Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
December 31, 2016
|
|
|
March 31, 2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
60,858
|
|
|
$
|
34,013
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
|
331,809
|
|
|
|
248,145
|
|
Trade
|
|
|
12,017
|
|
|
|
29,880
|
|
Prepaid costs and expenses
|
|
|
9,635
|
|
|
|
43,284
|
|
Total current assets
|
|
|
414,319
|
|
|
|
355,322
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
|
|
|
|
|
|
Oil and gas properties, using the full cost method
|
|
|
37,651,673
|
|
|
|
40,365,197
|
|
Other
|
|
|
107,484
|
|
|
|
107,484
|
|
Accumulated depreciation, depletion and amortization
|
|
|
(25,274,821
|
)
|
|
|
(24,395,184
|
)
|
Property and equipment, net
|
|
|
12,484,336
|
|
|
|
16,077,497
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
29,614
|
|
|
|
34,441
|
|
Total assets
|
|
$
|
12,928,269
|
|
|
$
|
16,467,260
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
202,408
|
|
|
$
|
332,172
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,070,000
|
|
|
|
5,580,000
|
|
Asset retirement obligations
|
|
|
960,525
|
|
|
|
1,211,077
|
|
Total liabilities
|
|
|
4,232,933
|
|
|
|
7,123,249
|
|
|
|
|
|
|
|
|
|
|
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; 2,104,266 issued and 2,037,266 shares outstanding as of December 31, 2016 and March 31, 2016
|
|
|
1,052,133
|
|
|
|
1,052,133
|
|
Additional paid-in capital
|
|
|
7,234,408
|
|
|
|
7,191,984
|
|
Retained earnings
|
|
|
754,796
|
|
|
|
1,445,895
|
|
Treasury stock, at cost – (67,000 shares)
|
|
|
(346,001
|
)
|
|
|
(346,001
|
)
|
Total stockholders’ equity
|
|
|
8,695,336
|
|
|
|
9,344,011
|
|
Total liabilities and stockholders’ equity
|
|
$
|
12,928,269
|
|
|
$
|
16,467,260
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
|
|
$
|
580,419
|
|
|
$
|
537,771
|
|
|
$
|
1,662,985
|
|
|
$
|
1,951,228
|
|
Other
|
|
|
9,715
|
|
|
|
7,099
|
|
|
|
178,174
|
|
|
|
25,080
|
|
Total operating revenues
|
|
|
590,134
|
|
|
|
544,870
|
|
|
|
1,841,159
|
|
|
|
1,976,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
234,372
|
|
|
|
286,519
|
|
|
|
721,864
|
|
|
|
869,091
|
|
Accretion of asset retirement obligation
|
|
|
9,248
|
|
|
|
8,797
|
|
|
|
26,939
|
|
|
|
26,394
|
|
Impairment of long-lived asset
|
|
|
-
|
|
|
|
2,150,621
|
|
|
|
-
|
|
|
|
2,984,410
|
|
Depreciation, depletion, and amortization
|
|
|
273,885
|
|
|
|
375,987
|
|
|
|
879,637
|
|
|
|
1,244,617
|
|
General and administrative
|
|
|
199,995
|
|
|
|
272,936
|
|
|
|
780,608
|
|
|
|
931,545
|
|
Total operating expenses
|
|
|
717,500
|
|
|
|
3,094,860
|
|
|
|
2,409,048
|
|
|
|
6,056,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(127,366
|
)
|
|
|
(2,549,990
|
)
|
|
|
(567,889
|
)
|
|
|
(4,079,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3
|
|
|
|
328
|
|
|
|
175
|
|
|
|
363
|
|
Interest expense
|
|
|
(32,378
|
)
|
|
|
(43,413
|
)
|
|
|
(123,385
|
)
|
|
|
(127,693
|
)
|
Net other expense
|
|
|
(32,375
|
)
|
|
|
(43,085
|
)
|
|
|
(123,210
|
)
|
|
|
(127,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(159,741
|
)
|
|
|
(2,593,075
|
)
|
|
|
(691,099
|
)
|
|
|
(4,207,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
-
|
|
|
|
(147,539
|
)
|
|
|
-
|
|
|
|
(660,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(159,741
|
)
|
|
$
|
(2,445,536
|
)
|
|
$
|
(691,099
|
)
|
|
$
|
(3,546,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(1.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Common Stock Par Value
|
|
|
Treasury Stock
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Total Stockholders’ Equity
|
|
Balance at April 1, 2016
|
|
$
|
1,052,133
|
|
|
$
|
(346,001
|
)
|
|
$
|
7,191,984
|
|
|
$
|
1,445,895
|
|
|
$
|
9,344,011
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(691,099
|
)
|
|
|
(691,099
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
42,424
|
|
|
|
-
|
|
|
|
42,424
|
|
Balance at December 31, 2016
|
|
$
|
1,052,133
|
|
|
$
|
(346,001
|
)
|
|
$
|
7,234,408
|
|
|
$
|
754,796
|
|
|
$
|
8,695,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares, issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2016
|
|
|
|
|
|
|
2,104,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Dec. 31, 2016
|
|
|
|
|
|
|
2,104,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares, held in treasury:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2016
