MEXCO ENERGY CORP

MEXCO ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended March 31, 2024 and 2023

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 acquisition, exploration, development and production of crude oil, natural gas, 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation. The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned subsidiaries. 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 consolidated 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.

Cash and Cash Equivalents. The Company considers all highly liquid debt instruments purchased with maturities of three months or less and money market funds to be cash equivalents. The Company maintains cash in bank deposit accounts that may, at times, exceed federally insured limits. At March 31, 2024, the Company had on deposit all of its cash and cash equivalents with three financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

Accounts Receivable. Accounts receivable includes trade receivables from joint interest owners and oil and gas purchasers. Credit is extended based on an evaluation of a customer’s financial condition and, generally, is uncollateralized. Accounts receivable under joint operating agreements have a right of offset against future oil and gas revenues if a producing well is completed. The collectibility of receivables is assessed and an allowance is made for any credit losses. The allowance for credit losses is determined based on a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company has not experienced any significant credit losses. For the years ended March 31, 2024 and 2023, no allowance has been made for any credit losses.

Oil and Gas Properties. Oil and gas properties are accounted for using the full cost method of accounting. Under this method of accounting, the costs of unsuccessful, as well as successful, acquisition, exploration and development activities are capitalized as property and equipment. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. The carrying amount of oil and gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation (“ARO”) when incurred. Generally, no gains or losses are recognized on the sale or disposition of oil and gas properties.

Excluded Costs. Oil and gas properties include costs that are excluded from capitalized costs being amortized. These amounts represent investments in unproved properties and major development projects. These costs are excluded until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the capitalized costs being amortized (the depreciation, depletion and amortization (“DD&A”) pool). Impairments transferred to the DD&A pool increase the DD&A rate. No costs were excluded for the years ended March 31, 2024 and 2023.

Ceiling Test. Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost ceiling test is an impairment test to determine a limit, or ceiling, on the book value of oil and gas properties. That limit is the after-tax present value of the future net cash flows from proved crude oil and natural gas reserves and using an average price over the prior first day of the month 12-month period held flat for the life of production plus the lower of cost or fair market value of unproved properties. If net capitalized costs of crude oil and natural gas properties exceed the ceiling limit, the Company must charge the amount of the excess to earnings as an expense reflected in additional accumulated DD&A. This is called a “ceiling limitation write-down.” This impairment to our oil and gas properties does not impact cash flow from operating activities, but does reduce stockholders’ equity and reported earnings.

Depreciation, Depletion and Amortization. The depreciable base for oil and gas properties includes the sum of capitalized costs, net of accumulated DD&A, estimated future development costs and asset retirement costs not accrued in oil and gas properties, less costs excluded from amortization and salvage. The depreciable base of oil and gas properties is amortized using the unit-of-production method.

Asset Retirement Obligations. The Company has significant obligations to plug and abandon natural gas and crude oil wells and related equipment at the end of oil and gas production operations. The Company records the fair value of a liability for an ARO in the period in which it is incurred and a corresponding increase in the carrying amount of the related asset. Subsequently, the asset retirement costs included in the carrying amount of the related asset are allocated to expense using the units of production method. In addition, increases in the discounted ARO liability resulting from the passage of time are reflected as accretion expense in the Consolidated Statements of Operations.

Estimating the future ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration. The Company uses the present value of estimated cash flows related to the ARO to determine the fair value. Inherent in the present value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the related asset.

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. Any interest and penalties are recorded as interest expense and general and administrative expense, respectively.

Other Property and Equipment. Provisions for depreciation of office furniture and equipment are computed on the straight-line method based on estimated useful lives ofthree toten years.

Income Per Common Share. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share assumes the exercise of all stock options having exercise prices less than the average market price of the common stock during the period using the treasury stock method and is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive.

Revenue Recognition - Revenue from Contracts with Customers. Revenues from our royalty and non-operated working interest properties are recorded under the cash receipts approach as directly received from the remitters’ statement accompanying the revenue check. Since the revenue checks are generally received two to three months after the production month, the Company accrues for revenue earned but not received by estimating production volumes and product prices. Any identified differences between its revenue estimates and actual revenue received historically have not been significant.

Gas Balancing. Gas imbalances are accounted for under the sales method whereby revenues are recognized based on production sold. A liability is recorded when excess takes of natural gas volumes exceed estimated remaining recoverable reserves (over produced). No receivables are recorded for those wells where the Company has taken less than its ownership share of gas production (under produced). The Company does not have any significant gas imbalances.

