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 and Southeastern
New Mexico; however, the Company owns producing properties and undeveloped acreage in fourteen states. All of the Company’s
oil and gas interests are operated by others.
Recent
Events
The
outbreak of the novel coronavirus (“COVID-19”) in the first calendar quarter of 2020 and its continued spread across
the globe in the second and third calendar quarters of 2020 has resulted, and is likely to continue to result, in significant
economic disruption and has, and is likely to continue to, adversely affect the operations of the Company’s business, as
the significantly reduced global and national economic activity has resulted in reduced demand for oil and natural gas. Federal,
state and local governments mobilized to implement containment mechanisms to minimize impacts to their populations and economies.
Various containment measures, which include the quarantining of cities, regions and countries, while aiding in the prevention
of further outbreak, have resulted in a severe drop in general economic activity and a resulting decrease in energy demand. In
addition, the global economy has experienced a significant disruption to global supply chains. The extent of the COVID-19 outbreak
on the Company’s operational and financial performance will continue to depend on certain developments, including the duration
and spread of the outbreak and its continued impact on customer activity and third-party providers. The direct impact to the Company’s
operations began to take effect at the close of the fiscal year ended March 31, 2020, and continued through the issuance of these
condensed consolidated financial statements. The full extent to which the COVID-19 outbreak may affect the Company’s financial
conditions, results of operations or liquidity subsequent to the issuance of these condensed consolidated financial statements
is uncertain. At the time of this filing, cases of COVID-19 in the U.S. remain high, including in Texas, where we are involved
in significant operations.
The
severe drop in economic activity, travel restrictions and other restrictions due to COVID-19 have had a significant negative impact
on the demand for oil and gas. Due to the significantly reduced demand for oil and natural gas as a result of the COVID-19 pandemic
and the current oversupply of oil and natural gas in the market, available storage and capacity for the Company’s customers’
production may be limited or completely unavailable in the future, which may further negatively impact the price of oil. The Company
cannot predict whether, or when, the global supply and demand imbalance will be resolved or whether, or when, oil and natural
gas production and economic activities will return to normalized levels. In the absence of additional reductions to global production,
oil, natural gas and NGLs prices could remain at current levels, or decline further, for an extended period of time.
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 (“GAAP”), 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, 2020, and the results of its operations and cash flows for the interim periods ended December 31, 2020 and 2019.
The consolidated financial statements as of December 31, 2020 and for the three and nine month periods ended December 31, 2020
and 2019 are unaudited. The consolidated balance sheet as of March 31, 2020 was derived from the audited balance sheet filed in
the Company’s 2020 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.
Investments.
The Company accounts for investments of less than 1% of any limited liability company using the cost method. The cost of the
investment is recorded as an asset on the consolidated balance sheets and when income from the investment is received, it is immediately
recognized on the consolidated statements of operations.
Derivative
Financial Instruments. The Company’s derivative financial instruments are used to manage commodity price risk attributable
to expected oil and gas production. While there is risk the financial benefit of rising oil and gas prices may not be captured,
the Company believes the benefits of stable and predictable cash flows outweigh the potential risks.
The
Company accounts for derivative financial instruments using fair value accounting and recognizes gains and losses in earnings
during the period in which they occur. Unsettled derivative instruments are recorded in the accompanying consolidated balance
sheets as either a current or non-current asset or a liability measured at its fair value. The Company only offsets derivative
assets and liabilities for arrangements with the same counterparty when right of offset exists. Derivative assets and liabilities
with different counterparties are recorded gross in the consolidated balance sheets. Derivative contract settlements are reflected
in operating activities in the accompanying consolidated statements of cash flows.
The
Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing
models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties.
Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values
from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active
markets.
