Washington, D. C. 20549
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-6994
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act. (Check one):
the consolidated financial statements.
the consolidated financial statements.
the consolidated financial statements.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position of the Company as of SeptemberJune 30, 2008,2009, and the results of its operations and cash flows for the interim periods ended SeptemberJune 30, 20082009 and 2007.2008. 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 SEC.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.
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,There were no stock options forfeited or expired during the three months ended June 30, 2009. During the three months ended June 30, 2008, 20,000 stock options expired because they were not exercised prior to the end of their ten-year term.
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 six month periods ended SeptemberJune 30, 20082009 and 2007.2008.
Effective April 1, 2007, we adopted the provisions of Financial Accounting Standards Bulletin ("FASB")Under FASB Interpretation No,No. 48, Accounting for Uncertainty in Income Taxes -– An Interpretation of FASB Statement No. 109 ("(“FIN 48"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 six months ending September 30,2008, the amount of unrecognized tax benefits was $563,000. For the six months ending September 30, 2007, there were no unrecognized tax benefits. Anyany interest and penalties related to incomeuncertain tax positions are recorded as interest expense and general and administrative expense, respectively. As of June 30, 2009, the Company had unrecognized tax benefits of approximately $467,164.
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 subsidiariessubsidiary and substantially all of the Company’s oil and gas properties. In September 2008, the borrowing base was redetermined and set at $4,900,000 bearing interest$4,900,000. Availability of this line of credit at prime rate per annumJune 30, 2009 was $3,650,000. No principal payments are anticipated to be required through March 31, 2010 based on the revised borrowing base.
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 2.5 percentage points, which was 2.8075% on June 30, 2009. TwoInterest 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 1/2 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. The loan agreement contains customary covenants for credit facilities of this type including limitations on disposition of assets, mergers and reorganizations. We are also obligated to meet certain financial covenants under the loan agreement. The Company is in compliance with all covenants as of June 30, 2009. In addition, this agreement prohibits us from paying cash dividends on our common stock.
At the end of fiscal 2009, two letters of credit for $50,000 each, in lieu of a plugging bond covering the properties we operate, arethe Company operates were 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 at prime rate (5.0%These letters of credit renew annually. Since the Company no longer has any well operations and 7.75% at September 30, 2008does not plan to have any operations in the State of New Mexico, the letter of credit for the State of New Mexico was not renewed and 2007, respectively). subsequently cancelled on April 29, 2009.
The balance outstanding on the line of credit as of SeptemberJune 30, 20082009 was $950,000.$1,250,000 and $1,200,000 as of August 3, 2009.
Subsequent Events. 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 are being prepared for production. 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.
Recent Accounting Pronouncements. EffectiveIn 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 October 2008, the FASB issued FSP FAS 157-3, No. SFAS No. 142-3, DeterminingDetermination of the Fair ValueUseful Life of Intangible Assets (“FSP SFAS No. 142-3”). FSP SFAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a Financial Asset Whenrecognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The intent of FSP SFAS No. 142-3 is to improve the Market for That Asset Is Not Active. FSP FAS 157-3 clarifiesconsistency between the applicationuseful life of FASB statementa recognized intangible asset under SFAS No. 157, Fair Value Measurements, in a market that is not active142 and provides an examplethe period of expected cash flows used to illustrate key considerations in determiningmeasure the fair value of a financialthe asset when the market for that financial asset is not active. Thisunder SFAS No. 141R and other applicable accounting literature. FSP SFAS No. 142-3 is effective upon issuancefor financial statements issued for fiscal years beginning after December 15, 2008 and willmust be applied prospectively to intangible assets acquired after the effective date. The adoption of this Standard did not have a material impact on ourthe Company’s financial position, results of operations or cash flows.statements.
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 Withwith Generally Accepted Accounting Principles. The effective date of SFAS No. 162 was November 15, 2008. The adoption of this Standard did not have a material impact on the Company’s financial statements.