|
|
|
|
|
|
|
(67,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Dec. 31, 2016
|
|
|
|
|
|
|
(67,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares, outstanding at December 31, 2016
|
|
|
|
|
|
|
2,037,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Nine Months Ended December 31,
(Unaudited)
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(691,099
|
)
|
|
$
|
(3,546,209
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
-
|
|
|
|
(660,870
|
)
|
Stock-based compensation
|
|
|
42,424
|
|
|
|
95,770
|
|
Depreciation, depletion and amortization
|
|
|
879,637
|
|
|
|
1,244,617
|
|
Accretion of asset retirement obligations
|
|
|
26,939
|
|
|
|
26,394
|
|
Impairment of oil and gas properties
|
|
|
-
|
|
|
|
2,984,410
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(65,801
|
)
|
|
|
162,467
|
|
Decrease in prepaid expenses
|
|
|
33,649
|
|
|
|
30,745
|
|
Increase in non-current assets
|
|
|
(25,219
|
)
|
|
|
-
|
|
(Decrease) increase in accounts payable and accrued expenses
|
|
|
(103,500
|
)
|
|
|
27,855
|
|
Net cash provided by operating activities
|
|
|
97,030
|
|
|
|
365,179
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions to oil and gas properties
|
|
|
(517,454
|
)
|
|
|
(1,083,698
|
)
|
Additions to other property and equipment
|
|
|
-
|
|
|
|
(693
|
)
|
Settlement of asset retirement obligations
|
|
|
(93,630
|
)
|
|
|
(23,812
|
)
|
Drilling refunds
|
|
|
75,808
|
|
|
|
-
|
|
Proceeds from sale of oil and gas properties and equipment
|
|
|
2,975,091
|
|
|
|
782,363
|
|
Net cash provided by (used in) investing activities
|
|
|
2,439,815
|
|
|
|
(325,840
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Reduction of long-term debt
|
|
|
(2,510,000
|
)
|
|
|
(500,000
|
)
|
Proceeds from long-term debt
|
|
|
-
|
|
|
|
400,000
|
|
Net cash used in financing activities
|
|
|
(2,510,000
|
)
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
26,845
|
|
|
|
(60,661
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
34,013
|
|
|
|
96,084
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
60,858
|
|
|
$
|
35,423
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
126,593
|
|
|
$
|
126,555
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Asset retirement obligations
|
|
$
|
5,247
|
|
|
$
|
5,097
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
MEXCO
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Operations
Mexco
Energy Corporation (a Colorado corporation) and its wholly owned subsidiaries, Forman Energy Corporation (a New York corporation),
Southwest Texas Disposal Corporation (a Texas corporation) and TBO Oil & Gas, LLC (a Texas 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”). Most of the Company’s oil and gas interests are centered in West Texas; however,
the Company owns producing properties and undeveloped acreage in thirteen states. Although predominately all of the Company’s
oil and gas interests are operated by others, the Company operates five wells in which it owns an interest.
2.
Basis of Presentation and Significant Accounting Policies
Principles
of Consolidation
. The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned
subsidiaries. All significant intercompany balances and transactions associated with the consolidated operations have been eliminated.
Estimates
and Assumptions
. In preparing financial statements in conformity with accounting principles generally accepted in the United
States of America, management is required to make informed judgments, estimates and assumptions 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. In addition, significant estimates are used in determining proved oil and gas reserves. Although
management believes its estimates and assumptions are reasonable, actual results may differ materially from those estimates. The
estimate of the Company’s oil and natural gas reserves, which is used to compute depreciation, depletion, amortization and
impairment of oil and gas properties, is the most significant of the estimates and assumptions that affect these reported results.
Interim
Financial Statements.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position of the Company as
of December 31, 2016, and the results of its operations and cash flows for the interim periods ended December 31, 2016 and 2015.