Recently
Adopted Accounting Pronouncements. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies various aspects of the income tax accounting
guidance in ASC 740, including requirements related to the following: (i) hybrid tax regimes; (ii) the tax basis step-up in goodwill
obtained in a transaction that is not a business combination; (iii) separate financial statements of entities not subject to tax;
(iv) the intraperiod tax allocation exception to the incremental approach; (v) ownership changes in investments - changes from
a subsidiary to an equity method investment (and vice versa); (vi) interim-period accounting for enacted changes in tax laws;
and (vii) the year-to-date loss limitation in interim-period tax accounting. ASU 2019-12 is effective for fiscal years beginning
after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. If an entity early adopts
these amendments in an interim period, it should reflect any adjustments as of the beginning of the annual period that includes
that interim period. In addition, an entity that elects to early adopt ASU 2019-12 is required to adopt all of the amendments
in the same period. The Company is currently assessing the effect that ASU 2019-12 will have on its financial position, results
of operations and disclosures.
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 until
the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized
as part of the carrying amount of our oil and natural gas properties. 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 2021:
Carrying amount of asset retirement obligations as of April 1, 2020
|
|
$
|
762,761
|
|
Liabilities incurred
|
|
|
14,013
|
|
Liabilities settled
|
|
|
(33,130
|
)
|
Accretion expense
|
|
|
21,540
|
|
Carrying amount of asset retirement obligations as of December 31, 2020
|
|
|
765,184
|
|
Less: Current portion
|
|
|
7,500
|
|
Non-Current asset retirement obligation
|
|
$
|
757,684
|
|
4.
Stock-based Compensation
The
Company recognized stock-based compensation expense of $13,865 and $8,125 in general and administrative expense in the Consolidated
Statements of Operations for the three months ended December 31, 2020 and 2019, respectively. Stock-based compensation expense
recognized for the nine months ended December 31, 2020 and 2019 was $41,813 and $24,375, respectively. The total cost related
to non-vested awards not yet recognized at December 31, 2020 totals approximately $127,996 which is expected to be recognized
over a weighted average of 2.70 years.
The
following table is a summary of activity of stock options for the nine months ended December 31, 2020:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining Contract
Life in Years
|
|
Outstanding at April 1, 2020
|
|
|
227,700
|
|
|
$
|
5.65
|
|
|
|
4.83
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(11,700
|
)
|
|
|
-
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(35,200
|
)
|
|
|
-
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
180,800
|
|
|
$
|
5.49
|
|
|
|
5.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2020
|
|
|
119,800
|
|
|
$
|
6.33
|
|
|
|
3.28
|
|
Exercisable at December 31, 2020
|
|
|
119,800
|
|
|
$
|
6.33
|
|
|
|
3.28
|
|
During
the nine months ended December 31, 2020 and 2019, no stock options were granted.
During
the nine months ended December 31, 2020, stock options covering 11,700 shares were exercised with a total intrinsic value of $12,217.
The Company received proceeds of $78,795 from these exercises. During the nine months ended December 31, 2019, no stock options
were exercised.
During
the nine months ended December 31, 2020, 1,000 unvested stock options were forfeited due to the resignation of an employee and
34,200 vested stock options expired unexercised. There were no stock options forfeited or expired during the nine months ended
December 31, 2019. No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate
history of these types of awards.
Outstanding
options at December 31, 2020 expire between November 2021 and March 2030 and have exercise prices ranging from $3.34 to $7.00.
Subsequently,
in January 2021, stock options covering 19,800 shares were exercised with a total intrinsic value of $53,751. The Company received
proceeds of $134,640 from these exercises.
5.
Long Term Debt
Long-term
debt on the Consolidated Balance Sheets consisted of the following as of the dates indicated:
|
|
December 31,
2020
|
|
|
March 31,
2020
|
|
Credit facility
|
|
$
|
1,100,000
|
|
|
$
|
795,000
|
|
Unamortized debt issuance costs
|
|
|
(28,183
|
)
|
|
|
(37,577
|
)
|
Total long-term debt
|
|
$
|
1,071,817
|
|
|
$
|
757,423
|
|
On
December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”),
which provided for a credit facility of $1,000,000 with a maturity date of December 28, 2021. The Agreement has no monthly commitment
reduction and a borrowing base to be evaluated annually.
