-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A+GpFvIyLdPuUfRKF+ELY5NDJ1Ki07qfHokTP4tExC0w1aCqSUvPtITrkJEfmgtQ FuxsP8ed/RCNej3FjDKnWQ== 0001144204-04-011876.txt : 20040813 0001144204-04-011876.hdr.sgml : 20040813 20040813164903 ACCESSION NUMBER: 0001144204-04-011876 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEXCO ENERGY CORP CENTRAL INDEX KEY: 0000066418 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840627918 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31785 FILM NUMBER: 04975008 BUSINESS ADDRESS: STREET 1: 214 W TEXAS AVENUE STREET 2: SUITE 1101 CITY: MIDLAND STATE: TX ZIP: 79701 BUSINESS PHONE: 9156821119 MAIL ADDRESS: STREET 1: 214 W TEXAS AVENUE STREET 2: SUITE 1101 CITY: MIDLAND STATE: TX ZIP: 79701 FORMER COMPANY: FORMER CONFORMED NAME: MILLER OIL CO DATE OF NAME CHANGE: 19800702 10-Q 1 v05682_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 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 (IRS Employer of incorporation) Identification Number) 214 West Texas Avenue, Suite 1101, Midland, Texas 79701 (Address of principal executive offices) (432) 682-1119 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES |_| NO |X| APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Stock, $0.50 par value: 1,736,041 shares outstanding at August 12, 2004 MEXCO ENERGY CORPORATION Table of Contents Page ---- PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and March 31, 2004 3 Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2004 and June 30, 2003 4 Consolidated Statements of Cash Flows (Unaudited) for the three months ended June 30, 2004 and June 30, 2003 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Controls and Procedures 12 PART II. OTHER INFORMATION 13 - --------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 14 - ---------- CERTIFICATIONS 15 - -------------- Page 2 MEXCO ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
June 30, March 31, 2004 2004 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 60,260 $ 92,795 Accounts receivable: Oil and gas sales 404,972 396,902 Trade 41,166 3,101 Related parties 7,614 -- Prepaid costs and expenses 41,889 32,382 ------------ ------------ Total current assets 555,901 525,180 Property and equipment, at cost: Oil and gas properties, using the full cost method, ($983,680 and $858,602 excluded from amortization as of June 30, 2004 and March 31, 2004, respectively) 17,204,738 16,959,560 Other 34,542 34,542 ------------ ------------ 17,239,280 16,994,102 Less accumulated depreciation, depletion and amortization 9,499,590 9,346,818 ------------ ------------ Property and equipment, net 7,739,690 7,647,284 ------------ ------------ $ 8,295,591 $ 8,172,464 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 183,820 $ 97,308 Income tax payable 27,223 -- Current portion of long-term debt -- 443,378 ------------ ------------ Total current liabilities 211,043 540,686 Long-term debt 1,600,000 1,256,622 Asset retirement obligation 416,190 420,665 Deferred income tax liability 517,610 519,272 Commitments and contingencies -- -- Stockholders' equity Preferred stock - $1 par value; 10,000,000 shares authorized; none outstanding -- -- Common stock - $0.50 par value; 40,000,000 shares authorized; 1,766,566 shares issued 883,283 883,283 Additional paid in capital 3,797,320 3,784,493 Retained earnings 999,070 896,368 Treasury stock, at cost (30,525 shares) (128,925) (128,925) ------------ ------------ Total stockholders' equity 5,550,748 5,435,219 ------------ ------------ $ 8,295,591 $ 8,172,464 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. Page 3 MEXCO ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months ended June 30, 2004 and 2003 (Unaudited) 2004 2003 --------- --------- Operating revenue: Oil and gas sales $ 674,995 $ 767,060 Other 2,008 1,266 --------- --------- Total operating revenue 677,003 768,326 Operating costs and expenses: Production 191,738 268,692 Accretion of asset retirement obligation 6,820 5,824 Depreciation, depletion and amortization 152,772 166,219 General and administrative 164,419 115,978 --------- --------- Total operating costs and expenses 515,749 556,713 --------- --------- 161,254 211,613 Other income and (expenses): Interest income 53 62 Interest expense (16,843) (24,280) --------- --------- Net other income and expenses (16,790) (24,218) --------- --------- Income before income taxes 144,464 187,395 Income tax expense: Current 43,425 -- Income tax expense: Deferred (1,663) 35,635 --------- --------- Income before cumulative effect of accounting change 102,702 151,760 Cumulative effect of accounting change, net of tax -- (102,267) --------- --------- Net income $ 102,702 $ 49,493 ========= ========= Net income (loss) per common share: Basic: Income before cumulative effect of accounting change $ 0.06 $ 0.09 Cumulative effect, net of tax $ -- $ (.06) Net income $ 0.06 $ 0.03 Diluted: Income before cumulative effect of accounting change $ 0.06 $ 0.09 Cumulative effect, net of tax $ -- $ (.06) Net income $ 0.06 $ 0.03 The accompanying notes are an