The financial statements as of December 31, 2016 and for the three and nine month periods ended December 31, 2016 and 2015 are
unaudited. The consolidated balance sheet as of March 31, 2016 was derived from the audited balance sheet filed in the Company’s
2016 annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The results of operations
for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies
followed by the Company are set forth in more detail in Note 2 of the “Notes to Consolidated Financial Statements”
in the Form 10-K. 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.
Recent
Accounting Pronouncements.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230)”, which is intended to reduce diversity in practice
in how certain transactions are classified in the statement of cash flows. The guidance addresses eight specific cash flow issues
for which current GAAP is either unclear or does not include specific guidance. The guidance is effective for annual periods beginning
after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, provided that all of the
amendments are adopted in the same period. This guidance must be adopted using a retrospective transition method. The Company
is currently evaluating the effect that adopting this guidance will have on its cash flows.
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting”. The amendment is to simplify several aspects of the accounting for share-based payment
transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The amendments in ASU No. 2016-09 are effective for interim and annual reporting periods beginning
after December 15, 2016. The Company is currently assessing the impact of ASU No. 2016-09 on the consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Topic 842 Leases, which requires companies to recognize a right of use asset and related
liability on the balance sheet for the rights and obligations arising from leases with durations greater than 12 months. The standard
is effective for fiscal years beginning after December 15, 2018, and interim periods thereafter. Early adoption is permitted.
We are currently evaluating the effect the new guidance will have on our consolidated financial statements.
In
January 2016, the FASB issued authoritative guidance that amends existing requirements on the classification and measurement of
financial instruments. The standard principally affects accounting for equity investments and financial liabilities where the
fair value option has been elected. The guidance is effective for fiscal periods after December 15, 2017, and interim periods
thereafter. Early adoption of certain provisions is permitted. We are currently evaluating the effect the new guidance will have
on our financial statements.
In
November 2015, the FASB issued ASU No. 2015-17, Topic 740 Income Taxes: Balance Sheet Classification of Deferred Taxes which requires
all deferred income tax liabilities and assets to be presented as noncurrent in a classified balance sheet. Currently, entities
are required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified balance
sheet. The new standard will become effective for Mexco beginning on April 1, 2017, with the option to early adopt, and can be
applied either prospectively or retrospectively. The adoption of this guidance will have no impact on our results of operations
or cash flows. The reclassification of amounts from current to noncurrent could affect the presentation of our balance sheet.
In
May 2014, the FASB issued ASU No. 2014-09, Topic 606: Revenue from Contracts with Customers. This ASU provides guidance concerning
the recognition and measurement of revenue from contracts with customers. The effective date for ASU 2014-09 was delayed through
the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual and interim
periods beginning after December 15, 2017 and is required to be adopted using either the retrospective or cumulative effect transition
method, with early adoption permitted in 2017. Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts
with Customers (Topic 606): Principal versus agent considerations (reporting revenue gross versus net), which clarifies the implementation
guidance on principal versus agent considerations on such matters. In April 2016, the FASB issued ASU No. 2016-10, Revenue from
Contracts with Customers (Topic 606): Identifying performance obligations and licensing, which clarifies guidance related to identifying
performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016,
the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope improvements and practical expedients,
which addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at
transition. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers. These amendments intended to improve and clarify the implementation guidance of Topic 606. Additionally,
the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy
election related to the presentation of sales taxes and other similar taxes collected from customers. Management is evaluating
the effect, if any, this pronouncement will have on our consolidated financial statements.
3.
Asset Retirement Obligations
The
Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and
equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period
in which it is incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding
amount 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. The ARO is included in the Consolidated Balance
Sheets with the current portion being included in the accounts payable and other accrued expenses.
The
following table provides a rollforward of the AROs for the first nine months of fiscal 2017:
Carrying amount of asset retirement obligations as of April 1, 2016
|
|
$
|
1,221,077
|
|
Liabilities incurred
|
|
|
5,247
|
|
Liabilities settled
|
|
|
(282,738
|
)
|
Accretion expense
|
|
|
26,939
|
|
Carrying amount of asset retirement obligations as of December 31, 2016
|
|
|
970,525
|
|
Less: Current portion
|
|
|
10,000
|
|
Non-Current asset retirement obligation
|
|
$
|
960,525
|
|
4.
Stock-based Compensation
The
Company recognized stock-based compensation expense of $10,738 and $23,873 in general and administrative expense in the Consolidated
Statements of Operations for the three months ended December 31, 2016 and 2015, respectively. Compensation expense recognized
for the nine months ended December 31, 2016 and 2015 was $42,424 and $95,770, respectively. The total cost related to non-vested
awards not yet recognized at December 31, 2016 totals $35,860 which is expected to be recognized over a weighted average of 1.29
years.
