     -       -       19,445       -       19,445  
Balance at June 30, 2008
   $ 974,433     $ (426,617 )   $ 5,207,460     $ 4,123,518     $ 9,878,794  
                                         
Net income
     -       -       -       511,115       511,115  
Issuance of stock through
                                        
     options exercised
     5,000       -       35,000       -       40,000  
Excess tax benefits from
                                        
stock-based compensation
                     257,562               257,562  
Stock-based compensation
     -       -       13,002       -       13,002  
Balance at September 30, 2008
   $ 979,433     $ (426,617 )   $ 5,513,024     $ 4,634,633     $ 10,700,473  
                                         
Net income
     -       -       -       131,501       131,501  
Excess tax benefits from
                                        
stock-based compensation
     -       -       67,057       -       67,057  
Stock-based compensation
     -       -       12,481       -       12,481  
Balance at December 31, 2008
   $ 979,433     $ (426,617 )   $ 5,592,562     $ 4,766,134     $ 10,911,512  
 
SHARE ACTIVITY

Common stock shares, issued:
      
Balance at March 31, 2008
     1,841,366  
Issued
     107,500  
Balance at June 30, 2008
     1,948,866  
Issued
     10,000  
Balance at September 30, 2008
     1,958,866  
Issued
     -  
Balance at December 31, 2008
     1,958,866  
         
Common stock shares, held in treasury:
        
Balance at March 31, 2008
     (84,000 )
Acquisitions
     -  
Balance at June 30, 2008
     (84,000 )
Acquisitions
     -  
Balance at September 30, 2008
     (84,000 )
Acquisitions
     -  
Balance at December 31, 2008
     (84,000 )
         
Common stock shares, outstanding at December 31, 2008
     1,874,866  
 
The accompanying notes are an integral part of
the consolidated financial statements.
 
Page 5
 
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31,
(Unaudited)

   
2008
    
2007
  
Cash flows from operating activities:
            
Net income
   $ 1,181,405     $ 247,164  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Increase in deferred tax liabilities
     42,170       115,302  
Excess tax benefit from share-based payment arrangement
     (538,187 )     (1,100 )
Stock-based compensation
     44,928       66,506  
Depreciation, depletion and amortization
     751,337       531,523  
Accretion of asset retirement obligations
     21,495       19,691  
Other
     1,809       -  
Changes in assets and liabilities:
                
(Increase) decrease in accounts receivable
     144,992       (436,916 )
(Increase) decrease in prepaid expenses
     (18,938 )     87,676  
Increase in income taxes payable
     538,187       -  
Increase in accounts payable and accrued expenses
     197,488       28,395  
                 
Net cash provided by operating activities
     2,366,686       658,241  
                 
Cash flows from investing activities:
                
Additions to oil and gas properties
     (2,709,451 )     (2,810,831 )
Proceeds from investment in GazTex, LLC
     18,700       -  
Proceeds from sale of oil and gas properties and equipment
     2,205       39,000  
                 
Net cash used in investing activities
     (2,688,546 )     (2,771,831 )
                 
Cash flows from financing activities:
                
Acquisition of treasury stock
     -       (119,093 )
Proceeds from exercise of stock options
     686,928       4,000  
Reduction of long-term debt
     (2,599,521 )     (50,000 )
Proceeds from long-term debt
     1,649,521       2,425,000  
Excess tax benefit from share-based payment arrangement
     538,187       1,100  
                 
Net cash provided by financing activities
     275,115       2,261,007  
                 
Net (decrease) increase in cash and cash equivalents
     (46,745 )     147,417  
                 
Cash and cash equivalents at beginning of year
     303,617       72,537  
                 
Cash and cash equivalents at end of period
   $ 256,872     $ 219,954  
                 
Supplemental disclosure of cash flow information:
                
Cash paid for interest
   $ 76,803     $ 54,854  
Income taxes paid
   $ -     $ -  
                 
Non-cash investing and financing activities:
                
Percentage of royalty interest purchase issued as payment for finder’s fee
   $ 31,863     $ 46,250  
Asset retirement obligations
   $ 23,152     $ 26,076  



The accompanying notes are an integral part of
the consolidated financial statements.
 