Stock-based Compensation. The Company uses the Binomial option pricing model to estimate the fair value of stock-based compensation expenses at grant date. This expense is recognized as compensation expense in its consolidated financial statements over the vesting period. The Company recognizes the fair value of stock-based compensation awards as wages within general and administrative expense in the Consolidated Statements of Operations based on a graded-vesting schedule over the vesting period.

**Reclassifications.**Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform with the current period’s presentation. These reclassifications had no effect on previously reported results of operations, retained earnings or net cash flows.

**Investments.**The Company accounts for investments of less than 3% in limited liability companies at cost. The Company has no control of the limited liability companies. 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.

**Liquidity and Capital Resources.**Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings, sales of non-core properties and issuance of common stock. 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 interest, non-operated properties in areas with significant development potential.

**Recent Accounting Pronouncements.**In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires disaggregated information about the Company’s effective tax rate reconciliation and income taxes paid. This ASU is effective for annual periods beginning after December 15, 2024 on a prospective basis and early adoption is permitted. The Company is currently evaluating the impact of this standard on its tax disclosures.

3. Long-Term Debt

On December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”), which originally 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. On March 28, 2023, the Agreement was amended to extend the maturity date to March 28, 2026.

Under the Agreement, interest on the facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal plus one-half of one percent (.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 (.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 March 31, 2024, there was $1,500,000 available for borrowing by the Company on the facility.

No principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2026. Upon closing the second amendment to the Agreement, the Company paid a loan origination fee of $9,000 plus legal and recording expenses totaling $12,950, which were also deferred over the 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.

In addition, the Agreement prohibits the Company from paying cash dividends on its common stock without prior written permission of WTNB. The Company obtained written permission from WTNB prior to declaring the special dividend on April 10, 2023 and the regular annual dividend on April 30, 2024 as discussed in Note 14. The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior WTNB approval.

There was no balance outstanding on the credit facility as of March 31, 2024. The following table is a summary of activity on the WTNB credit facility for the years ended March 31, 2024 and 2023:

4. Asset Retirement Obligations

The Company’s asset retirement obligations relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. 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 on the consolidated balance sheets with the current portion being included in the accounts payable and accrued expenses.

The following table provides a rollforward of the asset retirement obligations for fiscal years ended March 31:

5. Income Taxes

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”). The IRA 2022, among other tax provisions, imposes a 15% corporate alternative minimum tax based on financial statement income, effective for tax years beginning after December 31, 2022. The IRA 2022 also establishes a 1% excise tax on stock repurchases made by publicly traded U.S. corporations, effective for stock repurchases after December 31, 2022. The IRA 2022 did not impact the Company’s current year tax provision or the Company’s consolidated financial statements.

The Company files a consolidated federal income tax return and various state income tax returns. The amount of income taxes the Company records requires the interpretation of complex rules and regulations of federal and state taxing jurisdictions. With few exceptions, the earliest year open to examination by U.S. federal and state income tax jurisdictions is 2019.

The income tax provision consists of the following for the years months ended March 31, 2024 and 2023:

Federal income tax for the year ended March 31, 2024 was $500,915. There wasno federal income tax expense for the year ended March 31, 2023 because the Company was in a net deferred tax asset position.

GAAP requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Significant components of net deferred tax assets (liabilities) at March 31 are as follows:

As of March 31, 2024, the Company has a statutory depletion carryforward of approximately $5,400,000, which does not expire. At March 31, 2024, the Company had a net operating loss carryforward for regular income tax reporting purposes of approximately $720,000, which will begin expiring in 2040. The Company’s ability to use some of its net operating loss carryforwards and certain other tax attributes to reduce current and future U.S. federal taxable income is subject to limitations under the Internal Revenue Code.

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.

A reconciliation of the provision for income taxes to income taxes computed using the federal statutory rate for years ended March 31 follows:

For the years ended March 31, 2024 and 2023, the Company didnot have any uncertain tax positions.

While the amount of unrecognized tax benefits may change in the next 12 months, the Company does not expect any change to have a significant impact on its results of operations. The recognition of the total amount of the unrecognized tax benefits would have an impact on the effective tax rate. If these unrecognized tax benefits are disallowed, the Company will be required to pay additional taxes.