In December 2008, the SEC released Final Rule, Modernization of Oil and Gas Reporting, amending oil and gas reporting requirements under Rule 4-10 of Regulation S-X and Industry Guide 2 in Regulation S-K. The new requirements provide for consideration of new technologies in evaluating reserves, allow companies to disclose their probable and possible reserves to investors, report oil and gas reserves using an average price based on the prior 12-month period rather than year-end prices, and revise the disclosure requirements for oil and gas operations. The final rules are effective for fiscal years ending on or after December 31, 2009. The Company anticipates that the implementation of the new rule will provide a more meaningful and comprehensive understanding of oil and gas reserves. The Company is currently assessing the impact that the adoption will have on its disclosures, operating results, financial position and cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”), which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after the date in the set of financial statements being presented. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. Accordingly, the Company adopted SFAS 165 as of the quarter ended June 30, 2009 with no impact to its financial statements. The Company has evaluated subsequent events through August 10, 2009.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfer of Financial Assets, an amendment of FASB Statement No.140 which modifies and clarifies the requirements of FAS No. 140. The standard is effective for annual reporting periods beginning after November 15, 2009. Presently, the Company does not anticipate that adoption of this standard will have an impact on its financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) which modifies the requirements of FASB Interpretation No. 46(R). The standard is effective for financial statements issued after November 15, 2009. Presently, the Company does not anticipate that adoption of this standard will have an impact on its financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Accordingly, the Company will adoptThis standard replaces SFAS No. 162, withinThe Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification will become the required period.source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company will begin to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the second quarter of fiscal 2010. As the Codification was not intended to change or alter existing GAAP, the Company does not expect that the adoption of this Standard willSFAS No. 168 to have an impact on theits disclosures, operating results, financial statements.position and cash flows.
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 caninclude statements regarding our plans, beliefs or current expectations and my be identified withsignified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and phrases such as “believe,” “expect,” “anticipate,” “should,” “estimate,” “foresee” or other words and phrases of similar meaning.expressions. Forward-looking statements appear throughout this Form 10-Q with respect to, among other things: profitability, planned capital expenditures; estimates of oil and gas production,production; future project dates; estimates of future oil and gas prices; estimates of oil and gas reserves; our future financial condition or results of operations; and our business strategy and other plans and objectives for future operations. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement.
While we have made assumptions that we believe are reasonable, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. All forward-looking statements in thethis Form 10-Q are qualified in their entirety by the cautionary statement contained in this section. We do not undertake to update, revise or correct any of the forward-looking information. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Form 10-K.
Liquidity and Capital Resources. Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings 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 sixthree months of fiscal 2009,2010, cash flow from operations was $1,621,064$293,379, a 24% decrease when compared to $590,656 for the first six monthscorresponding period of fiscal 2008. This increase was primarily due to an increase in cash provided by oil and gas sales.2009. Cash of $1,231,574$234,224 was used for additions to oil and gas properties and $1,650,000$150,000 for net reduction in long term debt. Accordingly, net cash decreased $83,378.
During$92,663. This decrease can be primarily attributed to a decrease in cash from oil and gas sales as compared to cash from oil and gas sales in the third quartercorresponding period 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 and are preparing to build a pipeline to enable production and sales of natural gas from this well. Our share of the costs incurred for this project through October 2008 for our 31.25% working interest is approximately $440,000.2009.
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 and 5 proven undeveloped well locations in the Newark East (Barnett-Shale) Field of Tarrant County, Texas for approximately $429,000. There are an additional 6 potential drill sites on this acreage.
Effective July 1, 2008, we purchased a well in Loving County, Texas currentlywhich is capable of producing from the Lower Cherry Canyon section. We are acting as operator and have re-entered the well to test two other pay horizons.well. We have purchased right-of-way and are constructing a pipeline for transmission and sales of natural gas. Our share of the costs for our 31.25%50.2% working interest through October 2008June 2009 is approximately $81,000.$193,000.
In September 2008, we committed to participate in the drilling of a development well in Limestone County, Texas. This well has been drilled and is in the process of completion. Costs incurred for this project through October 9, 2008 are approximately $22,000.
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. Costs incurred for this project through October 2008 for our 25.5% working interest are approximately $72,000. We also own a 2% overridingcurrently hold royalty interest in this well.
On October 16, 2008, we purchased interests in approximately 143 mineralan aggregate of 522 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)(Barnett-Shale) Field which have been drilledof Tarrant County, Texas. This acreage has 9 producing natural gas wells, 3 proven undeveloped well locations and are being prepared6 additional potential drill sites. We subsequently purchased additional royalties in this acreage on March 31, 2009 for production. Approximately 28approximately $49,000.
