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

FORM 10-Q

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

For the quarterly period ended September 30, 20082009

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
79701
Midland, Texas
(Zip code)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ]  No [  ]

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):

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 November 10, 200812, 2009 was 1,874,866.1,891,866.
 
Page 1
 
MEXCO ENERGY CORPORATION

Table of Contents
PART I.  FINANCIAL INFORMATION
Table of Contents
   Page
PART I.  FINANCIAL INFORMATION
 
 Item 1.
Consolidated Balance Sheets (Unaudited) as of September 30, 2008
(Unaudited)2009 and March 31, 2008
2009		3
   
 
Consolidated Statements of Operations (Unaudited) for
the three months and six months ended September 30, 2008
2009 and September 30, 2007
2008		4
    
  
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) as of
September 30, 20082009
5
    
  
Consolidated Statements of Cash Flows (Unaudited) for
the six months ended September 30, 20082009 and September 30, 2007
2008		6
    
  Notes to Consolidated Financial Statements (Unaudited)7
    
 Item 2.
Management's Discussion and Analysis of Financial Condition
and Results
of Operations
1011
    
 Item 3.Quantitative and Qualitative Disclosures About Market Risk1214
    
 Item 4.Controls and Procedures1314
    
PART II.  OTHER INFORMATION14 
Item 1.Legal Proceedings15
    
 Item 1. 1A.Legal ProceedingsRisk Factors15
 
 Item 1A. 2.Risk FactorsUnregistered Sales of Equity Securities and Use of Proceeds15
 
 Item 3.Defaults upon Senior Securities15
Item 4.Submission of Matters to a Vote of Security Holders15
  
Item 5.Other Information15
  
Item 6.Exhibits15
    
SIGNATURES15 16
  
EXHIBITSCERTIFICATIONS 
 
Page 2
 
Mexco Energy Corporation and Subsidiaries
Mexco Energy Corporation and Subsidiaries 
CONSOLIDATED BALANCE SHEETS 
(Unaudited) 
       
  September 30,  March 31, 
  2009  2009 
ASSETS      
Current assets      
Cash and cash equivalents $229,057  $223,583 
Accounts receivable:        
Oil and gas sales  475,643   351,040 
Trade  58,317   164,834 
Related parties  -   1,687 
Prepaid costs and expenses  69,866   36,610 
Total current assets  832,883   777,754 
         
         
         
Property and equipment, at cost        
Oil and gas properties, using the full cost method  27,016,662   26,735,778 
Other  65,470   61,362 
   27,082,132   26,797,140 
         
Less accumulated depreciation, depletion and amortization  13,604,549   13,066,014 
Property and equipment, net  13,477,583   13,731,126 
  $14,310,466  $14,508,880 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current liabilities        
Accounts payable and accrued expenses $460,074  $555,765 
         
Long-term debt  1,275,000   1,400,000 
Asset retirement obligations  462,042   440,011 
Deferred income tax liabilities  986,705   1,185,494 
         
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;        
1,975,866 and 1,962,616 shares issued;
1,891,866 and 1,878,616 shares outstanding as of
        
September 30, 2009 and March 31, 2009, respectively  987,933   981,308 
Additional paid-in capital  5,719,683   5,617,620 
Retained earnings  4,845,646   4,755,299 
Treasury stock, at cost (84,000 shares)  (426,617)  (426,617)
Total stockholders' equity  11,126,645   10,927,610 
  $14,310,466  $14,508,880 
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of
the consolidated financial statements.
Page 3
  
September 30, 2008
  
March 31, 2008
 
  (Unaudited)    
ASSETS      
Current assets
      
Cash and cash equivalents
 $220,239  $303,617 
Accounts receivable:
        
Oil and gas sales
  867,441   758,459 
Trade
  474,449   102,403 
Related parties
  42,446   12,659 
Prepaid costs and expenses
  51,304   22,062 
Total current assets
  1,655,879   1,199,200 
         
Investment in GazTex, LLC
  --   20,509 
         
Property and equipment, at cost
        
Oil and gas properties, using the full cost method
  24,805,130   23,941,483 
Other
  61,362   61,362 
   24,866,492   24,002,845 
         
Less accumulated depreciation, depletion and amortization
  12,499,702   12,019,895 
Property and equipment, net
  12,366,790   11,982,950 
  $14,022,669  $13,202,659 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current Liabilities
        
Accounts payable and accrued expenses
 $726,505  $571,526 
         
Long-term debt
  950,000   2,600,000 
Asset retirement obligation
  409,552   374,789 
Deferred income tax liability
  1,236,139   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
        