On
February 28, 2020, the Agreement was amended to increase the credit facility to $2,500,000, extend the maturity date to March
28, 2023 and increase the borrowing base to $1,500,000.
Under
the Agreement, interest on the credit facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal
plus one-half of one percent (0.5%) floating daily. Interest on the outstanding amount under the Agreement is payable monthly.
In addition, the Company will pay an unused commitment fee in an amount equal to one-half of one percent (0.5%) times the daily
average of the unadvanced amount of the commitment. The unused commitment fee is payable quarterly in arrears on the last day
of each calendar quarter. As of December 31, 2020, there was $400,000 available on the credit facility.
No
principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2023. Upon closing
with WTNB on the original Agreement, the Company paid a .5% loan origination fee in the amount of $5,000 plus legal and recording
expenses totaling $34,532, which were deferred over the original life of the credit facility. Upon closing the amendment to the
Agreement, the Company paid a .1% loan origination fee of $2,500 and an extension fee of $3,125 plus legal and recording expenses
totaling $12,266, which were also deferred over the new remaining life of the credit facility.
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 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 senior debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratios (Senior
Debt/EBITDA) less than or equal to 4.00 to 1.00 measured with respect to the four trailing quarters and minimum interest coverage
ratios (EBITDA/Interest Expense) of 2.00 to 1.00 for each quarter. The Company is in compliance with all covenants as of December
31, 2020 and believes it will remain in compliance for the next fiscal year.
In
addition, this Agreement prohibits the Company from paying cash dividends on its common stock without written permission of WTNB.
The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior
WTNB approval. The Company obtained written permission from WTNB prior to entering into the current hedge agreement discussed
in Note 8.
The
balance outstanding on the line of credit as of December 31, 2020 was $1,100,000. The following table is a summary of activity
on the WTNB line of credit for the nine months ended December 31, 2020:
|
|
Principal
|
|
Balance at April 1, 2020:
|
|
$
|
795,000
|
|
Borrowings
|
|
|
680,000
|
|
Repayments
|
|
|
(375,000
|
)
|
Balance at December 31, 2020:
|
|
$
|
1,100,000
|
|
Subsequently,
on January 11, 2021, the Company borrowed $75,000 on the WTNB credit facility and on January 15, 2021, made a payment of $75,000
on the credit facility, leaving a balance of $1,100,000.
The
Company also maintained a Certificate of Deposit Account at WTNB to collateralize one outstanding letter of credit for $25,000
in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operated. The operated property
was sold effective December 1, 2019 and the letter of credit was cancelled. On April 10, 2020, the Certificate of Deposit Account
was terminated and the funds deposited into the Company’s operating account.
6.
Paycheck Protection Program (PPP) Loan.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act became effective.
One component of the CARES Act was the paycheck protection program (“PPP”) which provides small businesses with the
resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the United States Small Business
Administration (“SBA”) with support from the Department of the Treasury. The PPP provides funds to pay up to 24 weeks
of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The Company applied
for, and was accepted to participate in this program. On May 5, 2020, the Company received funding for approximately $68,600.
The
loan was a two-year loan with a maturity date of May 5, 2022 an annual interest rate of 1% payable monthly with the first six
monthly payments deferred. The Company applied for and on November 25, 2020 was approved for loan forgiveness in the amount of
$68,957 under the provisions of Section 1106 of the CARES Act. This was for the forgiveness of our PPP loan in the amount of $68,574
and $383 in accrued interest expense. The Company was eligible for loan forgiveness because the Company used all loan proceeds
to partially subsidize direct payroll expenses.
7.
Leases
The
Company leases approximately 4,160 rentable square feet of office space from an unaffiliated third party for the corporate office
located in Midland, Texas. This includes 1,021 square feet of office space shared with and reimbursed by the majority shareholder.
The lease is a 36-month lease that expires in May 2021 and does not include an option to renew. In June 2020, in exchange for
a reduction in rent for the months of June and July 2020, the Company agreed to a 2-month extension to its current lease agreement
at the regular monthly rate extending its current lease expiration date to July 2021.