We currently hold royalty interests in 122 mineral acres in Tarrant County, Texas. As of the 143 acres are outside of the drilling and spacing unit for theseMarch 31, 2009, there were three wells on this acreage producing natural gas into a sales pipeline. In April 2009, two additional wells were completed and are also available for further development. A directorbegan producing natural gas. In July 2009, an additional well was completed 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 disclosedput on Form 8-K dated October 15, 2008.production.
We continue to focus our efforts on the acquisition of royalties in areas with significant development potential.
We are participating in several other 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 SeptemberJune 30, 2008,2009, we had working capital of approximately $929,374$175,166 compared to working capital of $627,674$221,989 at March 31, 2008, an increase of $301,700.2009. This was mainly as a result of an increasea decrease in accounts receivable and cash and cash equivalents, partially offset by an increasea decrease in accounts payable and accrued expenses.
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 impactDuring the second quarter of fiscal 2009, oil and gas prices began trending downward, while drilling, completion and operating costs remained high. The effect of declining product prices on our financial conditionbusiness is significant. Lower product prices reduce our cash flow from operations and liquidity. However, managementdiminish the present value of our oil and gas reserves. Lower product prices also offer us less incentive to assume the drilling risks that are inherent in our business. The volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, the West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $30.28 per bbl in December 2008 to a high of $145.31 per bbl in July 2008. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $3.58 per MMBtu in March 2009 to a high of $13.31 per MMBtu in July 2008. On June 30, 2009 the WTI posted price for crude oil was $69.82 per bbl and the Henry Hub spot price for natural gas was $3.72 per MMBtu. Management is of the opinion that cash flow from operations and funds available from financing will be sufficient to provide adequate liquidity for the currentnext fiscal year.
Contractual Obligations. We have no off-balance sheet debt or unrecorded obligations and have not guaranteed the debt of any other party. The following table summarizes our future payments we are obligated to make based on agreements in place as of June 30, 2009:
| | Payments Due In (1): | |
| | Total | | | less than 1 year | | | 1-3 years | | | 3 years | |
Contractual obligations: | | | | | | | | | | | | |
Secured bank line of credit | | $ | 1,250,000 | | | $ | - | | | $ | 1,250,000 | | | $ | - | |
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,(1) | Does not include estimated interest of $35,100 less than 1 year and $105,300 1-3 years. |
These amounts represent the borrowing base was redetermined and increased to $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 our wholly owned subsidiaries and all of our oil and gas properties. Two letters of credit for $50,000 each, in lieu of a plugging bond covering the properties we operate, arebalances outstanding under the facility, one with the Texas Railroad commissionbank line of credit. These repayments assume that interest will be paid on a monthly basis and one with the State of New Mexico. Interest under this agreement is payable monthly at prime rate (5.0% and 7.75% at September 30, 2008 and 2007, respectively). This agreement generally restricts our ability to transfer assets or control of the Company, incur debt, extend credit, change the nature of our business, substantially change management personnel or pay cash dividends. The balance outstanding under this agreement as of September 30, 2008 was $950,000 and $1,750,000 as of November 7, 2008.that no additional funds will be drawn.
Results of Operations – Three Months Ended SeptemberJune 30, 2008 and 2007.2009 Compared to Three Months Ended June 30, 2008. Net income increaseddecreased from $538,789 for the quarter ended June 30, 2008 to a net loss of $8,756$68,003 for the quarter ended SeptemberJune 30, 2007 to2009; a net profitdecrease of $511,115 for the quarter ended September 30, 2008, an increase of $519,871$606,792 as a result of an increasea decrease in oil and gas sales.operating revenues partially offset by a decrease in production costs.
Oil and gas sales. Revenue from oil and gas sales increaseddecreased from $839,947$1,672,587 for the secondfirst quarter of fiscal 20082009 to $1,595,209$653,810 for the same period of fiscal 2009.2010. This increasedecrease of 90% or $755,26261% resulted from a decrease in oil and gas prices offset partially by an increase in oil and gas production. Average gas prices and production. Revenuesdecreased from oil and gas royalty interests accounted for approximately 36% of our total revenues$9.70 per mcf for the secondfirst quarter of fiscal 2009 compared to 23% for the second quarter of fiscal 2008. Average gas prices increased from $5.97 per mcf for the second quarter of fiscal 2008 to $8.78$3.04 per mcf for the same period of fiscal 2009.2010. Average oil prices also increaseddecreased from $70.53$118.57 per bbl for the secondfirst quarter of fiscal 20082009 to $116.07$53.78 for the same period of fiscal 2009.2010. Oil and gas production quantities were 4,4414,107 barrels (“bbls”) and 88,266122,286 thousand cubic feet (“mcf”) for the secondfirst quarter of fiscal 20082009 and 4,6064,331 bbls and 120,856138,418 mcf for the same period of fiscal 2009,2010, an increase of 4%5% in oil production and 37%13% in gas production.