integral part of the consolidated financial statements. Page 4 MEXCO ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months ended June 30, 2004 and 2003 (Unaudited) 2004 2003 --------- --------- Cash flows from operating activities: Net income $ 102,702 $ 49,493 Cumulative effect of accounting change, net of tax -- 102,267 Adjustments to reconcile net income to net cash provided by operating activities: Increase (decrease) in deferred income taxes (1,663) 35,635 Stock-based compensation 12,827 11,980 Depreciation, depletion and amortization 152,772 166,219 Accretion of asset retirement obligations 6,820 5,824 (Increase) decrease in accounts receivable (53,750) 91,525 Increase in prepaid expenses (9,507) (13,937) Increase in accounts payable and accrued expenses 67,154 54,264 Increase in income tax payable 27,223 -- --------- --------- Net cash provided by operating activities 304,578 503,270 Cash flows from investing activities: Additions to property and equipment (237,113) (174,317) --------- --------- Net cash used in investing activities (237,113) (174,317) Cash flows from financing activities: Acquisition of treasury stock -- (1,385) Payments of capital lease obligations -- (20,747) Principal payments on long-term debt (100,000) (250,000) --------- --------- Net cash used by financing activities (100,000) (272,132) --------- --------- Net increase (decrease) in cash (32,535) 56,821 Cash, beginning of the period 92,795 68,547 --------- --------- Cash, end of period $ 60,260 $ 125,368 ========= ========= Interest paid $ 16,754 $ 25,642 Income taxes paid $ -- $ -- The accompanying notes are an integral part of the consolidated financial statements. Page 5 MEXCO ENERGY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A. Organization and Significant Accounting Policies Organization and Basis of Presentation Mexco Energy Corporation, a Colorado corporation, was organized in 1972 and maintains its principal office in Midland, Texas. The Company and its wholly owned subsidiary, Forman Energy Corporation, a New York corporation, (collectively the "Company") are engaged in the acquisition, exploration, development and production of oil and gas. While the Company owns producing properties and undeveloped acreage in eleven states, the majority of its activities are centered in the Permian Basin of West Texas. Although most of the Company's oil and gas interests are operated by others, the Company operates a number of 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 and its wholly owned subsidiary as of June 30, 2004, and the results of its operations and cash flows for the interim periods ended June 30, 2004 and 2003. The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note A of the "Notes to Consolidated Financial Statements" in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, the disclosures herein are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Form 10-K. Principles of Consolidation The accompanying consolidated balance sheets include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the amounts reported in these financial statements. 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 and the related present value of estimated future net cash flows. Page 6 Stock-based Compensation The Company accounts for employee stock option grants in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), as amended by Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation," an interpretation of APB Opinion No. 25. The Company applies the intrinsic value method in accounting for its employee stock options and records no compensation costs for its stock option awards to employees. The Company recognizes compensation cost related to stock options awarded to independent consultants based on fair value of the options at date of grant. For the quarter ending June 30, 2004, the Company recognized $12,827 related to these stock options for independent consultants. The following pro forma information, as required by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148 ("SFAS 148"), presents net income and earnings per share information as if expense relating to stock options issued had been determined based on the fair value at the grant dates for all employee awards under the plan: Three Months Ended June 30, --------------------------- 2004 2003 ----------- ----------- Net income, as reported $ 102,702 $ 49,493 Deduct: Stock-based employee compensation expense determined under fair value based method (SFAS 123), net of tax $ (22,341) $ (14,399) ----------- ----------- Net income, pro forma $ 80,361 $ 35,094 =========== =========== Basic earnings per share: As reported $ 0.06 $ 0.03 Pro forma $ 0.05 $ 0.02 Diluted earnings per share: As reported $ 0.06 $ 0.03 Pro forma $ 0.04 $ 0.02 Asset Retirement Obligations The Company's asset retirement obligations relate to the plugging and abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April 1, 2003. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recorded in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The related cumulative adjustment to 2004 net income was a decrease of $102,267 net of tax, or ($0.06) per share. Additionally, in 2004, the Company recorded an initial asset retirement obligation liability of $358,419 and an increase to net properties and equipment and other assets of $210,206. The asset retirement obligations are recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded for both the asset retirement obligation and the asset retirement cost. Page 7 The current portion of the asset retirement obligation as of June 30, 2004 is $11,780 and is included in accounts payable and other accrued expenses. Oil and Gas Costs The cost of certain oil and gas leases that the Company has acquired, but not evaluated has been excluded in computing amortization of the full cost pool. The Company will begin to amortize these properties when the projects are evaluated, which is currently estimated to be within this fiscal year. Costs excluded from amortization at June 30, 2004 total $828,950 for U.S. properties and $154,730 for Russian properties. The Russian costs in fiscal 2004 and fiscal 2005 were for the feasibility study referred to in Note H to the Company's financial statements in its Annual Report to the SEC on Form 10K. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares (stock options and warrants) outstanding during the period. The following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings per share for the three month periods ended June 30, 2004 and 2003. Three Months Ended June 30 -------------------------- 2004 2003 --------- --------- Weighted average number of common shares outstanding 1,736,041 1,736,067 Incremental shares from the assumed exercise of dilutive stock options and warrants 120,938 24,417 --------- --------- Dilutive potential common shares 1,856,979 1,760,484 ========= ========= Options and warrants to purchase 70,000 shares at an average exercise price of $7.54 and 120,000 shares at an average exercise price of $7.25 outstanding at June 30, 2004 and June 30, 2003, respectively, were not included in the computation of diluted net income per share because the exercise price of the options and warrants was greater than the average market price of the common stock of the Company and, therefore, the effect would be antidilutive. Income Taxes Current income tax expense for the three months ended June 30, 2004 is $43,425. There is no current income tax expense for the three months ended June 30, 2003 due to a tax loss carryforward of approximately $139,000 from the year ending March 31, 2003. Long Term Liabilities Long term debt consists of a revolving credit agreement with Bank of America, N.A. ("Bank"), which provides for a credit facility of $5,000,000, subject to a borrowing base determination. On July 29, 2004, the borrowing base was redetermined and set at $2,500,000. The maturities of the debt are based on this revised borrowing base. As of June 30, 2004, the balance outstanding under this agreement was $1,600,000 and as of August 1, 2004 was $2,025,000. No principal payments are required for fiscal 2005 based on the revised borrowing base. Amounts borrowed under this agreement are collateralized by the common stock of the Company's wholly owned subsidiary and all oil and gas properties. Page 8 The asset retirement obligation as of June 30, 2004 represents the present value of the Company's estimated asset retirement obligations under SFAS 143. MEXCO ENERGY CORPORATION AND SUBSIDIARY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statements Regarding Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can be identified with words and phrases such as "believes," "expects," "anticipates," "should," "estimates," "foresees" or other words and phrases of similar meaning. Forward-looking statements appear throughout this Form 10-Q and include statements regarding Company plans, beliefs or current expectations with respect to, among other things: profitability, planned capital expenditures; estimates of oil and gas production, estimates of future oil and gas prices; estimates of oil and gas reserves; future financial condition or results of operations; and business strategy and other plans and objectives for future operations. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement. While the Company has made assumptions that it believes are reasonable, the assumptions that support its forward-looking statements are based upon information that is currently available and is subject to change. All forward-looking statements in the Form 10-Q are qualified in their entirety by the cautionary statement contained in this section. The Company does not undertake to update, revise or correct any of the forward-looking information. Liquidity and Capital Resources Historically, the Company's sources of funding have been from operating activities, bank financing and the issuance of common stock. The Company's focus is on increasing profit margins while concentrating on obtaining gas reserves with low cost operations by acquiring and developing primarily gas