6. Major Customers

Currently, the Company operates exclusively within the United States and its revenues and operating profit are derived from the oil and gas industry. Oil and gas production is sold to various purchasers and the receivables are unsecured. Historically, the Company has not experienced significant credit losses on its oil and gas accounts and management is of the opinion that significant credit risk does not exist. Management is of the opinion that the loss of any one purchaser would not have an adverse effect on the Company’s ability to sell its oil and gas production.

In fiscal 2024, one purchaser accounted for 59% of the total operating revenues and 48% of the total oil and natural gas accounts receivable and another purchaser accounted for 8% of the total operating revenues and 8% of the total oil and natural gas accounts receivable. In fiscal 2023, one purchaser accounted for 53% of the total operating revenues and 46% of the total oil and natural gas accounts receivable and another purchaser accounted for 8% of the total operating revenues and 21% of the total oil and natural gas accounts receivable.

7. Oil and Natural Gas Costs

The costs related to the Company’s oil and natural gas activities were incurred as follows for the years ended March 31:

The Company had the following aggregate capitalized costs relating to its oil and gas property activities at March 31:

DD&A amounted to $12.81 and $14.56 per BOE of production for the years ended March 31, 2024 and 2023, respectively.

8. Income Per Common Share

The following is a reconciliation of the number of shares used in the calculation of basic income per share and diluted income per share for the years ended March 31:

For the year ended March 31, 2024,93,000 shares relating to stock options were excluded from the computation of diluted net income because their inclusion would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $13.12 at March 31, 2024. For the year ended March 31, 2023,31,000 shares relating to stock options were excluded from the computation of diluted net income because their inclusion would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $18.05 at March 31, 2023.

9. Stockholders’ Equity

In March 2023, the Board of Directors authorized the use of up to $1,000,000 to repurchase shares of the Company’s common stock for the treasury account. This program does not have an expiration date and may be modified, suspended or terminated at any time by the Board. Under the repurchase program, share of common stock may be purchased from time to time through open market purchases or other transactions. The amount and timing of repurchases will be subject to the availability of stock, prevailing market conditions, the trading price of stock, our financial performance and other conditions. Repurchases may also be made form time-to-time in connection with the settlement of our share-based compensation awards. Repurchases will be funded from cash flow.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”). The IRA 2022, among other tax provisions, establishes a 1% excise tax on stock repurchases made by publicly traded U.S. corporations, effective for stock repurchases in excess of an annual limit of $1,000,000 after December 31, 2022.

During the year ended March 31, 2024, the Company repurchased 50,101 shares for the treasury account at an aggregate cost of $585,035, an average price of $11.68 per share per share. During the year ended March 31, 2023, the Company repurchased 18,416 shares for the treasury account at an aggregate cost of $244,494, an average price of $13.28 per share per share. Subsequently, in April 2024, the Company’s Board of Directors authorized the use of up to $1,000,000 to repurchase shares of the Company’s common stock, par value, $0.50, for the treasury account. This authorization replaced the previously authorized $1,000,000 common stock repurchase program which had $414,965 remaining at the time it was replaced. Also in April 2024, the Company repurchased 13,766 shares for the treasury account at an aggregate cost of $188,637.

10. Stock-based Compensation

In September 2019, the Company adopted the 2019 Employee Incentive Stock Plan (the “2019 Plan”). The 2019 Plan provides for the award of stock options up to 200,000 shares and includes option awards as well as stock awards. Option awards are granted with the restriction of requiring payment for the shares. Stock awards are granted without restrictions and without payment by the recipient. Neither option awards nor stock awards may exceed 25,000 shares granted to any one individual in any fiscal year. Stock options may be an incentive stock option or a nonqualified stock option. Options to purchase common stock under the plan are granted at the fair market value of the common stock at the date of grant, become exercisable to the extent of 25% of the shares optioned on each of four anniversaries of the date of grant, expire ten years from the date of grant and are subject to forfeiture if employment terminates. The 2019 Plan expiresten years from the date of adoption. According to the Company’s employee stock incentive plan, new shares will be issued upon the exercise of stock options and the Company can repurchase shares exercised under the plan.

During the year ended March 31, 2024, the Compensation Committee of the Board of Directors approved and the Company granted 32,000 stock options. During the year ended March 31, 2023, the Compensation Committee of the Board of Directors approved and the Company granted 31,000 stock options.