Production and exploration.Production costs decreased 23%28% from $467,336$334,988 for the secondfirst quarter of fiscal 20082009 to $357,753$240,973 for the same period of fiscal 2009.2010. This was the result of an approximate 82%a 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.the decrease in oil and gas sales as well as a decrease in lease operating expenses.
Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased 31%10%, from $183,797$238,844 for the secondfirst quarter of fiscal 20082009 to $240,962$263,462 for the same period of fiscal 2009,2010 primarily due to an increase to the full cost pool amortization basein oil and gas production partially offset by an increase in production.oil and gas reserves.
General and administrative expenses.General and administrative expenses increased 11%decreased 18% from $178,918$281,661 for the secondfirst quarter of fiscal 20082009 to $199,239$232,185 for the same period of fiscal 2009.2010. This was primarily due to an increasea decrease in salaries, consulting servicessalary and geological expenses as well as a decrease in board of directors’ fees.
Interest expense. Interest expense decreased 2%71% from $20,345$33,735 for the secondfirst quarter of fiscal 20082009 to $19,854$9,624 for the same period of fiscal 2009,2010, due to a decrease in the interest rate, partially offset by increased borrowings.
Results of Operations – Six Months Ended September 30, 2008borrowings and 2007. Net income increased from $26,049 for the six months ended September 30, 2007 to $1,049,904 for the same period of fiscal 2009, an increase of $1,023,855 or 3930%.
Oil and gas sales. Revenue from oil and gas sales increased from $1,690,092 for the six months ended September 30, 2007 to $3,267,797 for the same period of fiscal 2009. This increase of 93%, or $1,577,705, resulted from an increase in oil and gas prices and gas production. Revenues from oil and gas royalty interests accounted for approximately 37% of our total revenues for the six months ended September 30, 2008 compared to 24% for the same period of fiscal 2008. Average gas prices increased from $6.35 per mcf for the first six months ended September 30, 2007 to $9.24 per mcf for the same period of fiscal 2009. Average oil prices also increased from $64.95 per bbl for the first six months of fiscal 2008 to $117.25 for the same period of fiscal 2009. Oil and gas production quantities were 8,833 bbls and 175,805 mcf for the first six months ended September 30, 2007 and 8,713 bbls and 243,143 mcf for the same period of fiscal 2009, an increase of 38% in gas production and a decrease of 1% in oil production.
Production and exploration. Production costs decreased 13% from $800,386 for the first six months ended September 30, 2007 to $692,741 for the same period of fiscal 2009. This was the result of an approximate 81% 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.
Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased 35%, from $356,681 for the first six months ended September 30, 2007 to $479,807 for the same period of fiscal 2009 primarily due to an increase to the full cost pool amortization base and an increase in production.
General and administrative expenses. General and administrative expenses increased 7% from $448,543 for the first six months ended September 30, 2007 to $480,900 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 50% from $35,694 for the first six months ended September 30, 2007 to $53,589 for the same period of fiscal 2009 due to an increase in borrowings, partially offset by a decrease in interest rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary sources of market risk for us include fluctuations in commodity prices and interest rate fluctuations.rates. All of our financial instruments are for purposes other than trading. At SeptemberJune 30, 2008,2009, 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 SeptemberJune 30, 20082009, we had an outstanding loan balance of $950,000$1,250,000 under our $5.0 million revolving credit agreement, which bears interest at an annual rate equal to the primeBBA LIBOR daily floating rate, which varies from time to time.plus 2.50 percentage points. If the interest rate on our bank debt increases or decreases by one percentage point our annual pretax income would change by $9,500$12,500, based on the outstanding balance at SeptemberJune 30, 2008.2009.