The
Company determines an arrangement is a lease at inception. Operating leases are recorded in operating lease right-of-use asset,
operating lease liability, current, and operating lease liability, long-term on the consolidated balance sheets.
Operating
lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized
at the commencement date based on the present value of lease payments over the lease term. As the Company’s lease does not
provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date
in determining the present value of lease payments. The incremental borrowing rate used at adoption was 6.0%. Significant judgement
is required when determining the incremental borrowing rate. The Company chose not to discount because the difference is not significant.
Rent expense for lease payments is recognized on a straight-line basis over the lease term.
The
balance sheets classification of lease assets and liabilities was as follows:
|
|
December 31,
2020
|
|
Assets
|
|
|
|
|
Operating lease right-of-use asset, beginning balance
|
|
$
|
76,130
|
|
Current period amortization
|
|
|
(48,503
|
)
|
Lease amendment
|
|
|
(1,622
|
)
|
Lease extension
|
|
|
10,982
|
|
Total operating lease right-of-use asset, ending balance
|
|
$
|
36,987
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating lease liability, current
|
|
$
|
38,438
|
|
Operating lease liability, long term
|
|
|
-
|
|
Total lease liabilities
|
|
$
|
38,438
|
|
Future
minimum lease payments as of December 31, 2020 under non-cancellable operating leases are as follows:
|
|
Lease
Obligation
|
|
Fiscal Year Ended March 31, 2021
|
|
|
16,473
|
|
Fiscal Year Ended March 31, 2022
|
|
|
21,965
|
|
Total lease payments
|
|
$
|
38,438
|
|
Less: imputed interest
|
|
|
-
|
|
Operating lease liability
|
|
|
38,438
|
|
Less: operating lease liability, current
|
|
|
(38,438
|
)
|
Operating lease liability, long term
|
|
$
|
-
|
|
Net
cash paid for our operating lease for the nine months ended December 31, 2020 and 2019 was $34,121 and $35,300, respectively.
Rent expense, less sublease income of $14,315 and $13,167, respectively, is included in general and administrative expenses.
8.
Fair Value Measurements
The
Company applies FASB ASC Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), which establishes a
framework for measuring fair value based upon inputs that market participants use in pricing an asset or liability, which are
classified into two catagories: observable inputs or unobservable inputs. Observable inputs represent market data obtained from
independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable
inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the
following fair value input hierarchy:
Level
1: Quoted prices for identical instruments in active markets at the measurement date.
Level
2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that
are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets at the measurement date and for the anticipated term of the instrument.
Level
3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing
the asset or liability acquired, based on the best information available in the circumstances.
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.
See the Company’s Note 5 on Long Term Debt for further discussion.
Fair
Value Measurements on a Recurring Basis
A
financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement.
The
Company’s commodity derivative instruments were carried at fair value on a recurring basis in the Company’s consolidated
balance sheets. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs
to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered
from third parties.
Company
management validates the data provided by third parties by understanding the pricing models used, obtaining market values from
other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets.
Assumed credit risk adjustments, based on published credit ratings and public bond yield spreads are applied to the Company’s
commodity derivatives. The Company’s derivative instruments are subject to netting arrangements and qualify for net presentation
in the consolidated balance sheets in those instances where such arrangements exist with the respective counterparty.
To
ensure these derivative instruments are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness
of either party as well as market constraints on liquidity. There was no adjustment as of December 31, 2020.
Fair
Value Measurements on a Nonrecurring Basis
The
asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments
and, therefore, the Company has designated these liabilities as Level 3 measurements. The significant inputs to this fair value
measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free
rate. See Note 3 for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement
obligations.
9.
Derivative Financial Instruments
It
is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions
deemed by management as competent and competitive.
The
Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk. Derivative contracts
are utilized to economically hedge the Company’s exposure to price fluctuations and reduce the variability in the Company’s
cash flows associated with anticipated sales of future oil and natural gas production. The Company follows FASB ASC Topic 815,
Derivatives and Hedging (ASC Topic 815), to account for its derivative financial instruments.