properties with potential for long-lived production. For the first three months of fiscal 2005, cash flow from operations was $304,578 compared to $503,270 for the first three months of fiscal 2004. The cash flow from operations for the first three months of fiscal 2005 included the effects of an increase in accounts receivable and an increase in accounts payable and accrued expenses. Cash of $237,113 was used for additions to property and equipment and cash of $100,000 was used to pay on the line of credit. Accordingly, net cash decreased $32,535. In March 2004 the Company purchased partially developed royalty interests in Jackson Parish, Louisiana and interests in Limestone County, Texas for approximately $224,000. The properties in Limestone County, operated by XTO Energy, Inc., are in the Cotton Valley formation and contain 23 producing wells and an additional 6 permitted and/or drilling wells. This acreage contains approximately 100 potential undrilled locations on 40 acre spacing. The property in Louisiana, operated by Anadarko and producing from the Lower Cotton Valley formation, contains 3 producing wells and an additional 5 permitted and/or drilling wells. These royalty purchases advanced the Company's primary goal of acquiring natural gas reserves. Page 9 In March 2004, the Company signed an agreement in Moscow, Russia to begin a preliminary feasibility study for exploration and development of natural gas reserves in Russia. A team of U.S. and Russia experts commenced a feasibility study of a number of undeveloped natural gas fields located in the vicinity of Gasprom pipelines which serve Russia. Mexco Energy Corporation has set up OBTX, LLC, a Delaware limited liability company, in which Mexco owns a 90% interest with the remaining 10% interest split equally among three individuals, one of which is Arden Grover, a director of Mexco Energy Corporation. OBTX, LLC, plans to participate in any Russian ventures entered into and own a 50% interest subject to obtaining financing. In August 2004, the Company purchased partially developed royalty interests for $500,000 in Freestone County, Texas. These properties, operated by XTO and Anadarko Energy, Inc., contain 31 producing wells and an additional seven (7) permitted and/or drilling wells in the Cotton Valley formation. This acreage contains approximately 19 potential undrilled locations on 40 acre spacing. The Company has acquired and also is reviewing several projects for future participation. The cost of such projects would be funded, to the extent possible, with existing cash balances and cash flow from operations. The remainder may be funded through borrowings on the bank credit facility discussed below. At June 30, 2004, the Company had working capital of approximately $344,858 compared to a working capital deficit of approximately $15,506 at March 31, 2004, an increase of $360,364 due primarily to the reclassification of the current portion of long-term debt as a result of the borrowing base redetermination. The Company has 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 redetermination. On December 15, 2003 the credit agreement was amended with a maturity date of August 15, 2005. The borrowing base was redetermined on this date and set at $1,938,372 with monthly commitment reductions of $45,450 beginning on January 5, 2004. On July 29, 2004, the borrowing base was redetermined and increased to $2,500,000. As of June 30, 2004, the balance outstanding under this agreement was $1,600,000. No principal payments are anticipated to be required for fiscal 2005 based on the revised borrowing base. A letter of credit for $50,000, in lieu of a plugging bond with the Texas Railroad Commission covering the properties of the Company operates, is also outstanding under the facility. Amounts borrowed under this agreement are collateralized by the common stock of Forman and the Company's oil and gas properties. Interest under this agreement is payable monthly at prime rate (4.00% at June 30, 2004 and 2003). The agreement generally restricts the Company's ability to transfer assets or control of the Company, incur debt, extend credit, change the nature of the Company's business, substantially change management personnel, or pay cash dividends. The balance outstanding on the line of credit as of August 1, 2004 was $2,025,000. The prices of natural gas and crude oil have fluctuated significantly in recent years as well as in recent months. Fluctuations in price have a significant impact on the Company's financial condition and liquidity. However, management is of the opinion that cash flow from operations and funds available from financing will be sufficient to provide for its working capital requirements and capital expenditures for the current fiscal year. Page 10 Results of Operations - Three Months Ended June 30, 2004 and 2003 Net income before the cumulative effect of an accounting change decreased from $151,760 for the quarter ended June 30, 2003 to $102,702 for the quarter ended June 30, 2004. The Company recognized a cumulative