Page 6
 
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  Nature of Operations

Mexco Energy Corporation (a Colorado corporation), its wholly owned subsidiaries, Forman Energy Corporation (a New York corporation) and 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, 2008, and the results of its operations and cash flows for the interim periods ended December 31, 2008 and 2007.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note 2 of the “Notes to Consolidated Financial Statements” in the 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 SEC. 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 subsidiaries.  All significant intercompany balances and transactions associated with the consolidated operations 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.  The Company recognized compensation expense of $12,481 and $13,989 in general and administrative expense in the Consolidated Statements of Operations for the three months ended December 31, 2008 and 2007, respectively.  Compensation expense recognized for the nine months ended December 31, 2008 and 2007 was $44,928 and $66,506, respectively.

The following table is a summary of activity of stock options for the nine months ended December 31, 2008:

         
Weighted Average
    
Weighted Average
    
Aggregate
  
   
Number of
    
Exercise Price
    
Contract Life
    
Intrinsic
  
   
Shares
    
Per Share
    
in Years
    
Value
  
Outstanding at March 31, 2008
     290,000     $ 6.06       3.30     $ (535,750 )
Granted
     -       -                  
Exercised
     117,500       5.85                  
Forfeited or Expired
     20,000       7.75                  
Outstanding at December 31, 2008
     152,500     $ 6.00       3.30     $ 974,753  
                                 
Vested at December 31, 2008
     118,750     $ 5.98       3.25     $ 761,753  
Exercisable at December 31, 2008
     118,750     $ 5.98       3.25     $ 761,753  
 
Page 7
 
There were no stock options granted during the nine months ended December 31, 2008.  During the nine months ended December 31, 2007, stock options covering 25,000 shares were granted.

During the nine months ended December 31, 2008, employees and directors exercised options on a total of 117,500 shares at exercise prices between $4.00 and $8.24 per share.  The Company received proceeds of $686,928 from these exercises. The total intrinsic value of the exercised options was $4,177,440.  No tax deduction is recorded when options are awarded. Of these exercised options, 44,500 shares resulted in a disqualifying disposition and a tax benefit for the Company of $538,187 for the nine months ended December 31, 2008.  The Company issued new shares of common stock to settle these option exercises.  Stock options covering 1,000 shares were exercised during the nine months ended December 31, 2007.

No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history for these types of awards.  On April 2, 2008, 20,000 stock options expired because they were not exercised prior to the end of their ten-year term.  During the nine months ended December 31, 2007, 35,250 vested and 3,750 unvested stock options were forfeited due to the termination of a consulting agreement with a consultant and the resignation of an employee.

Outstanding options at December 31, 2008 expire between September 2009 and July 2014 and have exercise prices ranging from $4.00 to $8.24.

The total cost related to non-vested awards not yet recognized at December 31, 2008 totals approximately $47,483 which is expected to be recognized over a weighted average of 2.3 years.

Asset Retirement Obligations.  The Company’s asset retirement obligations relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties.  SFAS No. 143 requires the fair value of a liability for an asset retirement obligation 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 following table provides a rollforward of the asset retirement obligations for the first nine months of fiscal 2009:

Carrying amount of asset retirement obligations as of April 1, 2008
   $ 424,789  
Liabilities incurred
     23,152  
Liabilities settled
     (1,093 )
Accretion expense
     21,495  
Carrying amount of asset retirement obligations as of December 31, 2008
     468,343  
Less: Current portion
     50,000  
Non-Current asset retirement obligation
   $ 418,343  
 
The asset retirement obligation is included on the consolidated balance sheets with the current portion being included in the accounts payable and other accrued expenses.