The plan also provides for the granting of stock awards. No stock awards were granted during fiscal 2024 and 2023.

The Company recognized compensation expense of $229,799 and $142,783 related to vesting stock options in general and administrative expense in the Consolidated Statements of Operations for fiscal 2024 and 2023, respectively. The total cost related to non-vested awards not yet recognized at March 31, 2024 totals $502,361, which is expected to be recognized over a weighted average of 2.46 years.

The fair value of each stock option is estimated on the date of grant using the Binomial valuation model. Expected volatilities are based on historical volatility of the Company’s stock over the contractual term of 120 months and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Since the Company has only declared a special one-time dividend, no dividend yield was used in the calculation on current options understanding. Actual value realized, if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Binomial model.

Included in the following table is a summary of the grant-date fair value of stock options granted and the related assumptions used in the Binomial models for stock options granted in fiscal 2024 and 2023. All such amounts represent the weighted average amounts for each period.

No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history for these types of awards. During the year ended March 31, 2024, there wereno stock options forfeited or expired. During the year ended March 31, 2023,1,000 unvested stock options were forfeited due to the resignation of an employee.

The following table is a summary of activity of stock options for the years ended March 31, 2024 and 2023:

During the year ended March 31, 2024, stock options covering 5,500 shares were exercised with a total intrinsic value of $37,566. The Company received proceeds of $19,662 from these exercises. During the year ended March 31, 2023, stock options covering 5,000 shares were exercised with a total intrinsic value of $47,575. The Company received proceeds of $16,700 from these exercises. Subsequently, in April 2024, stock options covering 12,367 shares were exercised. The Company received proceeds of $77,641 from these exercises.

Other information pertaining to option activity was as follows during the year ended March 31:

The following table summarizes information about options outstanding at March 31, 2024:

Outstanding options at March 31, 2023 expire between August 2024 and April 2033 and have exercise prices ranging from $3.34 to $18.05.

11. Related Party Transactions

Related party transactions for the Company primarily 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 years ended March 31, 2024 and 2023 were $23,379 and $47,055, 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 year ending March 31, 2024 and 2023 were $15,572.

12. 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 1,112 square feet of office space shared with and paid by our principal shareholder. The lease does not include an option to renew and is a 36-month lease that was to expire in May 2021. 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. In June 2021, the Company agreed to extend its current lease at a flat (unescalated) rate for 36 months. The amended lease now expires on July 31, 2024.

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 sheet.

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 3.75%. Significant judgement is required when determining the incremental borrowing rate. Rent expense for lease payments is recognized on a straight-line basis over the lease term.

The balance sheet classification of lease assets and liabilities was as follows:

Future minimum lease payments as of March 31, 2024 under non-cancellable operating leases are as follows:

Net cash paid for our operating lease for the year ended March 31, 2024 and 2023 was $42,668. Rent expense, less sublease income of $15,572 is included in general and administrative expenses.

13. Oil and Gas Reserve Data (Unaudited)

The estimates of the Company’s proved oil and gas reserves, which are located entirely within the United States, were prepared in accordance with the generally accepted petroleum engineering and evaluation principles and definitions and guidelines established by the SEC. The estimates as of March 31, 2024 and 2023 were based on evaluations prepared by Russell K. Hall and Associates, Inc. The services provided by Russell K. Hall and Associates, Inc. are not audits of our reserves but instead consist of complete engineering evaluations of the respective properties. For more information about their evaluations performed, refer to the copy of their report filed as an exhibit to this Annual Report on Form 10-K. Management emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and natural gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future.

The following table presents the weighted average first-day-of-the-month prices used for oil and gas reserve preparation, based upon SEC guidelines.

The Company’s total estimated proved reserves at March 31, 2024 were approximately 1.547 MBOE of which 51% was oil and natural gas liquids and 49% was natural gas.

Changes in Proved Reserves:

Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. Proved undeveloped reserves (“PUD”) are proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion within five years of the date of their initial recognition. Moreover, the Company may be required to write down its proved undeveloped reserves if the operators do not drill on the reserves within the required five-year timeframe. Such downward revisions are primarily attributable to a decrease in crude oil and natural gas prices and partially the result of reserves written off due to the five-year limitation and the change in the timing of new development. The reserves written off were primarily royalty interests on leases in DeSoto Parish, Louisiana and Karnes County, Texas which are held by production and still in place to be developed in the future.