The
following table is a summary of activity of stock options for the nine months ended December 31, 2016:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract Life
in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at April 1, 2016
|
|
|
153,600
|
|
|
$
|
6.52
|
|
|
|
6.36
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
4,000
|
|
|
|
5.98
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
149,600
|
|
|
$
|
6.54
|
|
|
|
5.59
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2016
|
|
|
121,850
|
|
|
$
|
6.50
|
|
|
|
5.21
|
|
|
$
|
-
|
|
Exercisable at December 31, 2016
|
|
|
121,850
|
|
|
$
|
6.50
|
|
|
|
5.21
|
|
|
$
|
-
|
|
There
were no options granted during the nine months ended December 31, 2016 and 2015. During the nine months ended December 31, 2016,
3,000 vested and 1,000 unvested stock options were forfeited due to the resignation of an employee.
Outstanding
options at December 31, 2016 expire between August 2020 and August 2024 and have exercise prices ranging from $5.98 to $7.00.
5.
Fair Value of Financial Instruments
Fair
value as defined by authoritative literature is the price that would be received to sell an asset or paid to transfer a liability
(exit price) in an orderly transaction between market participants at the measurement date. Fair value measurements are classified
and disclosed in one of the following categories:
Level
1 – Quoted prices in active markets for identical assets and liabilities.
Level
2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments
in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are
observable.
Level
3 – Significant inputs to the valuation model are unobservable.
Financial
assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
The
carrying amount reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable and
accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments.
The
fair value amount reported in the accompanying consolidated balance sheets for long term debt approximates fair value because
the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics
and is deemed to use Level 2 inputs. See the Company’s Note 6 on Credit Facility for further discussion.
6.
Credit Facility
The
Company has a loan agreement with Bank of America, N.A. (the “Agreement”), which provided for a credit facility
of $5,570,000 with no monthly commitment reductions and a borrowing base to be evaluated on July 30 and January 1 of each
year or at any additional time in the Bank’s discretion. The borrowing base is reset to the extent the Company’s
sells or otherwise disposes of any of its oil and gas properties. The Company is required to pay 100% of such net proceeds to
the lender resulting in a permanent reduction of the borrowing base. Amounts borrowed under the Agreement are collateralized
by the common stock of the Company’s wholly owned subsidiaries and substantially all of the Company’s oil and gas
properties.
The
Agreement was renewed ten times with the tenth amendment effective as of March 31, 2016 with a maturity date of November 30, 2020.
On January 30, 2017, the borrowing base was reevaluated and set at $3,120,000. Under such renewal 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 3.0 percentage points, which was 3.76% on December 31, 2016. Interest on the outstanding amount under the
credit agreement is payable monthly. There was no availability of this line of credit at December 31, 2016. No principal payments
are anticipated to be required through November 30, 2020.
The
Agreement contains customary covenants for credit facilities of this type including limitations on change in control, disposition
of assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement
and requires minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $300,000 for the
three fiscal quarters ending December 31, 2016, $500,000 for the four fiscal quarters ending March 31, 2017 and $650,000 for each
trailing fiscal quarter period thereafter and minimum interest coverage ratios (EBITDA/Interest Expense) of 2.00 to 1.00 for each
quarter thereafter. The Company is in compliance with all covenants as of December 31, 2016.
In
addition, this Agreement prohibits the Company from paying cash dividends on its common stock. The Agreement does grant the Company
permission to enter into hedge agreements however, it is under no obligation to do so.
The
Agreement allows for up to $500,000 of the facility to be used for outstanding letters of credit. As of December 31, 2016, one
letter of credit for $50,000, in lieu of plugging bond with the Texas Railroad Commission (“TRRC”) covering the properties
the Company operates is outstanding under the facility. This letter of credit renews annually. The Company will pay a fee in an
amount equal to 1 percent (1.0%) per annum of the outstanding undrawn amount of each standby letter of credit, payable monthly
in arrears, on the basis of the face amount outstanding on the day the fee is calculated.
The
balance outstanding on the line of credit as of December 31, 2016 was $3,070,000. The following table is a summary of activity
on the Bank of America, N.A. line of credit for the nine months ended December 31, 2016:
|
|
Principal
|
|
Balance at April 1, 2016:
|
|
$
|
5,580,000
|
|
Borrowings
|
|
|
-
|
|
Repayments
|
|
|
2,510,000
|
|
Balance at December 31, 2016:
|
|
$
|
3,070,000
|
|
7.