Related Party Transactions.  A Family Limited Partnership of Thomas Craddick received from the Company a finder’s fee in kind, equal to 2.5% of the mineral interest purchased in the Newark East Field in Johnson County, Texas in October 2008.  Thomas Craddick is a member of the board of directors and Company employee.  Mr. Craddick invested his personal funds in a working interest (5.0% before payout and 3.75% after payout) in the Company’s well in Ward County, Texas.  As of December 31, 2008, Mr. Craddick did not have a balance due for his share of the expenses on this well.  This personal investment was made on the same basis as an unrelated third party investor.

On April 1, 2007, Jeff Smith, a member of the board of directors through September 11, 2008 and a geological consultant, entered into an agreement with the Company to provide geological consulting services for a fee of approximately $10,000 per month plus expenses.  The Company incurred charges from Mr. Smith for services rendered under this agreement and bonuses of approximately $35,500 and $94,870 for the three and nine months ended December 31, 2008, respectively. As of December 31, 2008, there was an outstanding invoice of $7,500 payable to Mr. Smith which was subsequently paid on January 15, 2009. Also as part of this agreement, Mr. Smith received from the Company a 0.25% overriding interest in each of the two wells in Loving County, Texas, a 1.0% overriding interest in the well in Ward County, Texas and a .5% overriding interest in the well in Reeves County, Texas.  Royalties paid to Mr. Smith from the Reeves County well were $3,836 for the nine months ended December 31, 2008.  Mr. Smith invested his personal funds in a working interest in the Company’s wells in Reeves County, Texas (2.5% before payout and 1.875% after payout) and Ward County, Texas (2.0% before payout and 1.5% after payout), on a non-promoted basis.  As of December 31, 2008, Mr. Smith did not have a balance due for his share of the expenses on these wells.
 
Page 8
 
Income Per Common Share.  Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted net income 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 income per share and diluted income per share for the three and nine month periods ended December 31, 2008 and 2007:
 
   
Three Months Ended
    
Nine Months Ended
  
   
December 31
    
December 31
  
   
2008
    
2007
    
2008
    
2007
  
Weighted average common shares
                        
outstanding - basic
     1,874,866       1,764,649       1,836,999       1,771,222  
Effect of the assumed exercise of
                                
dilutive stock options
     63,880       7,934       91,030       6,786  
Weighted average common share
                                
outstanding - dilutive
     1,938,746       1,772,583       1,928,029       1,778,008  
                                 
Earnings per common share:
                                
Basic
   $ 0.07     $ 0.13     $   0.64     $ 0.14  
Diluted
   $ 0.07     $ 0.12     $   0.61     $ 0.14  

For the three month and nine month periods ended December 31, 2008, no potential common shares relating to stock options were excluded in the computation of diluted net income per share.  For the three month and nine month periods ended December 31, 2007, potential common stock of 240,000 shares, relating to stock options, were excluded in the computation of diluted net income per share because the options were anti-dilutive.  The December 31, 2007 anti-dilutive stock options had a weighted average exercise price of $6.49.

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. For the three and nine months ending December 31, 2008, current income tax is $67,057 and $538,187 and deferred income tax is $2,311 and $42,170, resulting in an effective tax rate of 35% and 33%, respectively.  There was no current income tax expense for the three and nine months ending December 31, 2007.  There was a deferred income tax expense of $102,468 and $115,302 for the three months and nine months ended December 31, 2007, respectively.  The effective income tax rate for the three and nine months ended December 31, 2007 was 32%.

Effective April 1, 2007, we adopted the provisions of Financial Accounting Standards Bulletin (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in a tax return. For the nine months ending December 31, 2008, the amount of unrecognized tax benefits was approximately $496,000.  For the nine months ending December 31, 2007, there were no unrecognized tax benefits.  Any interest and penalties related to uncertain tax positions are recorded as interest expense and general and administrative expense, respectively.