September 30 and March 31, 2008, respectively
  979,433   920,683 
Additional paid-in capital
  5,513,024   4,381,269 
Retained earnings
  4,634,633   3,584,729 
Treasury stock, at cost (84,000 shares)
  (426,617)  (426,617)
Total stockholders’ equity  10,700,473   8,460,064 
  $14,022,669  $13,202,659 
Mexco Energy Corporation and Subsidiaries 
CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited) 
  
  Three Months Ended  Six Months Ended 
  September 30  September 30 
  2009  2008  2009  2008 
Operating revenue:            
Oil and gas $737,944  $1,595,209  $1,391,754  $3,267,797 
Other  8,350   6,597   12,717   13,330 
Total operating revenues  746,294   1,601,806   1,404,471   3,281,127 
                 
Operating expenses:                
Production  269,251   357,753   510,224   692,741 
Accretion of asset retirement obligation  7,879   7,266   15,607   14,204 
Depreciation, depletion, and amortization  275,072   240,962   538,534   479,807 
General and administrative  198,229   199,239   430,414   480,900 
Total operating expenses  750,431   805,220   1,494,779   1,667,652 
                 
Operating profit (loss)  (4,137)  796,586   (90,308)  1,613,475 
                 
Other income (expenses):                
Interest income  61   671   227   1,007 
Interest expense  (8,737)  (19,854)  (18,361)  (53,589)
                 
Net other expense  (8,676)  (19,183)  (18,134)  (52,582)
                 
Earnings (loss) before provision for income taxes  (12,813)  777,403   (108,442)  1,560,893 
                 
Income tax expense (benefit):                
Current  -   257,562   -   471,130 
Deferred  (171,163)  8,726   (198,789)  39,859 
   (171,163)  266,288   (198,789)  510,989 
                 
Net income $158,350  $511,115  $90,347  $1,049,904 
                 
                 
Earnings per common share:                
Basic $0.08  $0.27  $0.05  $0.58 
Diluted $0.08  $0.26  $0.05  $0.55 
                 
Weighted average common shares outstanding:                
Basic  1,883,248   1,873,127   1,880,944   1,817,962 
Diluted  1,942,514   1,975,453   1,945,702   1,922,568 
 
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
September 30
  
Six Months Ended
September 30
 
  
2008 
  2007  2008  2007 
Operating revenue:            
Oil and gas sales
 $1,595,209  $839,947  $3,267,797  $1,690,092 
Other
  6,597   1,161   13,330   1,334 
Total operating revenues
  1,601,806   841,108   3,281,127   1,691,426 
                 
Operating expenses:                
Production
  357,753   467,336   692,741   800,386 
Accretion of asset retirement obligation
  7,266   6,713   14,204   13,324 
Depreciation, depletion, and amortization  240,962   183,797   479,807   356,681 
General and administrative
  199,239   178,918   480,900   448,543 
Total operating expenses
  805,220   836,764   1,667,652   1,618,934 
                 
Income from operations  796,586   4,344   1,613,475   72,492 
                 
Other income (expense):                
Interest income
  671   1,747   1,007   2,085 
Interest expense
  (19,854)  (20,345)  (53,589)  (35,694)
                 
Net other expense
  (19,183)  (18,598)  (52,582)  (33,609)
                 
                 
Income (loss) before income taxes  777,403   (14,254)  1,560,893   38,883 
                 
                 
Income tax expense (benefit):                
Current
  257,562   --   471,130   -- 
Deferred
  8,726   (5,498)  39,859   12,834 
   266,288   (5,498)  510,989   12,834 
                 
Net income (loss) $511,115  $(8,756) $1,049,904  $26,049 
                 
                 
Earnings per common share:                
Basic:
 $0.27  $--  $0.58  $0.01 
Diluted:
 $0.26  $--  $0.55  $0.01 
                 
Weighted average common shares outstanding:                
Basic:
  1,873,127   1,772,268   1,817,962   1,774,526 
Diluted:
  1,975,453   1,772,268   1,922,568   1,786,397 

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)
 
        
Additional
Paid-In
Capital
     
Total
Stockholders’
Equity
 
  
Common Stock
Par Value
  
Treasury
Stock
  
Retained
Earnings
 
 
                
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 
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, 2009 $981,308  $(426,617) $5,617,620  $4,755,299  $10,927,610 
Net loss  -   -   -   (68,003)  (68,003)
Stock based compensation  -   -   9,348   -   9,348 
Balance at June 30, 2009 $981,308  $(426,617) $5,626,968  $4,687,296  $10,868,955 
                     
Net Income  -   -   -   158,350   158,350 
Issuance of stock through                    
options exercised  6,625   -   86,167   -   92,792 
Stock based compensation  -   -   6,548   -   6,548 
Balance at September 30, 2009 $987,933  $(426,617) $5,719,683  $4,845,646  $11,126,645 
                     