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 SeptemberJune 30, 2008,2009, our largest credit risk associated with any single purchaser was $188,620.$29,228. We are also exposed to credit risk in the event of nonperformance from any of our working interest partners. At SeptemberJune 30, 2008,2009, our largest credit risk associated with any working interest partner was $42,759.$39,630. We have not experienced any significant credit losses.
Volatility of Oil and Gas PricesEnergy Price Risk. Our revenues, operatingmost significant market risk is the pricing for natural gas and crude oil. Our financial condition, results of operations, and future rate of growthcapital resources 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 of 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 whena noncash write-down of our oil and gas properties could be required under full cost accounting rules if prices decline.declined significantly, even if it is only for a short period of time. Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically. Thus, we may experience material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well performance.
Similarly, any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources. Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. 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 six months of fiscalquarter ended June 30, 2009, our pretax incomeloss would have changed by $8,713.$4,331. If the average gas price had increased or decreased by ten centsone dollar per mcf for the first six months of fiscalquarter ended June 30, 2009, our pretax incomeloss would have changed by $24,314.$138,418.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis. At the end of the period covered by this report, our principal executive officer and principal financial officer have 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 on such evaluation, such officers have concluded that, as of SeptemberJune 30, 2008,2009, our disclosure controls and procedures were effective in timely alerting them to material information relating to us (and our consolidated subsidiaries)subsidiary) required to be included in our periodic SEC filings.
Changes in Internal Control over Financial Reporting. No changes in the Company’s internal control over financial reporting occurred during the quarter ended SeptemberJune 30, 20082009 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 are currently a party to a lawsuit that is being filed against the drilling company of a well in which we have a working interest of approximately 6.5%. 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 20082009 Annual Report on Form 10-K, except to add that worldwide credit markets have experienced considerable difficulty in recent months. Thus, Mexco expects future increased costs of and restricted ability to obtain financing.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 HoldersItem 4. | Submission of Matters to a Vote of Security Holders |
Our annual meeting was held on September 11, 2008. Following are the two proposals voted on at the meeting andthe results of each:
Proposal #1 was the election of the following directors:None.
| Votes For: | | Votes Withheld: |
Thomas R. Craddick | 1,435,205 | | 33,898 |
Thomas Graham, Jr. | 1,449,322 | | 19,781 |
Arden R. Grover | 1,450,777 | | 18,326 |
Jack D. Ladd | 1,450,777 | | 18,326 |
Nicholas C. Taylor | 1,449,644 | | 19,459 |
Proposal #2 was to ratify the selection of Grant Thornton, LLP as independent registered public accounting firm for the Company for the fiscal year ended March 31, 2009. Votes for were 1,445,419, votes against were 9,382 and votes abstained were 14,302.
Item 5. Other InformationNone.
The Board of Directors of the Company amended Article II and Article X of the Company's By-laws (the "By-laws"), effective as of November 15, 2008, to revise the date of the annual meeting of shareholders to the second Thursday in September from the previously designated second Tuesday in July; and to allow for the issuance of uncertificated shares thereby allowing the Company to participate in the Direct Registration System, which is currently administered by The Depository Trust Company. The Direct Registration System allows investors to have securities registered in their names without the issuance of physical certificates and allows investors to electronically transfer securities to broker-dealers in order to effect transactions without the risks and delays associated with transferring physical certificates. The Article X amendment to the By-laws also provides that each registered stockholder shall be entitled to a stock certificate upon written request to the transfer agent or registrar of the Company.
The full text of the By-laws, as amended, is filed as Exhibit 3.1 to this Form 10-Q, and amended Articles II and X thereof is incorporated herein by reference.
| 3.1 | Amended and Restated Bylaws of the Mexco Energy Corporation |
| | |
| 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: November 13, 2008 /s/ Nicholas C. Taylor
Nicholas C. Taylor
President
Dated: November 13, 2008 /s/Tamala L. McComic
Tamala L. McComic
Vice President, Treasurer and Assistant Secretary | MEXCO ENERGY CORPORATION |
| (Registrant) |
| |
| |
Dated: August 14, 2009 | /s/ Nicholas C. Taylor |
| Nicholas C. Taylor |
| President |
| |
| |
| |
Dated: August 14, 2009 | /s/ Tamala L. McComic |
| Tamala L. McComic |
| Executive Vice President, Treasurer and Assistant Secretary |
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