effect of accounting change of $102,267, net of tax related to the asset retirement obligation effect on prior years for the quarter ended June 30, 2003. Oil and gas sales decreased from $767,060 for the first quarter of fiscal 2004 to $674,995 for the same period of fiscal 2005. This decrease of 12% or $92,065 resulted from a decrease in production offset partially by an increase in both oil and gas prices. Average gas prices increased from $4.92 per mcf for the first quarter of fiscal 2004 to $5.08 per mcf for the same period of fiscal 2005, while average oil prices increased from $26.90 per bbl for the first quarter of fiscal 2004 to $36.19 for the same period of fiscal 2005. Oil and gas production quantities were 5,518 barrels ("bbls") and 125,649 thousand cubic feet ("mcf") for the first quarter of fiscal 2004 and 3,867 bbls and 105,347 mcf for the same period of fiscal 2005, a decrease of 30% in oil production and a decrease of 16% in gas production, a result of natural decline. Production costs decreased from $268,692 for the first quarter of fiscal 2004 to $191,738 for the same period of fiscal 2005. This was the result of decreased repairs to operated wells during the quarter and decreased production taxes due to the decrease in oil and gas sales. General and administrative expenses increased 42% from $115,978 for the first quarter of fiscal 2004 to $164,419 for the same period of fiscal 2005. This is primarily the result of an increase in consulting services, travel and organization costs related to participating in the formation of a Russian Company. These expenses were approximately $36,400 for the quarter. Depreciation, depletion and amortization based on production and other methods decreased 8%, from $166,219 for the first quarter of fiscal 2004 to $152,772 for the same period of fiscal 2005 primarily due to a decrease in production. Interest expense decreased 30% from $24,280 for the first quarter of fiscal 2004 to $16,843 for the same period of fiscal 2005, due to decreased borrowings. Asset Retirement Obligations The Company's asset retirement obligations relate to the plugging and abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April 1, 2003. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recorded in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The related cumulative adjustment to 2004 net income was a decrease of $102,267 net of tax, or ($0.06) per share. Additionally, in 2004, the Company recorded an initial asset retirement obligation liability of $358,419 and an increase to net properties and equipment and other assets of $210,206. The asset retirement obligations are recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded for both the asset retirement obligation and the asset retirement cost. Page 11 The following table provides a rollforward of the asset retirement obligations for the current period: Carrying amount of asset retirement obligations as of April 1, 2004 $ 420,665 Liabilities incurred 840 Liabilities settled (355) Accretion expense 6,820 Revisions in estimated liabilities -- --------- Carrying amount of asset retirement obligations as of June 30, 2004 $ 427,970 ========= The current portion of the asset retirement obligation as of June 30, 2004 is $11,780 and is included in accounts payable and other accrued expenses. Item 3. Quantitative and Qualitative Disclosures About Market Risk The primary sources of market risk for the Company include fluctuations in commodity prices and interest rate fluctuations. At June 30, 2004, the Company had not entered into any hedge arrangements, commodity swap agreements, commodity futures, options or other similar agreements relating to crude oil and natural gas. At June 30, 2004, the Company had an outstanding loan balance of $1,600,000 under its $5.0 million revolving credit agreement, which bears interest at the prime rate, which varies from time to time. If the interest rate on the Company's bank debt increases or decreases by one percentage point, the Company's annual pretax income would change by $16,000, based on the outstanding balance at June 30, 2004. Credit Risk. Credit risk is the risk of loss as a result of nonperformance by other parties of their contractual obligations. The Company's primary credit risk is related to oil and gas production sold to various purchasers and the receivables generally are uncollateralized. At June 30, 2004, the Company's largest credit risk associated with any single purchaser was $89,411. The Company has not experienced any significant credit losses. Volatility of Oil and Gas Prices. The Company's revenues, operating results and future rate of growth are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond our control. These factors include the level of global demand for petroleum products, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic. The Company cannot predict future oil and gas prices with any degree of certainty. Sustained weakness in oil and gas prices may adversely affect the Company's ability to obtain capital for the Company's