                     
SHARE ACTIVITY                    
                     
Common stock shares, issued:                    
Balance at March 31, 2009      1,962,616             
Issued      -             
Balance at June 30, 2009      1,962,616             
Issued      13,250             
Balance at Sept. 30, 2009      1,975,866             
                     
Common stock shares, held in treasury:                 
Balance at March 31, 2009      (84,000)            
Acquisitions      -             
Balance at June 30, 2009      (84,000)            
Acquisitions      -             
Balance at Sept. 30, 2009      (84,000)            
                     
Common stock shares, outstanding                 
at September 30, 2009      1,891,866             

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
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)
Common stock shares, outstanding
at September 30, 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 Six Months Ended September 30,
(Unaudited)

Mexco Energy Corporation and SubsidiariesMexco Energy Corporation and Subsidiaries 
CONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Six Months Ended September 30,For the Six Months Ended September 30, 
(Unaudited)(Unaudited) 
      
 2008  2007  2009  2008 
Cash flows from operating activities:            
Net income
 $1,049,904  $26,049  $90,347  $1,049,904 
Adjustments to reconcile net income to net cash
                
provided by operating activities:
                
Increase in deferred tax liabilities
  39,859   12,834 
Deferred income tax (benefit) expense  (198,789)  39,859 
Excess tax benefit from share based payment arrangement
  (471,130)  --   -   (471,130)
Stock-based compensation
  32,447   52,516   15,896   32,447 
Depreciation, depletion and amortization
  479,807   356,681   538,534   479,807 
Accretion of asset retirement obligations
  14,204   13,324   15,607   14,204 
Loss in subsidiary of OBTX, LLC
  1,809   -- 
Other  (2,038)  1,809 
Changes in assets and liabilities:
                
Increase in accounts receivable
  (510,815)  (2,024)  (16,399)  (510,815)
(Increase) decrease in prepaid expenses
  (29,242)  9,896 
Increase in prepaid expenses  (33,256)  (29,242)
Increase in income taxes payable
  471,130   --   -   471,130 
Increase in accounts payable and accrued expenses
  543,091   121,380   41,959   543,091 
        
Net cash provided by operating activities
  1,621,064   590,656   451,861   1,621,064 
                
Cash flows from investing activities:                
Additions to oil and gas properties
  (1,231,574)  (866,749)  (451,485)  (1,231,574)
Additions to other property and equipment  (4,108)  - 
Proceeds from investment in GazTex, LLC
  18,700   --   -   18,700 
Proceeds from sale of oil and gas properties and equipment
  374   10,800   41,414   374 
        
Net cash used in investing activities
  (1,212,500)  (855,949)  (414,179)  (1,212,500)
                
Cash flows from financing activities:                
Acquisition of treasury stock
  --   (51,422)
Proceeds from exercise of stock options
  686,928   4,000   92,792   686,928 
Reduction of long-term debt
  (2,025,000)  (50,000)  (200,000)  (2,025,000)
Proceeds from long-term debt
  375,000   400,000   75,000   375,000 
Excess tax benefit from share based payment arrangement
  471,130   --   -   471,130 
Net cash used in financing activities  (32,208)  (491,942)
                
Net cash (used in) provided by financing activities
  (491,942)  302,578 
        
Net (decrease) increase in cash and cash equivalents  (83,378)  37,285 
Net increase (decrease) in cash and cash equivalents  5,474   (83,378)
                
Cash and cash equivalents at beginning of period  303,617   72,537   223,583   303,617 
                
Cash and cash equivalents at end of period $220,239  $109,822  $229,057  $220,239 
        
                
Supplemental disclosure of cash flow information:                
Cash paid for interest
 $60,794  $33,902  $18,899  $60,794 
Income taxes paid
 $--  $--   -   - 
                
Non-cash investing and financing activities:                
Asset retirement obligations
 $21,183  $12,469  $7,335  $21,183 
 
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), and its wholly owned subsidiaries,subsidiary, 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 September 30, 2008,2009, and the results of its operations and cash flows for the interim periods ended September 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.  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.subsidiary.  Prior to fiscal 2010, balances included our wholly owned subsidiary, OBTX, LLC (a Delaware limited liability company) which was dissolved in March 2009.  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 $13,002$6,548 and $33,387$13,002 in general and administrative expense in the Consolidated Statements of Operations for the three months ended September 30, 20082009 and 2007,2008, respectively.  Compensation expense recognized for the six months ended September 30, 2009 and 2008 was $15,896 and 2007 was $32,447, and $52,516, respectively.