Summary of Proved Developed and Undeveloped Reserves as of March 31, 2024 and 2023:

At March 31, 2024, the Company reported estimated PUDs of 508 MBOE, which accounted for 33% of its total estimated proved oil and gas reserves. This figure primarily consists of a projected 64 new wells (205 MBOE) operated by others, 14 wells are currently being drilled with plans for 37 wells to follow in fiscal 2025,104 wells in fiscal 2026 and 6 wells in fiscal 2027. The cost of these projects would be funded, to the extent possible, from existing cash balances, cash flow from operations and bank borrowings. The remainder may be funded through non-core asset sales and/or sales of our common stock.

The following table discloses the Company’s progress toward the conversion of PUDs during fiscal 2024.

Progress of Converting Proved Undeveloped Reserves:

Estimated future net cash flows represent an estimate of future net revenues from the production of proved reserves using average prices for 2024 and 2023 along with estimates of the operating costs, production taxes and future development costs necessary to produce such reserves. No deduction has been made for depreciation, depletion or any indirect costs such as general corporate overhead or interest expense.

Operating costs and production taxes are estimated based on current costs with respect to producing oil and natural gas properties. Future development costs including abandonment costs are based on the best estimate of such costs assuming current economic and operating conditions. The future cash flows estimated to be spent to develop the Company’s share of proved undeveloped properties through March 31, 2027 are $5,481,477.

Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved, less applicable carryforwards.

The future net revenue information assumes no escalation of costs or prices, except for oil and natural gas sales made under terms of contracts which include fixed and determinable escalation. Future costs and prices could significantly vary from current amounts and, accordingly, revisions in the future could be significant.

The current reporting rules require that year end reserve calculations and future cash inflows be based on the 12-month average market prices for sales of oil and gas on the first calendar day of each month during the fiscal year discounted at 10% per year and assuming continuation of existing economic conditions. The average prices used for fiscal 2024 were $76.88 per bbl of oil and $2.75 per mcf of natural gas. The average prices used for fiscal 2023 were $92.02 per bbl of oil and $5.68 per mcf of natural gas.

The standardized measure of discounted future net cash flows is computed by applying the 12-month unweighted average of the first day of the month pricing for oil and natural gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and natural gas reserves, less estimated future expenditures (based on year end costs) to be incurred in developing and producing the proved reserves, discounted using a rate of 10% per year to reflect the estimated timing of the future cash flows. Future income taxes are calculated by comparing undiscounted future cash flows to the tax basis of oil and natural gas properties plus available carryforwards and credits and applying the current tax rate to the difference.

The basis for this table is the reserve studies prepared by an independent petroleum engineering consultant, which contain imprecise estimates of quantities and rates of production of reserves. Revisions of previous year estimates can have a significant impact on these results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is not necessarily indicative of the fair value of proved oil and gas properties.

The following information is based on the Company’s best estimate of the required data for the Standardized Measure of Discounted Future Net Cash Flows as of March 31, 2024 and 2023 in accordance with ASC 932, “Extractive Activities – Oil and Gas” which requires the use of a 10% discount rate. This information is not the fair market value, nor does it represent the expected present value of future cash flows of the Company’s proved oil and gas reserves.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves:

Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves:

14. Subsequent Events

On April 30, 2024, the Company announced that its Board of Directors declared a regular annual dividend of $0.10 per common share to itsshareholders of record at the close of business on May 21, 2024. The regular annual dividend was paid on June 4, 2024.

In April 2024, the Company’s Board of Directors authorized the use of up to $1,000,000 to repurchase shares of the Company’s common stock, par value, $0.50, for the treasury account. Also in April 2024, the Company repurchased 13,766 shares for the treasury account at an aggregate cost of $188,637, an average price of $13.70 per share.

In April 2024, the Company acquired small royalty (mineral) interests in 21 wells operated by Anadarko Petroleum and Cimarex Energy and located in Reeves County, Texas for a purchase price of $158,000.

In April 2024, stock options covering 12,367 shares were exercised. The Company received proceeds of $77,641 from these exercises.

In April 2024, Mexco expended approximately $207,800 to participate in the drilling of nine horizontal wells located in the Delaware Basin in Lea County, New Mexico.

In May 2024, the Company funded another $200,000 toward its $2,000,000 equity investment in a limited liability company.

In May 2024, the Company expended approximately $90,000 to complete 2 horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico.

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.

INDEX TO EXHIBITS