Investment in GazTex, LLC.  The Company’s long-term asset consisted 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 from January 16, 2007, Mexco owned 100% of the interest.  In May 2008, the Company dissolved GazTex, LLC and received the initial cash investment less related fees and expenses for a net amount of $18,700.

Long Term Liabilities.  Long term liabilities consist of a revolving credit agreement with Bank of America, N.A. (“Bank”), which provides for a credit facility of $5,000,000 with no monthly commitment reductions.  The borrowing base is evaluated annually, on or about September 1. Amounts borrowed under this agreement are collateralized by the common stock of one of the Company’s wholly owned subsidiaries and all of the Company’s oil and gas properties.   In September 2008, the borrowing base was redetermined and set at $4,900,000.  In December 2008, the credit agreement was renewed with a maturity date of October 31, 2010.  Under the renewed agreement, interest on the facility accrues at an annual rate equal to the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) daily floating rate, plus 2.50 percentage points.  Interest on the outstanding amount under the credit agreement is payable monthly.  In addition, the Company will pay an unused commitment fee in an amount equal to ½ of 1 percent (.5%) times the daily average of the unadvanced amount of the commitment.  The unused commitment fee shall be payable quarterly in arrears on the last day of each calendar quarter beginning March 31, 2009.  Two letters of credit for $50,000 each, in lieu of a plugging bond covering the properties we operate, are outstanding under the facility, one with the Texas Railroad Commission and one with the State of New Mexico.  The loan agreement contains customary covenants for credit facilities of this type including limitations on disposition of assets, mergers and reorganizations.  The Company is also obligated to meet certain financial covenants under the loan agreement.  The Company is in compliance with all covenants as of December 31, 2008.  The balance outstanding on the line of credit as of December 31, 2008 was $1,650,000.
 
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Recent Accounting Pronouncements.  Effective April 1, 2008, the Company implemented Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements.  The Company elected to implement this Statement with the one-year deferral permitted by FASB Staff Position (“FSP”) 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually).  The deferral applies to nonfinancial assets and liabilities measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which the Company uses fair value.  Management does not expect any significant impact to the consolidated financial statements when SFAS 157 for these assets and liabilities is implemented.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, which has been established by the FASB as a framework for entities to identify the sources of accounting principles and for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP.  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  Accordingly, the Company will adopt SFAS No. 162 within the required period.  The Company does not expect that the adoption of this Standard will have an impact on the financial statements.

In June 2008, the SEC announced that it has approved a one-year extension of the compliance data for smaller reporting companies to meet the section 404(b) auditor attestation requirement of the Sarbanes-Oxley Act.  With the extension, small companies will now be required to provide the attestation reports in their annual reports for the fiscal years ending on or after December 15, 2009.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of FASB statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP is effective upon issuance and will not have a material impact on our financial position, results of operations or cash flows.

In December 2008, the SEC released Final Rule, Modernization of Oil and Gas Reporting. The new disclosure requirements include provisions that permit the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. The new requirements also will allow companies to disclose their probable and possible reserves to investors. In addition, the new disclosure requirements require companies to: (a) report the independence and qualifications of its reserves preparer or auditor; (b) file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit; and (c) report oil and natural gas reserves using an average price based upon the prior 12-month period rather than year-end prices. The new disclosure requirements are effective for annual reports on Forms 10-K for fiscal years ending on or after December 31, 2009. The Company is currently assessing the impact that adoption of this rule will have on its financial 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 “believe,” “expect,” “anticipate,” “should,” “estimate,” “foresee” or other words and phrases of similar meaning.  Forward-looking statements appear throughout this Form 10-Q with respect to, among other things:  profitability, planned capital expenditures; estimates of oil and gas production, 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.
 
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Liquidity and Capital Resources.  Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings and issuance of common stock.  Our primary financial resource is our base of oil and gas reserves.  We pledge our producing oil and gas properties to secure our revolving line of credit.  In the past two fiscal years, we have obtained additional financing for prospects by selling fractional working interests to industry partners at prices in excess of our cost.

