10-Q 1 v023467_10-q.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, 2005 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: 1,733,041 shares outstanding at August 11, 2005 page 1 MEXCO ENERGY CORPORATION Table of Contents Page ---- PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Consolidated Balance Sheets as of June 30, 2005 (Unaudited) and March 31, 2005 3 Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2005 and June 30, 2004 4 Consolidated Statements of Cash Flows (Unaudited) for the three months ended June 30, 2005 and June 30, 2004 5 Notes to Consolidated Financial Statements (Unaudited) 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 11 Item 4. Controls and Procedures 11 PART II. OTHER INFORMATION 12 --------------------------- Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 12 ---------- CERTIFICATIONS 13 -------------- page 2
Mexco Energy Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, March 31, 2005 2005 ------------ ------------ (Unaudited) ASSETS Current assets Cash and cash equivalents $ 89,024 $ 85,209 Accounts receivable: Oil and gas sales 419,410 418,348 Trade 7,286 23,258 Related parties 1,275 2,103 Prepaid costs and expenses 35,215 7,362 ------------ ------------ Total current assets 552,210 536,280 Investment in GazTex, LLC 282,126 282,126 Property and equipment, at cost Oil and gas properties, using the full cost method ($965,018 and $983,680 excluded from amortization as of June 30, 2005 and 2004, respectively) 18,547,694 18,376,974 Other 36,855 36,855 ------------ ------------ 18,584,549 18,413,829 Less accumulated depreciation, depletion, and amortization 10,067,765 9,929,086 ------------ ------------ Property and equipment, net 8,516,784 8,484,743 ------------ ------------ $ 9,351,120 $ 9,303,149 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable - trade $ 121,535 $ 111,675 Income tax payable 74,278 48,127 Current portion of long-term debt 1,815,000 -- ------------ ------------ Total current liabilities 2,010,813 159,802 Long-term debt -- 1,990,000 Asset retirement obligation 364,884 374,506 Deferred income tax liability 740,713 715,284 Minority interest 25,362 25,362 Commitments and contingencies Stockholders' equity Preferred stock - $1.00 par value; 10,000,000 shares authorized; none outstanding -- -- Common stock - $0.50 par value; 40,000,000 shares authorized; 1,766,566 shares issued 883,283 883,283 Additional paid-in capital 3,836,827 3,826,592 Retained earnings 1,634,813 1,473,895 Treasury stock, at cost (33,525 shares) (145,575) (145,575) ------------ ------------ Total stockholders' equity 6,209,348 6,038,195 ------------ ------------ $ 9,351,120 $ 9,303,149 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. page 3 Mexco Energy Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended June 30, (Unaudited) 2005 2004 ------------- ------------- Operating revenues: Oil and gas $ 802,720 $ 674,995 Other 372 2,008 ------------- ------------- Total operating revenues 803,092 677,003 Operating expenses: Production 176,445 191,738 Accretion of asset retirement obligation 5,785 6,820 Depreciation, depletion, and amortization 138,679 152,772 General and administrative 195,403 164,419 ------------- ------------- Total operating expenses 516,312 515,749 ------------- ------------- Operating profit 286,780 161,254 Other income (expense): Interest income 167 53 Interest expense (29,982) (16,843) ------------- ------------- Net other expense (29,815) (16,790) Minority interest in loss of subsidiary 3,824 -- ------------- ------------- Earnings before income taxes 260,789 144,464 Income tax expense: Current 74,442 43,425 Deferred 25,429 (1,663) ------------- ------------- 99,871 41,762 ------------- ------------- Net income $ 160,918 $ 102,702 ============= ============= Net income per common share: Basic: $ 0.09 $ 0.06 Diluted: $ 0.09 $ 0.06 The accompanying notes are an integral part of the consolidated financial statements. page 4 Mexco Energy Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended June 30, (Unaudited) 2005 2004 --------- --------- Cash flows from operating activities: Net income $ 160,918 $ 102,702 Adjustments to reconcile net income to net cash provided by operating activities: Increase (decrease) in deferred income taxes 25,429 (1,663) Stock-based compensation 10,235 12,827 Depreciation, depletion, and amortization 138,679 152,772 Accretion of asset retirement obligations 5,785 6,820 Minority interest in loss of GazTex, LLC (3,824) -- (Increase) decrease in accounts receivable 15,738 (53,750) Increase in prepaid expenses (27,853) (9,507) Increase in income taxes payable 26,151 27,223 Increase in accounts payable and accrued expenses 790 67,154 --------- --------- Net cash provided by operating activities 352,048 304,578 Cash flows from investing activities: Additions to oil and gas properties (191,590) (237,113) Proceeds from sale of oil and gas properties and equipment 14,533 -- --------- --------- Net cash used in investing activities (177,057) (237,113) Cash flows from financing activities: Reduction of long-term debt (175,000) (100,000) Minority interest contributions 3,824 -- --------- --------- Net cash used in financing activities (171,176) (100,000) --------- --------- Net increase (decrease) in cash and cash equivalents 3,815 (32,535) Cash and cash equivalents