Income Taxes
A
valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that
some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment
regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated,
to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results
of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the
current and forecasted business economics of our industry.
Based
on the material write-downs of the carrying value of our oil and natural gas properties during fiscal 2016, we project being in
a net deferred tax asset position at March 31, 2017. Our deferred tax asset is $1,094,421 as of December 31, 2016 with a valuation
amount of $1,094,421. We believe it is more likely than not that these deferred tax assets will not be realized. Management assesses
the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit
the use of deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates
of future taxable income are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer
present and additional weight is given to subjective evidence such as future expected growth.
The
income tax provision consists of the following for the three and nine months ended December 31, 2016 and 2015:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Current income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred income tax benefit
|
|
|
-
|
|
|
|
(147,539
|
)
|
|
|
-
|
|
|
|
(660,870
|
)
|
Total income tax provision:
|
|
$
|
-
|
|
|
$
|
(147,539
|
)
|
|
$
|
-
|
|
|
$
|
(660,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0
|
%
|
|
|
(6
|
%)
|
|
|
0
|
%
|
|
|
(16
|
%)
|
8.
Related Party Transactions
Related
party transactions for the Company relate to shared office expenditures in addition to administrative and operating expenses paid
on behalf of the majority stockholder. The total billed to and reimbursed by the stockholder for the three months ended December
31, 2016 and 2015 was $9,565 and $31,711, respectively. The total billed to and reimbursed by the stockholder for the nine months
ended December 31, 2016 and 2015 was $22,061 and $81,412, respectively.
9.
Loss Per Common Share
The
Company’s basic net loss per share has been computed based on the weighted average number of common shares outstanding during
the period. Diluted net loss 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. 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 net loss per share and diluted loss per
share for the three and nine month periods ended December 31, 2016 and 2015:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(159,741
|
)
|
|
$
|
(2,445,536
|
)
|
|
$
|
(691,099
|
)
|
|
$
|
(3,546,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted avg. common shares outstanding – basic
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
Effect of the assumed exercise of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted avg. common shares outstanding – dilutive
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(1.74
|
)
|
Due
to a net loss for the three and nine months ended December 31, 2016 and 2015, the weighted average number of common shares outstanding
excludes common stock equivalents because their inclusion would be anti-dilutive.
10.
Impairments of Oil and Natural Gas Properties
Our
oil and natural gas properties are subject to quarterly full cost ceiling tests. Under the ceiling test, capitalized costs, less
accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of
estimated future net revenues (adjusted for cash flow hedges) less estimated future expenditures to be incurred in developing
and producing the proved reserves, less any related income tax effects. Estimated future net revenues for the quarterly ceiling
limit are calculated using the average of commodity prices on the first day of the month over the trailing 12-month period. In
the three and nine months ended December 31, 2015, capitalized costs of oil and natural gas properties exceeded the ceiling, resulting
in an impairment in the carrying value of our oil and natural gas properties of approximately $2,150,621 and $2,984,410, respectively.
We did not have an impairment in the carrying amount of our oil and natural gas properties for the nine months ended December
31, 2016.
11.
Subsequent Events
In
February 2017, the Company sold its fractional interest in two wells, a salt water disposal system and undeveloped acreage in
Williams County, North Dakota for sales price of approximately $42,000 which was applied to the Company’s outstanding bank
indebtedness.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless
the context otherwise requires, references to the “Company”, “Mexco”, “we”, “us”
or “our” mean Mexco Energy Corporation and its consolidated subsidiaries.
Cautionary
Statements Regarding Forward-Looking Statements.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations (“MD&A”) contains “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Forward-looking statements include statements regarding our plans, beliefs or current
expectations and may be signified by the words “could”, “should”, “expect”, “project”,
“estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”,
“forecast”, “predict” and other similar 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;
future project dates; estimates of future oil and gas prices; estimates of oil and gas reserves; our future financial condition
or results of operations; and our business strategy and other plans and objectives for future operations. Forward-looking statements
involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in
any forward-looking statement.
While
we have made assumptions that we believe are reasonable, the assumptions that support our forward-looking statements are based
upon information that is currently available and is subject to change. All forward-looking statements in the Form 10-Q are qualified
in their entirety by the cautionary statement contained in this section. We do not undertake to update, revise or correct any
of the forward-looking information. It is suggested that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Form 10-K.
Liquidity
and Capital Resources.