The following table is a summary of activity of stock options for the six months ended September 30, 2008:2009:

  Number of Shares  Weighted Average Exercise Price Per Share  Weighted Aggregate Average Remaining Contract Life in Years  Intrinsic Value 
Outstanding at March 31, 2009  148,750  $6.04   3.04  $813,703 
Granted  -   -         
Exercised  13,250   7.00         
Forfeited or Expired  -   -         
Outstanding at September 30, 2009  135,500  $5.95   2.63  $657,783 
                 
Vested at September 30, 2009  109,250  $6.06   2.56  $517,645 
Exercisable at September 30, 2009  109,250  $6.06   2.56  $
517,645
 
Page 7
  
Number of
Shares
  
Weighted Average
Exercise Price
Per Share
  
Weighted Average
Contract Life
in Years
  
Aggregate
Intrinsic
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 September 30, 2008
  152,500  $6.00   3.81  $1,679,303 
                 
Vested at September 30, 2008
  112,500  $6.07   3.52  $1,231,253 
Exercisable at September 30, 2008
  112,500  $6.07   3.52  $1,231,253 

There were no stock options granted during the six months ended September 30, 20082009 and 2007.2008.
Page 7

During the six months ended September 30, 2008,2009, employees and directors exercised options on a total of 117,50013,250 shares at exercise prices between $4.00$6.17 and $8.24 per share.  The Company received proceeds of $686,928$92,792 from these exercises. The total intrinsic value of the exercised options was $4,177,440.$55,661.  No tax deduction is recorded when options are awarded.  Of these exercised options, 44,5004,750 shares resulted in a disqualifying disposition and a tax benefit for the Company of $471,130 for the six months ended September 30, 2008.disposition.  The Company issued new shares of common stock to settle these option exercises.

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 six months ended September 30, 2009.  During the six months ended September 30, 2008, 20,000 stock options expired because they were not exercised prior to the end of their ten-year term.

Outstanding options at September 30, 20082009 expire between September 2009March 2010 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 September 30, 20082009 totals approximately $59,965$22,000 which is expected to be recognized over a weighted average of 2.71.8 years.

Fair Value of Financial Instruments.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable.  The Company primarily applies the market approach for recurring fair value measurements and endeavor to utilize the best available information.

The following represents information about the estimated fair values of the Company’s financial instruments:

Cash and cash equivalents, accounts receivable, other current assets, accounts payable, interest payable and other current liabilities.  The carrying amounts approximate fair value due to the short maturity of these instruments.

Line of credit and term note.  The carrying amount of borrowings outstanding under the Company’s credit facility approximate fair value because the instrument bears interest at variable market rates.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Certain assets and liabilities are reported at fair value on a nonrecurring basis in the Company’s consolidated balance sheets.  The following methods and assumptions were used to estimate the fair values:

Impairments of long-lived assets — The Company reviews its long-lived assets to be held and used, including proved oil and gas properties, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable.  An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets.  In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.  The Company reviews its oil and gas properties by amortization base or by individual well for those wells not constituting part of an amortization base.  For each property determined to be impaired, an impairment loss equal to the difference between the carrying value of the properties and the estimated fair value (discounted future cash flows) of the properties would be recognized at that time.  Estimating future cash flows involves the use of judgments, including estimation of the proved and unproved oil and gas reserve quantities, timing of development and production, expected future commodity prices, capital expenditures and production costs.

Asset Retirement Obligations — The Company estimates the fair values of asset retirement obligations (“AROs”) based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO; amounts and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates.

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 theThe fair value of a liability for an asset retirement obligation to beARO is recorded in the period in which it is incurred, withdiscounted to its present value using the credit adjusted risk-free interest rate, and a corresponding increase inamount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. 
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The following table provides a rollforward of the asset retirement obligations for the first six months of fiscal 2009:2010:

Carrying amount of asset retirement obligations as of April 1, 2008
 $424,789 
Carrying amount of asset retirement obligations as of April 1, 2009 $490,011 
Liabilities incurred
  21,183   7,335 
Liabilities settled
  (624)  (911)
Accretion expense
  14,204   15,607 
Carrying amount of asset retirement obligations as of September 30, 2008
  459,552 
Carrying amount of asset retirement obligations as of September 30, 2009  512,042 
Less: Current portion
  50,000   50,000 
Non-Current asset retirement obligation
 $409,552  $ 462,042 

The asset retirement obligationARO 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, a member of the board of directors and Company employee, received from the Company a finder’s fee in kind, equal to 2.5% of the mineral interest purchased Newark East Field in Johnson County, Texas.  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 ofThis personal investment was made on the same basis as an unrelated third party investor.  Revenues paid to Mr. Craddick from this well were approximately $2,545 for the six months ended September 30, 2008, Mr. Craddick owed $30,651 for his share of the expenses on this well, which was subsequently paid on October 1, 2008.2009.