at beginning of year 85,209 92,795 --------- --------- Cash and cash equivalents at end of year $ 89,024 $ 60,260 ========= ========= Interest paid $ 29,017 $ 16,754 Income taxes paid $ 51,164 $ -- The accompanying notes are an integral part of the consolidated financial statements. page 5 MEXCO ENERGY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Operations Mexco Energy Corporation (a Colorado Corporation), its wholly owned subsidiary, Forman Energy Corporation, and its 90% owned subsidiary, OBTX, LLC (a Delaware Limited Liability Company) (collectively, the "Company") are engaged in the exploration, development and production of natural gas, crude oil, condensate and natural gas liquids (NGLs). OBTX, LLC was formed on April 8, 2004, and is included in the consolidated financial statements since its date of formation. 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 June 30, 2005, and the results of its operations and cash flows for the interim periods ended June 30, 2005 and 2004. The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note A of the "Notes to Consolidated Financial Statements" in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, the disclosures herein are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Form 10-K. 2. Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated. 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 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 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, 2005, the Company recognized $10,235 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: page 6 Three Months Ended June 30, 2005 2004 --------------- --------------- Net income, as reported $ 160,918 $ 102,702 Deduct: Stock-based employee compensation expense determined under fair value based method (SFAS 123), net of tax $ (29,098) $ (22,341) --------------- --------------- Net income, pro forma $ 131,820 $ 80,361 =============== =============== Basic earnings per share: As reported $ 0.09 $ 0.06 Pro forma $ 0.08 $ 0.05 Diluted earnings per share: As reported $ 0.09 $ 0.06 Pro forma $ 0.07 $ 0.04 Asset Retirement Obligations. The Company's asset retirement obligations relate to the plugging and abandonment of oil and gas properties. The fair value of a liability for an asset retirement obligation is required to be recorded in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. The asset retirement obligations are recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded for both the asset retirement obligation and the asset retirement cost. The following table provides a rollforward of the asset retirement obligations for the current period: Carrying amount of asset retirement obligations as of April 1, 2005 $ 395,046 Liabilities incurred -- Liabilities settled (15,407) Accretion expense 5,785 Revisions in estimated liabilities -- Carrying amount of asset retirement obligations --------------- as of June 30, 2005 $ 385,424 =============== The asset retirement obligation, which is included on the consolidated balance sheet, was $385,424 at June 30, 2005. The current portion of the asset retirement obligation as of June 30, 2005, was $20,540 and is included on the consolidated balance sheet in accounts payable and other accrued expenses. Accretion expense was $5,785 and $6,820 as of June 30, 2005 and 2004, respectively. Oil and Gas Costs. The cost of certain oil and gas leases that the Company has acquired, but not evaluated has been excluded in computing amortization of the full cost pool. The Company will begin to amortize these properties when the projects are evaluated, which is currently estimated to be within this fiscal year. Costs excluded from amortization at June 30, 2005 total $965,018 for U.S. properties. 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, 2005 and 2004. page 7 Three Months Ended June 30 2005 2004 ------------- ------------- Weighted average number of common shares outstanding 1,733,041 1,736,041 Incremental shares from the assumed exercise of dilutive stock options and warrants 143,662 120,938 ------------- ------------- Dilutive potential common shares 1,876,703 1,856,979 Options and warrants to purchase 70,000 shares at an average exercise price of $7.54 outstanding at June 30, 2004 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. No options outstanding at June 30, 2005 were excluded in the computation of diluted net income per share. 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 is recognized in net income in the period that includes the enactment date. The effective income tax rate for the three months ended June 30, 2005, was 38%. This increased rate over the statutory rate is a result of a revision of an estimate of statutory depletion. Investment in GazTex, LLC. The Company's long-term assets consist of an investment in GazTex, LLC, a Russian company owned 50% by OBTX, LLC, accounted for by the equity method. OBTX, LLC is a Delaware limited liability company in which Mexco owns 90% of the interest, with the remaining 10% divided equally among three individuals, one of whom is Arden Grover, a director of Mexco Energy Corporation. All geological and geophysical costs associated with the evaluation of Russian properties have been paid 90% by Mexco Energy Corporation and 10% by the other three owners of OBTX, LLC. GazTex, LLC was formed during fiscal 2005 and through June 30, 2005 has no operations other than the evaluation activity. Through June 30, 2005, the Company has $282,126 classified as a long-term investment in GazTex, LLC. The 10% interest in OBTX, LLC is included in the Company's financial statements as a minority interest. OBTX, LLC, plans to participate in any Russian venture entered into and own a 50% interest. For the quarter ended June 30, 2005, the Company has expensed approximately $38,000 in consulting costs for the evaluation of projects. No costs were expensed during the first quarter of fiscal 2005. 