Historically, we have funded our operations, acquisitions, exploration and development expenditures
from cash generated by operating activities, bank borrowings and issuance of common stock. Our primary financial resource is our
base of oil and gas reserves. We pledge our producing oil and gas properties to secure our revolving line of credit. We do not
have any delivery commitments to provide a fixed and determinable quantity of its oil and gas under any existing contract or agreement.
Due
to depressed commodity price environment, we are applying financial discipline to all aspects of our business. Our ability to
grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and
NGL we sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. The substantial
decline in oil and natural gas prices has negatively affected the amount of cash we have available for capital expenditures and
debt service. In order to meet obligations, we may continue to sell non-core assets, if necessary.
Our
long term strategy is on increasing profit margins while concentrating on obtaining reserves with low cost operations by acquiring
and developing oil and gas properties with potential for long-lived production. We focus our efforts on the acquisition of royalties
and working interests in non-operated properties in areas with significant development potential.
For
the first nine months of fiscal 2017, cash flow from operations was $97,030, a 73% decrease when compared to the corresponding
period of fiscal 2016. Cash of $75,808 was received for drilling refunds and net cash proceeds of $2,975,091 was received from
the sale of assets. Cash of $517,454 was used for additions to oil and gas properties, cash of $93,630 was used to settle asset
retirement obligations and cash of $2,510,000 was used to reduce the line of credit. Accordingly, net cash increased $26,845.
At
December 31, 2016, we had working capital of $211,911 compared to working capital of $23,150 at March 31, 2016, an increase of
$188,761 for the reasons set forth below.
Oil
and Natural Gas Properties
Pioneer
Natural Resources Company has drilled seven wells which are producing in Upton County, Texas, all being horizontal wells with
10,000 feet of laterals at no expense to Mexco. These wells are located in part on 411 acres in which Mexco has retained a 1%
overriding royalty interest. On July 15, 2016, Pioneer exercised its option by paying to the Company $90,000 to extend for an
additional two years on the undeveloped portion of Mexco’s leasehold interest in 60 net acres (200 gross acres) in Upton
County, Texas.
During
the first nine months of fiscal 2017, Mexco participated with various percentage interests in ten horizontal wells in the Delaware
Basin located in the western portion of the Permian Basin in Eddy and Lea Counties, New Mexico with aggregate costs to date of
$494,450.
The
first of these wells we participated in was the
drilling
of a horizontal development well in the Cedar Canyon Bone Spring Wolfcamp formation of Eddy County, New Mexico. The lease,
operated by BC Operating, Inc., contains approximately 320 acres with one producing well. Initial production results for the
new well averaged 465 barrels of oil and 5,000,000 cubic feet of gas per day. Mexco’s working interest in this lease is
.926% (.695% net revenue interest).
The
next three wells were tested in October and November 2016 at an average rate of 1,015 barrels of oil; 1,705 barrels of
water; and, 1,700,000 cubic feet of gas per day, or 1,298 barrels of oil equivalent per day, with an average flowing
tubing pressures of 632 pounds per square inch, on 64/64 inch chokes. Mexco’s working interests in these wells range
from .52% to .74%.
The fifth
well
was produced on January 24, 2017 flowing at a rate of 2,119 barrels of oil, 2,169 barrels of water and 2,441,000 cubic feet of
gas per day, or 2,526 barrels of oil equivalent per day, with a flowing tubing pressure of 750 pounds per square inch, on a 51/64
inch choke. Mexco’s working interest in this well is .70%.
The
sixth well was also produced on January 24, 2017
flowing at a rate of 1,411 barrels of oil, 2,660 barrels of water and 1,688,000 cubic feet of gas per day, or 1,692 barrels of
oil equivalent per day, with a flowing tubing pressure of 975 pounds per square inch, on a 62/64 inch choke. Mexco’s working
interest in this well is .34%.
The
remaining four of these ten wells are in various stages of drilling, completion and production with possible further costs to
be incurred by Mexco. The results of these tests are neither indicative of future sustained production rates nor of results to
be expected in other wells.
During
the first quarter of fiscal 2017, Mexco sold its interest in a non-core oil and gas property located in Martin County, Texas for
$60,000 which was used to reduce the balance of Mexco’s line of credit.
In
October 2016, Mexco received approximately $2.187 million in cash from a sale of working interests to Parsley Energy, Inc. covering
50 net acres located in Glasscock County, Texas in the horizontal Wolfcamp trend of the Permian Basin in West Texas. These proceeds
are part of a sale by several co-owners of 11,672 gross (9,140 net) acres containing 67 gross (60 net) vertical wells with net
production of 270 barrels of oil equivalent plus 5 disposal wells and existing infrastructure. Of these proceeds, approximately
$1.887 million was applied to Mexco’s bank debt and the balance to the Company’s working capital.