On AprilMarch 1, 2007,2009, Jeff Smith, a member of the board of directors through September 11, 2008 and a geological consultant, entered into an amended agreement with the Company to provide geological consulting services for a fee of approximately $10,000$5,000 per month plus expenses.  In September 2009, this agreement was amended a second time to $500 per month plus expenses for services rendered without prior written approval the Company.  The Company incurred charges from Mr. Smith for services rendered under this amended agreement of approximately $29,370$8,250 and $59,370$22,750 for the three and six months ended September 30, 2008,2009, respectively.  As of September 30, 2008, there were outstanding invoices of $11,870 payable to Mr. Smith.  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 $2,924 for the six months ended September 30, 2008.  Mr. Smith invested his personal funds in a working interest (2.5% before payout and 1.875% after payout) in the Company’s wells in Reeves County, Texas (2.5% before payout and 1.875% after payout) and Ward County, Texas.  As ofTexas (2.0% before payout and 1.5% after payout, on a non-promoted basis.  Revenues paid to Mr. Smith from these wells were approximately $2,530 for the six months ended September 30, 2008, Mr. Smith owed $11,7952009.

At September 30, 2009, these related parties did not have a balance due for histheir share of the expenses on these wells.

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 assumes the exercise of all stock options having exercise prices less than the average market price of the common stock during the period using the treasury stock method and 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.  In periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive.

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 September 30, 20082009 and 2007.2008.

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Three Months Ended
September 30
  
Six Months Ended
September 30
 
  2008  2007  2008  2007 
Weighted average common shares
            
outstanding - basic
  1,873,127   1,772,268   1,817,962   1,774,526 
Effect of the assumed exercise of
                
dilutive stock options
  102,326   --   104,606   11,871 
Weighted average common share
                
outstanding - dilutive
  1,975,453   1,772,268   1,922,568   1,786,397 
                 
Earnings per common share:                
Basic
 $0.27  $--  $0.58  $0.01 
Diluted
 $0.26  $--  $0.55  $0.01 
  Three Months Ended  Six Months Ended 
  September 30  September 30 
  2009  2008  2009  2008 
Net income $158,350  $511,115  $90,347  $1,049,904 
                 
Shares outstanding:                
Weighted avg. common shares outstanding – basic  1,883,248   1,873,127   1,880,944   1,817,962 
Effect of the assumed exercise of dilutive stock options  59,266   102,326   64,758   104,606 
Weighted avg. common shares outstanding – dilutive  1,942,514   1,975,453   1,945,702   1,922,568 
                 
Earnings (loss) per common share:                
Basic $0.08  $0.27  $0.05  $0.58 
Diluted $0.08  $0.26  $0.05  $0.55 

For the three month and six month periods ended September 30, 2009 and 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 six month periods ended September 30, 2007, potential common shares of 274,000 and 224,000, respectively, relating to stock options, were excluded in the computation of diluted net income per share because the options were anti-dilutive.  The September 30, 2007 anti-dilutive stock options had a weighted average exercise price of $6.75.

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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 six months ending September 30, 2008, current income tax is $257,562 and $471,130 and deferred income tax is $8,726 and $39,859, resulting in an effective tax rate of 34% and 33%, respectively. There was no current income tax expense for the three and six months ending September 30, 2007.2009.  There was a deferred income tax benefit of $5,498$171,163 and $198,789 for the three months ended September 30, 2007 and a deferred income tax expense of $12,834 for the six months ended September 30, 20072009, respectively.  This was a result of the completion of the 2008 tax return which resultedincluded a change in an effective tax rate of 33%.

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.statutory depletion carryforward.  For the six months ending September 30,2008, the amount of unrecognized tax benefits was $563,000. For thethree and six months ending September 30, 2007,2008, current income tax was $257,562 and $471,130 and deferred income tax was $8,726 and $39,859, respectively.

As of September 30, 2009, the Company has a statutory depletion carryforward of approximately $3,218,000, which does not expire.  At September 30, 2009, there were no unrecognizedwas a net operating loss carryforward for regular income tax benefits. reporting purposes of approximately $1,867,000, which will begin expiring in 2021.  The Company’s ability to use some of the net operating loss carryforward and certain other tax attributes to reduce current and future U.S. federal taxable income is subject to limitations under the Internal Revenue Code.

Any interest and penalties related to incomeuncertain tax positions are recorded as interest expense and general and administrative expense, respectively.