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 2009, cash flow from operations was $2,366,686 compared to $658,241 for the first nine months of fiscal 2008.  This increase was primarily due to an increase in cash provided by oil and gas sales.  Cash of $2,709,451 was used for additions to property and equipment and $950,000 for net reductions in long term debt.  Accordingly, net cash decreased $46,745.

During the third quarter of fiscal 2008, we acted as operator and drilled an exploratory well in Loving County, Texas which has been completed.  We have acquired right-of-way, built a pipeline and commenced testing and sales of natural gas from this well.  Our share of the costs incurred for this project through January 2009 for our 31.25% working interest is approximately $524,000.

On June 6, 2008 we purchased mineral and royalty interests contained in an aggregate of 522 acres with royalties varying from .126% to .385% in 6 producing natural gas wells, 5 proven undeveloped well locations and an additional 6 potential drill sites in the Newark East (Barnett-Shale) Field of Tarrant County, Texas for approximately $429,000.  This acreage now has 8 producing natural gas wells with an additional well currently being drilled.

Effective July 1, 2008, we purchased a well in Loving County, Texas which is capable of producing from the Lower Cherry Canyon section.  We are acting as operator and have re-entered the well, tested one horizon and plan to test two other horizons.  Our share of the costs for our 31.25% working interest through January 2009 is approximately $116,000.

In September 2008, we committed to participate in the drilling of a development well in Limestone County, Texas.  This well has been completed and is currently producing.  Costs incurred for this project through January 2009 are approximately $31,000.

In September 2008, we acted as operator and re-entered a well in Ward County, Texas to an approximate depth of 14,000 feet to test the upper and lower Pennsylvanian intervals.  This well was recompleted, perforated, acid fraced and is currently being tested pending completion of a pipeline for sales of natural gas.  Costs incurred for this project through January 2009 for our 25.5% working interest are approximately $76,000. We also own a 2% overriding royalty interest in this well.

On October 16, 2008, we purchased interests in approximately 143 mineral acres amounting to an approximate 10% net royalty in three gas wells located in Johnson County, Texas for approximately $1.275 million.  This property contains three (3) development wells in the Newark East (Barnett Shale) Field which have been drilled and were put on production in mid-November 2008.  Approximately 28 of the 143 acres are outside of the drilling and spacing unit for these three wells and are also available for further development.  A Family Limited Partnership of a director and employee of the Company received a finder’s fee of 2.5% of the mineral interest purchased in lieu of a cash payment as disclosed on Form 8-K dated October 15, 2008.

We continue to focus our efforts on the acquisition of royalties in areas with significant development potential.

We are participating in several others projects and 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.

At December 31, 2008, we had working capital of approximately $497,559 compared to working capital of $627,674 at March 31, 2008, a decrease of $130,115.  This was mainly as a result of a decrease in accounts receivable oil and gas sales.
 
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Crude oil and natural gas prices have fluctuated significantly in recent years.  There have been substantial decreases 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 adequate liquidity for the current fiscal year.

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.  In September 2008, the borrowing base was redetermined and set at $4,900,000 with no monthly commitment reductions. The borrowing base is evaluated annually, on or about September 1.  Amounts borrowed under this agreement are collateralized by the common stock of one of the Company’s wholly owned subsidiaries and all of the Company’s oil and gas properties.   Two letters of credit for $50,000 each, in lieu of a plugging bond covering the properties we operate, are outstanding under the facility, one with the Texas Railroad Commission and one with the State of New Mexico.  Interest under this agreement is payable monthly.  The balance outstanding under this agreement as of December 31, 2008 was $1,650,000 and $1,575,000 as of February 11, 2009.