The
Company’s crude oil derivative positions consisted of put options. The Company has elected not to designate any of its derivative
contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative
contracts, as well as all payments and receipts on settled derivative contracts, in net realized and unrealized gain (loss) on
commodity price hedging contracts on the consolidated statements of operations. All derivative contracts are recorded at fair
market value and included in the consolidated balance sheets as assets or liabilities. As of December 31, 2020, the Company has
no derivative contracts.
The
Company may have multiple hedge positions that span a several-month time period and result in fair value asset and liability positions.
At the end of the reporting periods, those positions are offset to a single fair value asset or liability for each commodity and
the netted balance is reflected in the consolidated balance sheets as an asset or liability.
During
the quarter ended June 30, 2020 the Company entered into a series of crude oil put option contracts. All of these such contracts
expired in July and August 2020.
The
following tables summarizes the amounts of the Company’s realized and unrealized losses on derivative contracts listed as
loss on derivative instruments in the Company’s consolidated statements of operations for the nine months ended December
31, 2020.
|
|
Loss Recognized
|
|
Realized loss on oil price hedging contracts
|
|
$
|
(19,200
|
)
|
Unrealized gain (loss) on oil price hedging contracts
|
|
|
-
|
|
Net realized and unrealized loss on derivative contracts
|
|
$
|
(19,200
|
)
|
10.
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 are in a net deferred
tax asset position as of December 31, 2020. Our deferred tax asset is $1,312,129 as of December 31, 2020 with a valuation amount
of $1,312,129. 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.
11.
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 principal stockholder. The total billed to and reimbursed by the stockholder for the three months ended December
31, 2020 and 2019 was $9,122 and $12,289, respectively. The total billed to and reimbursed by the stockholder for the nine months
ended December 31, 2020 and 2019 was $27,443 and $32,232, respectively. The principal stockholder pays for his share of the lease
amount for the shared office space directly to the lessor. Amounts paid by the principal stockholder directly to the lessor for
the three months ending December 31, 2020 and 2019 were $4,045 and $3,981, respectively. Amounts paid by the principal stockholder
directly to the lessor for the nine months ending December 31, 2020 and 2019 were $11,694 and $11,900, respectively.
12.
Income (loss) Per Common Share
The
Company’s basic net income (loss) per share has been computed based on the weighted average number of common shares outstanding
during the period. Diluted net income (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 and is computed by dividing net
income (loss) by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding
during the period. In periods where losses are reported, the weighted-average number of common shares outstanding excludes potential
common shares, because their inclusion would be anti-dilutive.
The
following is a reconciliation of the number of shares used in the calculation of basic and diluted net income (loss) per share
for the three and nine month periods ended December 31, 2020 and 2019:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
80,047
|
|
|
$
|
35,196
|
|
|
$
|
(261,143
|
)
|
|
$
|
(101,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted avg. shares outstanding – basic
|
|
|
2,051,081
|
|
|
|
2,040,166
|
|
|
|
2,044,054
|
|
|
|
2,040,166
|
|
Effect of assumed exercise of dilutive stock options
|
|
|
3,207
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted avg. shares outstanding – dilutive
|
|
|
2,054,288
|
|
|
|
2,040,166
|
|
|
|
2,044,054
|
|
|
|
2,040,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.05
|
)
|
For
the three months ended December 31, 2019, 139,800 potential common shares relating to stock options were excluded in the computation
of diluted net income per share because the price of the options was greater than the average market price of the common shares
and therefore, the effect would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $6.12
at December 31, 2020.
Due
to a net loss for the nine months ended December 31, 2020 and 2019, the weighted average number of common shares outstanding excludes
common stock equivalents because their inclusion would be anti-dilutive.
13.
Subsequent Events
The
Company completed a review and analysis of all events that occurred after the consolidated balance sheet date to determine if
any such events must be reported and has determined that there are no other subsequent events to be disclosed.