Investment in GazTex, LLC.  The Company’s long-term asset consisted  As of an investment in GazTex, LLC, a Russian company owned 50% by OBTX, LLC, accounted for bySeptember 30, 2009, the equity method.  OBTX, LLC is a Delaware limited liability company in which from January 16, 2007, Mexco owned 100%Company has unrecognized tax benefits of approximately $473,000.  For the interest.  In Maysix months ending September 30, 2008, the Company dissolved GazTex, LLC and received the initial cash investment less related fees and expenses for a net amount of $18,700.unrecognized tax benefits was approximately $563,000.

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.  There was no change to this set borrowing base in September 2009. Availability of this line of credit at prime rate per annumSeptember 30, 2009 was $3,625,000.  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 2.74625% on September 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 September 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 was $1,275,000 as of September 30, 2008 was $950,000.2009 and $1,150,000 as of November 12, 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.  Effective April 1, 2008,In June 2009, the Company implemented Financial Accounting Standards Board (“FASB”) Statement of Financialintroduced the FASB Accounting Standards No. 157, Fair Value MeasurementsCodification (the “Codification”) as the new source of authoritative U.S. Generally Accepted Accounting Principles (“SFAS 157”GAAP”), which defines fair value, establishes a framework.  All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative.  However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be the source of authoritative generally accepted accounting principles for its measurement and expands disclosures about fair value measurements.SEC registrants.  Effective September 30, 2009, there will be no more references made to the superseded FASB standards in the Company’s consolidated financial statements.  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.  ManagementCodification does not expect any significant impact to the consolidated financial statements when SFAS 157 for these assetschange or alter existing GAAP and, liabilities is implemented.
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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 andtherefore, will not have a materialan impact on ourthe Company’s financial position, results of operations or cash flows.
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In December 2008, the SEC released Final Rule, Modernization of Oil and Gas Reporting.  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 2008,2009, the FASB issued SFAS No. 162, guidance on Subsequent Events.  This guidance 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 available to be issued.  The HierarchyCompany adopted this guidance as of Generally Accepted Accounting Principlesthe quarter ended June 30, 2009 with no impact to its financial statements.  The Company has evaluated subsequent events through November 12, 2009, which is the date these financial statements were issued. 

In June 2009, the FASB issued guidance related to the accounting for transfers of financial assets.  The guidance removes the concept of a qualifying special-purpose entity from Codification topic, “Transfers and Servicing”, which has been establishedcreates a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarifies the de-recognition criteria for a transfer to be accounted for as a sale, changes the amount of recognized gains or losses on the transfer of financial assets accounted for as a sale when beneficial interests are received by the FASB as a framework for entities to identify the sources of accounting principlestransferor 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. 162introduces new disclosure requirements. The new guidance is effective 60 days followingfor annual reporting periods beginning after November 15, 2009.  Presently, 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 expectanticipate that the adoption of this Standard will have an impact on theits financial statements.

In June 2009, the FASB issued guidance which requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE.  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 a material impact on its financial statements.

In August 2009, the FASB issued guidance under the “Fair Value Measurements and Disclosures” topic of the Codification to provide additional guidance on measuring the fair value of liabilities.  The FASB issued this update because some entities have expressed concern that there may be a lack of observable market information to measure the fair value of a liability.  The guidance provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available.  In such circumstances, the new guidance specifies that a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance.  Examples of the alternative valuation methods include using a present value technique or a market approach, which is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The guidance also states that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustments to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  This new guidance is effective for the first reporting period beginning after August 28, 2009, with earlier application permitted.  Accordingly, the Company will begin to use the new guidance in the third quarter of fiscal 2010.  Presently, the Company does not anticipate that adoption of this Standard will have a material impact on its financial statements.

In September 2009, the FASB issued an update to Extractive Activities-Oil and Gas which makes a technical correction to an SEC Observer comment in EITF 90-22, “Accounting for Gas-Balancing Arrangements”.  The update amends paragraph 932-10-S99-5 of the Codification regarding the accounting and disclosures for gas balancing arrangements because the SEC staff has not taken a position on whether the entitlements method or sales method is preferable for gas-balancing arrangements that do not meet the definition of a derivative.

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.subsidiary.

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 may 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.
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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.

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 September 30, 2009:
  Payments Due In (1): 
  Total  less than 1 year  1-3 years  3 years 
Contractual obligations:            
Secured bank line of credit
 $1,275,000  $-  $1,275,000  $- 

(1)           Does not include estimated interest of $35,000 less than 1 year and $105,000 1-3 years.

These amounts represent the balances outstanding under the bank line of credit.  These repayments assume that interest will be paid on a monthly basis and that no additional funds will be drawn.