Effective
November 1, 2016, the Company sold its 100% working interest (76.7% average net revenue interest) in eight oil and gas wells and
one disposal well of which Mexco is operator, located in the El Cinco and Tippett Fields of Pecos County, Texas. The Company received
a cash purchase price of $405,000 which was applied to reduce bank indebtedness. These properties were determined by management
to be non-core with limited potential for further development.
In
connection with Barnett Shale Fort Worth Basin royalties owned by the Company, a settlement was reached with the defendants, Chesapeake
Energy Corporation and Total E&P USA underpayment of royalties resulting in a payment of $154,289 of which $123,394 was paid
in cash on August 19, 2016 and the balance of $30,894 in an interest free promissory note due in three years and payable by Chesapeake.
We
are participating in other projects and are reviewing projects in which we may participate. The cost of such projects would be
funded, to the extent possible, from existing cash balances, cash flow from operations and sales of non-core assets.
Crude
oil and natural gas prices have fluctuated significantly in recent years. Lower product prices reduce our cash flow from operations
and diminish 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 makes it extremely difficult to predict future oil
and natural gas price movements with any certainty. For example in the last twelve months, the West Texas Intermediate (“WTI”)
posted price for crude oil has ranged from a low of $22.75 per bbl in February 2016 to a high of $50.75 per bbl in December 2016.
The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $1.49 per MMBtu in March 2016
to a high of $3.80 per MMBtu in December 2016. On December 31, 2016 the WTI posted price for crude oil was $50.25 per bbl and
the Henry Hub spot price for natural gas was $3.71 per MMBtu.
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 December 31, 2016:
|
|
Payments due in:
|
|
|
|
Total
|
|
|
less than 1 year
|
|
|
1 - 3 years
|
|
|
over 3 years
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured bank line of credit (1)
|
|
$
|
3,070,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,070,000
|
|
Leases (2)
|
|
$
|
24,880
|
|
|
$
|
21,710
|
|
|
$
|
4,755
|
|
|
$
|
-
|
|
|
(1)
|
These
amounts represent the balances outstanding under the bank line of credit. These repayments assume that interest will be paid on
a monthly basis, no additional funds will be drawn and does not include estimated interest of $115,466 less than 1 year and $336,776
1-3 years.
|
|
|
|
|
(2)
|
The
lease amount represents the monthly rent amount for our principal office space in Midland, Texas under one three year lease agreement
effective April 1, 2013 which was extended for an additional two years and a second three year lease agreement effective April
1, 2014. The total obligation for the remainder of the leases is $36,430 which includes $11,550 paid directly by our majority
shareholder for his portion of the shared office space.
|
Results
of Operations – Three Months Ended December 31, 2016 and 2015.
For the quarter ended December 31, 2016, there was a
net loss of $159,741 compared to a net loss of $2,445,536 for the quarter ended December 31, 2015. This was a result of an increase
in operating revenues and a decrease in total operating expenses. As opposed to the prior year, there was no impairment during
the three months ended December 31, 2016.
Oil
and gas sales
. Revenue from oil and gas sales was $580,419 for the third quarter of fiscal 2017, an 8% increase from $537,771
for the same period of fiscal 2016. This resulted from an increase in oil and gas prices partially offset by a decrease in oil
and gas production, partially due to wells down for mechanical difficulties.
|
|
2016
|
|
|
2015
|
|
|
%
Difference
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
376,013
|
|
|
$
|
339,331
|
|
|
|
10.8
|
%
|
Volume
(bbls)
|
|
|
8,502
|
|
|
|
8,936
|
|
|
|
(4.9
|
)%
|
Average
Price (per bbl)
|
|
$
|
44.23
|
|
|
$
|
37.98
|
|
|
|
16.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
204,405
|
|
|
$
|
198,440
|
|
|
|
3.0
|
%
|
Volume
(mcf)
|
|
|
87,512
|
|
|
|
106,416
|
|
|
|
(17.8
|
)%
|
Average
Price (per mcf)
|
|
$
|
2.34
|
|
|
$
|
1.86
|
|
|
|
25.8
|
%
|
Production
and exploration.
Production costs were $234,372 for the third quarter of fiscal 2017, an 18% decrease from $286,519 for the
same period of fiscal 2016. This was primarily the result of a decrease in lease operating expenses as a result of lowering service
costs and the sale of our operated properties in Pecos County, Texas.
