MEXCO ENERGY CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Company’s oil and gas interests are operated by others.

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 consolidated 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.

**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 June 30, 2026, and the results of its operations and cash flows for the interim periods ended June 30, 2026 and 2025. The consolidated financial statements as of June 30, 2026 and for the three-month periods ended June 30, 2026 and 2025 are unaudited. The consolidated balance sheet as of March 31, 2026 was derived from the audited balance sheet filed in the Company’s 2026 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 consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K.

Oil and Gas Properties. The Company accounts for its oil and natural gas properties using the full cost method of accounting. Under this method, all costs incurred in the acquisition, exploration, and development of oil and natural gas properties are capitalized and amortized using the unit-of-production method based on proved reserves. Costs directly related to exploration and development activities are capitalized, while production costs, general corporate overhead, and similar activities are expensed as incurred.

The carrying value of oil and natural gas properties includes asset retirement costs associated with the fair value of asset retirement obligations (“ARO”) when incurred.

Sales or other dispositions of oil and natural gas properties, whether or not currently being amortized, are generally accounted for as adjustments to capitalized costs, with no gain or loss recognized unless the disposition significantly alters the relationship between capitalized costs and proved reserves. This treatment includes transactions involving Term Assignments and Assignments, Bills of Sale and Conveyances.

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Depletion of evaluated oil and natural gas properties is calculated using the unit-of-production method, whereby capitalized costs plus estimated future development costs are amortized over total proved reserves.

In addition, capitalized costs less accumulated depletion and related deferred income taxes are not allowed to exceed an amount (the full cost ceiling) equal to the sum of: 1) the present value of estimated future net revenues discounted at ten percent computed in compliance with SEC guidelines; 2) plus the cost of properties not being amortized; 3) plus the lower of cost or estimated fair value of unproven properties included in the costs being amortized; 4) less income tax effects related to differences between the book and tax basis of the properties.

No impairments on oil and natural gas properties as a result of the ceiling test were recorded for the three months ended June 30, 2026 and 2025.

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 is generally uncollateralized. 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 three months ended June 30, 2026 and 2025, no allowance has been made for any credit losses.

**Investments.**The Company utilizes the measurement alternative to account for investments when it does not possess the ability to exercise significant influence or control and the investment does not have a readily determinable fair value. Under this method, investments are initially recognized at cost and subsequently measured at cost, adjusted for any observable changes in the fair value of the investment. In addition, the Company reviews the carrying value of investments measured under the measurement alternative for impairment on a regular basis. If there is an indication of impairment, the Company assesses whether the carrying value of the investment exceeds its recoverable amount. Any impairment losses are recognized in the consolidated statements of operations. Income from these investments is recognized as Income from investments in LLCs in the consolidated statements of operations.

**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.

Segments. The Company’s chief operating decision maker (“CODM”), comprised of the Chairman of the Board and the President, evaluates operating results and allocates capital resources on a consolidated basis. Accordingly, the Company hasone reportable segment: crude oil and natural gas development, exploration, and production.

**Recently Issued Accounting Standards.**The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following standards are applicable:

In November 2024, FASB issued Accounting Standards Update (“ASU”) 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (“Subtopic 220-40”), which expands disclosures around a public entity’s costs and expenses of specific items (i.e. employee compensation and depreciation, depletion and amortization (“DD&A”)), requires the inclusion of amounts that are required to be disclosed under US GAAP in the same disclosure as other disaggregation requirements, requires qualitative descriptions of amounts remaining in expense captions that are not separately disaggregated quantitatively, and requires disclosure of total selling expenses, and in annual periods, the definition of selling expenses. The amendment does not change or remove existing disclosure requirements. The amendment is effective for fiscal years beginning after December 15, 2026, and interim periods with fiscal years beginning after December 15, 2027. Early adoption is permitted, and the amendment can be adopted prospectively or retrospectively to any or all periods presented in the financial statements. The Company is currently assessing the impact of adopting this standard which is expected to only affect financial statement disclosures.

In December 2025, FASB issued ASU 2025-12, Codification Improvements. ASU 2025-12 is the latest in a series of updates that the FASB made to the existing GAAP literature to amend or supplement that literature related to minor change and corrections that have been identified and made amendments to thirty-three ASC topics. This ASU is effective for annual reporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosure.