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 six months of fiscal 2009,2010, cash flow from operations was $1,621,064 compared to $590,656 for the first six months of fiscal 2008.  This increase was primarily due to an increase in cash provided by oil and gas sales.$451,861.  Cash of $1,231,574$451,485 was used for additions to oil and gas properties and $1,650,000$125,000 for net reduction in long term debt.  Accordingly, net cash decreased $83,378.

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 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.

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.increased $5,474.  

Effective July 1, 2008, we purchased a well in Loving County, Texas currently producingwhich produces from the Lower Cherry Canyon section.  We are acting as operator and have re-entered the well to test two other pay horizons.and constructed a pipeline for transmission and sales of natural gas.  Our share of the costs for our 31.25%50.2% working interest through October 2008September 2009 is approximately $81,000.$247,000.

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.
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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 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 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.approximately $49,000.

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 September 30, 2008,2009, we had working capital of approximately $929,374$372,809 compared to working capital of $627,674$221,989 at March 31, 2008,2009, an increase of $301,700.$150,820.  This was mainly as a result of an increase in accounts receivable partially offset by an increaseand a 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 $1.84 per MMBtu in September 2009 to a high of $13.31 per MMBtu in July 2008.  On September 30, 2009 the WTI posted price for crude oil was $70.46 per bbl and the Henry Hub spot price for natural gas was $3.24 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.

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 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, 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 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.

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Results of Operations – Three Months Ended September 30, 20082009 and 2007.2008.  Net income increased from a net loss of $8,756was $158,350 for the quarter ended September 30, 2007 to2009, a net profit ofdecrease from $511,115 for the quarter ended September 30, 2008, an increase of $519,871 as2008.  This was 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 increased from $839,947was $737,944 for the second quarter of fiscal 2008 to2010, a 54% decrease from $1,595,209 for the same period of fiscal 2009.  This increase of 90% or $755,262 resulted from an increasea decrease in oil and gas prices and oil production offset partially by an increase in gas production.  Revenues from oil andAverage gas royalty interests accounted for approximately 36% of our total revenuesprices were $3.08 per thousand cubic feet (“mcf”) for the second quarter of fiscal 2009 compared to 23% for the second quarter of fiscal 2008.  Average gas prices increased2010, a decrease from $5.97 per mcf for the second quarter of fiscal 2008 to $8.78 per mcf for the same period of fiscal 2009.  Average oil prices also increased from $70.53were $64.40 per bblbarrel (“bbl”) for the second quarter of fiscal 2008 to2010, a decrease from $116.07 per bbl for the same period of fiscal 2009. Oil and gas production quantities were 4,441 barrels (“bbls”)4,379 bbls and 88,266 thousand cubic feet (“mcf”)147,853 mcf for the second quarter of fiscal 20082010 and 4,606 bbls and 120,856 mcf for the same periodsecond quarter of fiscal 2009, an increase of 4%22% in oilgas production and 37%a decrease of 5% in gasoil production.

Production and exploration.  Production costs decreased 23% from $467,336were $269,251 for the second quarter of fiscal 2008 to2010, a 25% decrease from $357,753 for the same period of fiscal 2009.  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%, from $183,797was $275,072 for the second quarter of fiscal 2008 to2010, a 14% increase from $240,962 for the same period of fiscal 2009, primarily due to an increase to the full cost pool amortization base and an increase in production.
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General and administrative expenses.  General and administrative expenses increased 11% from $178,918 for the second quarter of fiscal 2008 to $199,239 for the same period of fiscal 2009. This was due to an increase in salaries, consulting services and fees.

Interest expense. Interest expense decreased 2% from $20,345 for the second quarter of fiscal 2008 to $19,854 for the same period of fiscal 2009, due to a decrease in the interest rate, partially offset by increased borrowings.

Results of Operations – Six Months Ended September 30, 2008 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 $448,543were $198,229 for the first six months ended September 30, 2007 to $480,900second quarter of fiscal 2010, a 1% decrease from $199,239 for the same period of fiscal 2009.  This was due to an increasea decrease in salary expense, consulting services, fees and fees.salaries.

Interest expense.  Interest expense increased 50% from $35,694was $8,737 for the first six months ended September 30, 2007 to $53,589second quarter of fiscal 2010, a 56% decrease from $19,854 for the same period of fiscal 2009, due to an increasea decrease in borrowings and interest rate.

Income taxes.  There was an income tax benefit of $171,163 for the three months ended September 30, 2009, a decrease from an income tax expense of $266,288 for the three months ended September 30, 2008.  This was a result of the completion of the 2008 tax return which included a change in the statutory depletion carryforward.