Depreciation,
depletion and amortization.
Depreciation, depletion and amortization expense was $273,885 for the third quarter of fiscal
2017, a 27% decrease from $375,987 for the same period of fiscal 2016, primarily due to a decrease to the full cost pool amortization
base and a decrease in oil and gas production.
General
and administrative expenses.
General and administrative expenses were $199,995 for the third quarter of fiscal 2017, a 27%
decrease from $272,936 for the same period of fiscal 2016. This was primarily due to a decrease in engineering services, stock
option compensation expense, salaries and insurance expense.
Interest
expense.
Interest expense was $32,378 for the third quarter of fiscal 2017, a 25% decrease from $43,413 for the same period
of fiscal 2016, due to a decrease in borrowings partially offset by an increase in interest rate.
Income
taxes.
There was no income tax for the quarter ended December 31, 2016 compared to an income tax benefit of $147,539 for the
quarter ended December 31, 2015. The effective tax rate for the three months ended December 31, 2015 was 0% compared to (6%) for
the three months ended December 31, 2015. The decrease in the effective income tax rate was primarily due to the tax benefit at
expected rates being fully offset by a change in the valuation allowance.
Results
of Operations – Nine Months Ended December 31, 2016 and 2015.
For the nine months ended December 31, 2016, there was
a net loss of $691,099 compared to a net loss of $3,546,209 for the nine months ended December 31, 2015. This was a result of
a decrease in operating revenues partially offset by a decrease in total operating expenses. As opposed to the prior year, there
was no impairment during the nine months ended December 31, 2016.
Oil
and gas sales
. Revenue from oil and gas sales was $1,662,985 for the nine months ended December 31, 2016, a 15% decrease from
$1,951,228 for the same period of fiscal 2016. This resulted from a decrease in oil prices and a decrease in in oil and gas production.
|
|
2016
|
|
|
2015
|
|
|
%
Difference
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,117,525
|
|
|
$
|
1,313,315
|
|
|
|
(14.9
|
)%
|
Volume
(bbls)
|
|
|
26,434
|
|
|
|
29,160
|
|
|
|
(9.3
|
)%
|
Average Price (per bbl)
|
|
$
|
42.28
|
|
|
$
|
45.04
|
|
|
|
(6.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
545,460
|
|
|
$
|
637,913
|
|
|
|
(14.5
|
)%
|
Volume
(mcf)
|
|
|
266,606
|
|
|
|
310,994
|
|
|
|
(14.3
|
)%
|
Average Price (per mcf)
|
|
$
|
2.05
|
|
|
$
|
2.05
|
|
|
|
0.0
|
%
|
Other
operating revenue.
Other operating revenue was $178,174 for the nine months ended December 31, 2016 compared to $25,080 for
the nine months ended December 31, 2015 primarily due to the settlement of a lawsuit for underpayment of royalties from Chesapeake
Energy Corporation and Total E & P USA in the amount of $148,614.
Production
and exploration.
Production costs were $721,864 for the nine months ended December 31, 2016, a 17% decrease from $869,091
for the nine months ended December 31, 2015. This was primarily the result of a decrease in lease operating expenses as a result
of lowering service costs and a decrease in production taxes due to the decrease in oil and gas revenue.
Depreciation,
depletion and amortization.
Depreciation, depletion and amortization expense was $879,637 for the nine months ended December
31, 2016, a 29% decrease from $1,244,617 for the nine months ended December 31, 2015, primarily due to a decrease in oil and gas
production and a decrease in the full cost pool amortization base.
General
and administrative expenses.
General and administrative expenses were $780,608 for the nine months ended December 31, 2016,
a 16% decrease from $931,545 for the nine months ended December 31, 2015. This was primarily due to a decrease in engineering
services, stock option compensation expense, salaries and insurance expense.
Interest
expense.
Interest expense was $123,385 for the nine months ended December 31, 2016, a 3% decrease from $127,693 for the nine
months ended December 31, 2015 due to a decrease in borrowings partially offset by an increase in interest rate.
Income
taxes.
There was no income tax for the nine months ended December 31, 2016 compared to an income tax benefit of $660,870 for
the nine months ended December 31, 2015. The effective tax rate for the nine months ended December 31, 2016 was 0% compared to
(16%) for the nine months ended December 31, 2015. The decrease in our effective income tax rate was primarily due to the tax
benefit at expected rates being fully offset by a change in our valuation allowance.