Results of Operations – Three Months Ended December 31, 2008 and 2007. Net income decreased from $221,114 for the quarter ended December 31, 2007 to $131,501 for the quarter ended December 31, 2008, a decrease of $89,613 or 41% primarily as a result of a decrease in oil and gas sales and an increase in depreciation, depletion and amortization.

Oil and gas sales.  Revenue from oil and gas sales decreased from $952,211 for the third quarter of fiscal 2008 to $908,253 for the same period of fiscal 2009.  This decrease of 5% or $43,958 resulted from a decrease in oil and gas prices and oil production partially offset by an increase in gas production.  Revenues from oil and gas royalty interests accounted for approximately 47% of our total revenues for the third quarter of fiscal 2009 compared to 16% for the third quarter of fiscal 2008. Average gas prices decreased from $6.36 per mcf for the third quarter of fiscal 2008 to $4.54 per mcf for the same period of fiscal 2009.  Average oil prices also decreased from $86.05 per bbl for the third quarter of fiscal 2008 to $54.55 for the same period of fiscal 2009.  Oil and gas production quantities were 4,515 barrels (“bbls”) and 88,630 thousand cubic feet (“mcf”) for the third quarter of fiscal 2008 and 4,190 bbls and 149,778 mcf for the same period of fiscal 2009, a decrease of 7% in oil production and an increase of 69% in gas production.

Production and exploration.  Production costs decreased 1% from $241,019 for the third quarter of fiscal 2008 to $237,736 for the same period of fiscal 2009. This was the result of decreased production taxes due to the decrease in oil and gas sales partially offset by an increase in lease operating expenses and ad valorem taxes.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased 55%, from $174,842 for the third quarter of fiscal 2008 to $271,530 for the same period of fiscal 2009, primarily due to an increase to the full cost pool amortization base.

General and administrative expenses.  General and administrative expenses increased 3% from $187,648 for the third quarter of fiscal 2008 to $193,102 for the same period of fiscal 2009. This was due to an increase in salaries, consulting services and fees.

Interest expense. Interest expense decreased 24% from $22,791 for the third quarter of fiscal 2008 to $17,226 for the same period of fiscal 2009, due to a decrease in borrowings as well as interest rate.

Results of Operations – Nine Months Ended December 31, 2008 and 2007. Net income increased from $247,164 for the nine months ended December 31, 2007 to $1,181,405 for the same period of fiscal 2009, an increase of $934,241 or 378%.

Oil and gas sales.  Revenue from oil and gas sales increased from $2,642,302 for the nine months ended December 31, 2007 to $4,176,050 for the same period of fiscal 2009. This increase of 58%, or $1,533,748, resulted from increases in oil and gas prices and gas production partially offset by a decrease in oil production. Revenues from oil and gas royalty interests accounted for approximately 36% of our total revenues for the nine months ended December 31, 2008 compared to 18% for the same period of fiscal 2008.  Average gas prices increased from $6.35 per mcf for the first nine months ended December 31, 2007 to $7.45 per mcf for the same period of fiscal 2009.  Average oil prices also increased from $72.09 per bbl for the first nine months of fiscal 2008 to $96.89 for the same period of fiscal 2009.  Oil and gas production quantities were 13,348 bbls and 264,435 mcf for the first nine months ended December 31, 2007 and 12,903 bbls and 392,921 mcf for the same period of fiscal 2009, a decrease of 3% in oil production and an increase of 49% in gas production.
 
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Production and exploration.  Production costs decreased from $1,041,405 for the first nine months ended December 31, 2007 to $930,477 for the same period of fiscal 2009.  This was the result of an approximate 78% decrease in repairs and maintenance to operated wells in the El Cinco field partially offset by an increase in production taxes due to increased revenues and an increase in ad valorem taxes.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased 41%, from $531,523 for the first nine months ended December 31, 2007 to $751,337 for the same period of fiscal 2009 primarily due to an increase to the full cost pool amortization base.