exploration and development activities and may require a reduction in the carrying value of the Company's oil and gas properties. Similarly, an improvement in oil and gas prices can have a favorable impact on the Company's financial condition, results of operations and capital resources. Item 4. Controls and Procedures Disclosure Controls and Procedures Our Board of Directors has adopted a policy designated to establish disclosure controls and procedures that are adequate to provide reasonable assurance that we will be able to collect, process and disclose both financial and non-financial information, on a timely basis, in our reports to the SEC and other communications with our stockholders. Disclosure controls and procedures include all processes necessary to ensure that material information is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our management, including our chief executive and chief financial officers, to allow timely decisions regarding required disclosures. Page 12 With respect to our disclosure controls and procedures: o We have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report; o This evaluation was conducted under the supervision and with the participation of our management, including our chief executive and chief financial officers; and o It is the conclusion of our chief executive and chief financial officers that these disclosure controls and procedures operate such that material information flows to the appropriate collection and disclosure points in a timely manner and are effective in ensuring that material information is accumulated and communicated to our management and is made known to the chief executive and chief financial officers, particularly during the period in which this report was prepared, as appropriate to allow timely decisions regarding required disclosures. Changes in Internal Control Over Financial Reporting No changes in internal control over financial reporting were made during the quarter ended June 30, 2004 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 None. Item 2. Changes in securities None. Item 3. Defaults upon senior securities None. Item 4. Submission of matters to a vote of security holders None. Item 5. Other Information None. Page 13 Item 6. Exhibits and Reports on Form 8-K Exhibits 31.1 Certification of the Chief Executive Officer of Mexco Energy Corporation 31.2 Certification of the Chief Financial Officer of Mexco Energy Corporation 32.1 Certification by the Chief Executive Officer of Mexco Energy Corporation pursuant to 18 U.S.C.ss.1350 32.2 Certification by the Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C.ss.1350 Reports on Form 8-K Form 8-K filed August 4, 2004 pursuant to Item 5, announcing royalty purchase in Freestone County. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEXCO ENERGY CORPORATION (Registrant) Dated: August 12, 2004 /s/ Nicholas C. Taylor ---------------------------------------- Nicholas C. Taylor President Dated: August 12, 2004 /s/ Tamala L. McComic -------------------------------------- Tamala L. McComic Vice President, Treasurer and Assistant Secretary Page 14 EX-31.1 2 v05682_ex31.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER MEXCO ENERGY CORPORATION CERTIFICATION I, Nicholas C. Taylor, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy Corporation 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2004 /s/ Nicholas C. Taylor ---------------------------------------- Nicholas C. Taylor Chief Executive Officer Page 15 EX-31.2 3 v05682_ex31-2.txt Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER MEXCO ENERGY CORPORATION CERTIFICATION I, Tamala L. McComic, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy Corporation 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2004 /s/ Tamala L. McComic ---------------------------------------- Tamala L. McComic Chief Financial Officer Page 16 EX-32.1 4 v05682_ex32-1.txt Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF MEXCO ENERGY CORPORATION PURSUANT TO 18 U.S.C. ss.1350 In connection with the accompanying report on Form 10-Q for the period ended June 30, 2004 and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Nicholas C. Taylor, Chief Executive Officer of Mexco Energy Corporation (the "Company"), hereby certify that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Nicholas C. Taylor ---------------------------------------- Nicholas C. Taylor Chief Executive Officer August 12, 2004 Page 17 EX-32.2 5 v05682_ex32-2.txt Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF MEXCO ENERGY CORPORATION PURSUANT TO 18 U.S.C. ss.1350 In connection with the accompanying report on Form 10-Q for the period ended June 30, 2004 and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Tamala L. McComic, Chief Financial Officer of Mexco Energy Corporation (the "Company"), hereby certify that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Tamala L. McComic ---------------------------------------- Tamala L. McComic Chief Financial Officer August 12, 2004 Page 18 -----END PRIVACY-ENHANCED MESSAGE-----