Results of Operations – Six Months Ended September 30, 2009 and 2008.  Net income was $90,347 for the six months ended September 30, 2009, a decrease from $1,049,904 for the six months ended September 30, 2008.  This was a result of a decrease in operating revenues partially offset by a decrease in interest rates.production costs.

Oil and gas sales.  Revenue from oil and gas sales was $1,391,754 for the six months ended September 30, 2009, a 57% decrease  from $3,267,797 for the same period of fiscal 2009.  This resulted from a decrease in oil and gas prices partially offset by an increase in gas production.  Average gas prices were $3.06 per mcf for the first six months of fiscal 2010, a decrease from $9.24 per mcf for the first six months of fiscal 2009.  Average oil prices were $59.12 per bbl for the first six months of fiscal 2010, a decrease from $117.25 per bbl for the first six months of fiscal 2009.  Oil and gas production quantities were 8,710 bbls and 286,271 mcf for the first six months of fiscal 2010 and 8,713 bbls and 243,143 mcf for the first six months of fiscal 2009, an increase of 18% in gas production and no change in oil production.

Production and exploration.  Production costs were $510,224 for the six months ended September 30, 2009, a 26% decrease from $692,741 for the six months ended September 30, 2008.  This was the result of a decrease in production taxes due to 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 were $538,534 for the six months ended September 30, 2009, a 12% increase from $479,807 for the six months ended September 30, 2008 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 were $430,414 for the six months ended September 30, 2009, a 10% decrease from $480,900 for the six months ended September 30, 2008.  This was due to a decrease in consulting services, fees and salaries.
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Interest expense.  Interest expense was $18,361 for the six months ended September 30, 2009, a 66% decrease from $53,589 for the same period fiscal 2009 due to a decrease in borrowings and interest rate.

Income taxes.  There was an income tax benefit of $198,789 for the six months ended September 30, 2009, a decrease from an income tax expense of $510,989 for the three months ended September 30, 2008.  This was a result of the completion of the 2008 tax return which included a change in the statutory depletion carryforward.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The primary sources of market risk for us include fluctuations in commodity prices and interest rate fluctuations.rates.  All of our financial instruments are for purposes other trading.  At September 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 September 30, 20082009, we had an outstanding loan balance of $950,000$1,275,000 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$12,750 based on the outstanding balance at September 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 September 30, 2008,2009, our largest credit risk associated with any single purchaser was $188,620.$77,550.  We are also exposed to credit risk in the event of nonperformance from any of our working interest partners.  At September 30, 2008,2009, our largest credit risk associated with any working interest partner was $42,759.$20,262.  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.
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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 fiscal 2009,2010, our pretaxnet income would have changed by $8,713.$8,710.  If the average gas price had increased or decreased by ten centsone dollar per mcf for the first six months of fiscal 2009,2010, our pretaxnet income would have changed by $24,314.$286,271.

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 September 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 September 30, 20082009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II – OTHER INFORMATION

Item 1.Legal Proceedings
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
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 Holders
Item 4.Submission of Matters to a Vote of Security Holders

Our annual meeting was held on September 11, 2008.15, 2009.  Following are the twothree proposals voted on at the meeting andtheand the results of each:

Proposal #1 was the election of the following directors:
 
 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
  Votes For:Votes Withheld:
 Thomas R. Craddick1,509,10262,609
 Thomas Graham, Jr.1,519,76151,950
 Arden R. Grover1,538,11833,593
 Jack D. Ladd1,539,08932,622
 Nicholas C. Taylor1,514,78156,930

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, 2009.2010.  Votes for were 1,445,419,1,542,356, votes against were 9,3829,016 and votes abstained were 14,302.20,339.

Proposal #3 was to approve the Mexco Energy Corporation 2009 Employee Incentive Stock Plan.  Votes for were 1,258,170, votes against were 39,315 and votes abstained were 3,538 with 270,688 non-votes.

Item 5.Other Information
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.

Item 6.     Exhibits
Item 6.Exhibits

3.1Amended and Restated Bylaws of the Mexco Energy Corporation
 31.1Certification of the Chief Executive Officer of Mexco Energy Corporation

 31.2Certification of the Chief Financial Officer of Mexco Energy Corporation

 32.1Certification of the Chief Executive Officer and Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C. §1350
 
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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MEXCO ENERGY CORPORATION
(Registrant)


Dated: 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: November 12, 2009
/s/ Nicholas C. Taylor      
Nicholas C. Taylor
President
Dated: November 12, 2009
/s/ Tamala L. McComic     
Tamala L. McComic
Executive Vice President, Treasurer and Assistant Secretary
 
 
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