General and administrative expenses.  General and administrative expenses increased 6% from $636,191 for the first nine months ended December 31, 2007 to $674,002 for the same period of fiscal 2009.  This was due to an increase in salary expense, consulting services and fees.

Interest expense. Interest expense increased 21% from $58,484 for the first nine months ended December 31, 2007 to $70,815 for the same period of fiscal 2009 due to an increase in borrowings partially offset by a decreased interest rate.

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, 2008, 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.

Interest Rate Risk.  At December 31, 2008 we had an outstanding loan balance of $1,650,000 under our $5.0 million revolving credit agreement, which bears interest at BBA LIBOR daily floating rate, plus 2.50 percentage points.  In addition, beginning March 31, 2009, we will pay quarterly, in arrears, an unused commitment fee in an amount equal to ½ of 1 percent (.5%) times the daily average of the unadvanced amount of the commitment.  If the interest rate on our bank debt increases or decreases by one percentage point, our annual pretax income would change by $16,500 based on the outstanding balance at December 31, 2008.

Credit Risk.  Credit risk is the risk of loss as a result of nonperformance by other parties of their contractual obligations. Our primary credit risk is related to oil and gas production sold to various purchasers and the receivables are generally not collateralized.  At December 31, 2008, our largest credit risk associated with any single purchaser was $171,619. We are also exposed to credit risk in the event of nonperformance from any of our working interest partners.  At December 31, 2008, our largest credit risk associated with any working interest partner was $72,465. 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.  Prices for oil and natural gas fluctuate widely. We cannot predict future oil and natural gas prices with any certainty.  Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile.  Factors that can cause price fluctuations 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 political and economic conditions in oil producing countries.  Declines in oil and natural gas prices will materially adversely affect our financial condition, liquidity, ability to obtain financing and operating results.

Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity proved reserves.  Any reduction in reserves, including reductions due to price fluctuations, can reduce the borrowing base under our revolving credit facility and adversely affect the amount of cash flow available for capital expenditures and our ability to obtain additional capital for our exploration and development activities.  In addition, we may have ceiling test writedowns when prices decline.  Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically.  Thus, we may experience material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well performance.

Similarly, any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources.  Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other.  Our financial results are more sensitive to movements in natural gas prices than oil prices because most of our production and reserves are natural gas.  If the average oil price had increased or decreased by one dollar per barrel for the first nine months of fiscal 2009, our pretax income would have changed by $12,903. If the average gas price had increased or decreased by ten cents per mcf for the first nine months of fiscal 2009, our pretax income would have changed by $39,292.
 
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Item 4.  Controls and Procedures

We maintain disclosure controls and procedures to ensure that information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis. At the end of the period covered by this report, our principal executive officer and principal financial officer reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e).  Based upon such evaluation, such officers concluded that, as of December 31, 2008, our disclosure controls and procedures were effective in timely alerting them to material information relating to us (and our consolidated subsidiaries) required to be included in our periodic SEC filings.

No changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2008 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
 
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business.  We were a party to a lawsuit against the drilling company of a well in which we have a working interest of approximately 6.5%.  The operator of this well is currently in the process of dismissing all claims.  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 2008 Annual Report on Form 10-K except to add that worldwide credit markets have experienced considerable difficulty in recent months.  Thus, we expect future increased costs of and restricted ability to obtain financing.
   
Item 4.
Submission of Matters to a Vote of Security Holders
 
None.
   
Item 6.
Exhibits
   
 
31.1
Certification of the Chief Executive Officer of Mexco Energy Corporation
     
 
31.2
Certification of the Chief Financial Officer of Mexco Energy Corporation
     
 
32.1
Certification of the Chief Executive Officer and Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C. §1350

 
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 11, 2009
/s/ Nicholas C. Taylor
 
Nicholas C. Taylor
 
President
   
   
Dated: February 11, 2009
/s/ Tamala L. McComic
 
Tamala L. McComic
 
Vice President, Treasurer and Assistant Secretary
 
 

 
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