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. As of June 30, 2005, the balance outstanding under this agreement was $1,815,000 and matures on April 1, 2006. The borrowing base is currently being re-evaluated and upon completion of the evaluation the note will be extended. Amounts borrowed under this agreement are collateralized by the common stock of the Company's wholly owned subsidiary and all oil and gas properties. Recent Accounting Pronouncements. Share based payment - In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), Share-Based Payment, which establishes accounting standards for all transactions in which an entity exchanges its equity instruments for goods and services. SFAS No. 123(R) focuses primarily on accounting for transactions with employees, and carries forward without change to prior guidance for share-based payments for transactions with non employees. SFAS No. 123(R) eliminates the intrinsic value measurement objective in APB Opinion 25 and generally requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant. The standard requires grant date fair value to be estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such cost must be recognized over the period during which an employee is required to provide service in exchange for the award (which is usually the vesting period). The standard also requires the Company to estimate page 8 the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur. The Company is required to apply SFAS No. 123(R) to all awards granted, modified or settled in our first annual reporting period under U.S. GAAP beginning after June 15, 2005. The Company will adopt SFAS No. 123(R) on April 1, 2006. The Company has not yet completed the analysis of the impact of SFAS No. 123(R). FASB Statement No. 154 - In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections ("Statement 154"). Statement 154 requires companies to recognize changes in accounting principle, including changes required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods' financial statements. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of Statement 154 will have a material effect on its financial position or results of operations. 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. Unless the context otherwise requires, references to the 'Company", "Mexco", "we", "us" or "our" mean Mexco Energy Corporation and its consolidated subsidiaries. Liquidity and Capital Resources. Historically, the Company's sources of funding have been from operating activities and bank financing. 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 2006, cash flow from operations was $352,048 compared to $304,578 for the first three months of fiscal 2005. The increase was primarily due to an increase in net income. The cash flow from operations for the first three months of fiscal 2006 included the effects of a decrease in accounts receivable and an increase in accounts payable and accrued expenses. Cash of $191,590 was used for additions to property and equipment and cash of $175,000 was used to pay on the line of credit. Accordingly, net cash increased $3,815. Through June 30, 2005, we have reviewed a number of possible projects in Russia. We established a long-term investment in GazTex, LLC for our capital costs of these projects of $282,126. Any projects reviewed that we have decided not to continue studying or develop have been expensed. We expensed approximately $38,000 for the first quarter of fiscal 2006 related to Russian projects. No costs were expensed during the first quarter of fiscal 2005. page 9 In February 2005, we purchased a mineral interest in Devon's Aycock Gas Unit containing 160 acres for approximately $56,000. The unit currently has one producing well with plans to drill two additional wells in 2006. This unit is located in Freestone County, Texas where the Company has purchased other royalty interests. Effective February 2005, we purchased for $550,000 partially developed royalty interests primarily located in Freestone and Limestone Counties, Texas and operated by Anadarko Petroleum, XTO, and Devon Energy. These properties contain 75 producing wells and an additional nine permitted and/or drilling wells in the Cotton Valley formation. This acreage contains approximately 83 potential undeveloped locations, which are principally Cotton Valley infill wells. We continue to focus our efforts on the acquisition of royalties in areas with significant development potential. We are reviewing several other projects in which we may participate. The cost of such projects would be funded, to the extent possible, from existing cash balances and cash flow from operations. The remainder may be funded through borrowings on the credit facility discussed below. At June 30, 2005, the Company had a working capital deficit of approximately $1,458,603 compared to a working capital of approximately $376,478 at March 31, 2005, a decrease of $1,835,081 due to the current classification of the long-term debt. Long-Term Debt. 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 determination. Effective August 15, 2004, the credit agreement was amended with a maturity date of April 1, 2006. On July 29, 2004, the borrowing base was redetermined and set at $2,500,000 with no monthly commitment reductions. As of June 30, 2005, the balance outstanding under this agreement was $1,815,000. The borrowing base is currently being re-evaluated and upon completion of the evaluation the note is expected to be extended. Amounts borrowed under this agreement are collateralized by the common stock of the Company's wholly owned subsidiary and all oil and gas properties. A letter of credit for $50,000, in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operates, is also outstanding under the facility. Interest under this agreement is payable monthly at prime rate (6.00% and 4.00% at June 30, 2005 and 2004, respectively). This 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, 2005 was $1,775,000. 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. Results of Operations - Three Months Ended June 30, 2005 and 2004. Net income increased from $102,702 for the quarter ended June 30, 2004 to $160,918 for the quarter ended June 30, 2005, an increase of $58,216 or 57%. Oil and gas sales increased from $674,995 for the first quarter of fiscal 2005 to $802,720 for the same period of fiscal 2006. This increase of 19% or $127,725 resulted from an increase in oil production and increases in both oil and gas prices offset partially by a decrease in gas production. Average gas prices increased from $5.08 per mcf for the first quarter of fiscal 2005 to $6.24 per mcf for the same period of fiscal 2006, while average oil prices increased from $36.19 per bbl for the first quarter of fiscal 2005 to $48.37 for the same period of fiscal 2006. Oil and gas production quantities were 3,867 barrels ("bbls") and 105,347 thousand cubic feet ("mcf") for the first quarter of fiscal 2005 and 4,250 bbls and 95,722 mcf for the same period of fiscal 2006, an increase of 10% in oil production, partially due to the addition of certain oil producing interests acquired during the fourth quarter of fiscal 2005. Gas production decreased 9% as a result of natural decline. Production costs decreased from $191,738 for the first quarter of fiscal 2005 to $176,445 for the same period of fiscal 2006. This was the result of decreased repairs to operated wells during the quarter partially offset by increased production taxes due to the increase in oil and gas sales. page 10 General and administrative expenses increased 19% from $164,419 for the first quarter of fiscal 2005 to $195,403 for the same period of fiscal 2006. This is primarily the result of an increase in consulting services related to our Russian activities. These expenses were approximately $38,000 for the quarter. Depreciation, depletion and amortization based on production and other methods decreased 9%, from $152,772 for the first quarter of fiscal 2005 to $138,679 for the same period of fiscal 2006 primarily due to a decrease in production. Interest expense increased 78% from $16,843 for the first quarter of fiscal 2005 to $29,982 for the same period of fiscal 2006, due to increased borrowings and increased interest rates. 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, 2005, 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, 2005, the Company had an outstanding loan balance of $1,815,000 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 $18,150, based on the outstanding balance at June 30, 2005. 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, 2005, the Company's largest credit risk associated with any single purchaser was $68,592. 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 The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures are effective. No changes in the Company's internal control over financial reporting occurred during the Current Quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. page 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- We are a defendant in a lawsuit that has arisen in the ordinary course of business related to the oil and gas leases on the Campbell 15-1 well in Hemphill County, Texas. While the outcome of this lawsuit cannot be predicted with certainty, management does not expect this lawsuit to have a material adverse effect on our consolidated financial condition or results of operations. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- None. Exhibits 31.1 Certification of the Chief Executive Officer of Mexco Energy Corporation 31.2 Certification of the Chief Financial Officer of Mexco Energy Corporation 32.1 Certification 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 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 11, 2005 /s/ Nicholas C. Taylor ------------------------------------------------ Nicholas C. Taylor President Dated: August 11, 2005 /s/ Tamala L. McComic ------------------------------------------------ Tamala L. McComic Vice President, Treasurer and Assistant Secretary page 12