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**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 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 AROs for the first three months of fiscal 2027:

4. 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. On September 17, 2025, WTNB reaffirmed the borrowing base at $1,500,000. On March 28, 2026, the Agreement was amended to extend the maturity date to March 28, 2029.

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 (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 June 30, 2026, the Company had $1,500,000 available to borrow under the facility.

No principal payments are anticipated to be required through the maturity date of the credit facility, March 28, 2029. Upon closing the third amendment to the Agreement, the Company paid a loan origination fee of $9,000 plus legal expenses totaling $12,200, which are amortized 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 changes in control, disposition of assets, mergers, and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement including requirements that senior debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) ratios (Senior Debt/EBITDA) is less than or equal to 3.00 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, this 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 regular annual dividend on June 4, 2026, as discussed in Note 10. The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior WTNB approval.

There wasno balance outstanding on the credit facility as of June 30, 2026 and 2025.

5. Stock-based Compensation

The Company recognized compensation expense of $39,880 and $51,208 related to vesting stock options in general and administrative expense in the Consolidated Statements of Operations for the first quarter of fiscal 2027 and 2026, respectively. The total cost related to non-vested awards not yet recognized at June 30, 2026 totals $66,293, which is expected to be recognized over a weighted average of.57 years.

During the three months ended June 30, 2026 and 2025, no stock options were granted or exercised.

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 three months ended June 30, 2026 and 2025, there wereno stock options forfeited or expired.

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The following table is a summary of stock options activity for the three months ended June 30, 2026:

Outstanding options at June 30, 2026 expire between September 2028 and April 2033 and have exercise prices ranging from $3.34 to $18.05.

**6. 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 702 square feet of office space shared with and paid by our principal shareholder. In June 2024, the Company agreed to extend its lease at a flat (unescalated) rate for another 36 months. The amended lease expires on July 31, 2027.

The Company determines an arrangement is a lease at inception. Operating leases are recorded as 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 9%. 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 sheets classification of lease assets and liabilities was as follows:

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Future minimum lease payments as of June 30, 2026 under non-cancellable operating leases are as follows:

Net cash paid for our operating lease for the three months ended June 30, 2026 and 2025 was $12,536. Rent expense, less sublease income of $2,544 is included in general and administrative expenses.

7. Income Taxes

On July 4, 2025, the One Big Beautiful Bill (“OBBB”) was enacted, making significant changes to U.S. federal tax law. The Company has evaluated the impact of the OBBB and concluded that it did not have a material impact on the Company’s consolidated financial statements.

The income tax provision consists of the following for the three months ended June 30, 2026 and 2025:

The Company’s effective tax rate will typically differ from the U.S. federal statutory rate primarily as a result of state income taxes, particularly in New Mexico, percentage depletion in excess of basis, and other permanent differences. The effective income tax rate was 28% and 30% for the three months ended June 30, 2026 and 2025, respectively.

**8. Related Party Transactions **

Related party transactions for the Company consist of shared office expenditures, as well as administrative and operating expenses paid on behalf of the principal stockholder. The total amount billed to and reimbursed by the principal stockholder for the quarters ended June 30, 2026 and 2025 was $10,000 and $10,770, 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 ended June 30, 2026 and 2025 were $2,544.

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9. Income Per Common Share

The following is a reconciliation of the number of shares used in the calculation of basic and diluted net income per share for the three-month periods ended June 30, 2026 and 2025.

For the three months ended June 30, 2026,60,500 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 $15.34 at June 30, 2026. For the three months ended June 30, 2025,90,206 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 $13.09 at June 30, 2025.

**10. Stockholders’ Equity **

In April 2024, the Board of Directors (the “Board”) 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. In June 2026, the Board authorized the use of an additional $250,000 to repurchase shares of the Company’s common stock for the treasury account. The Company’s repurchase program does not have an expiration date and may be modified, suspended or terminated at any time by the Board. Under the repurchase program, shares 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 the stock, our financial performance, and other conditions. Repurchases may also be made from time-to-time in connection with the settlement of our share-based compensation awards. Repurchases will be funded from cash flow. As of June 30, 2026, the Company’s repurchase program has $546,784 in remaining funds.

During the three months ended June 30, 2026 and 2025, there wereno shares of common stock repurchased for the treasury account.

On June 4, 2026, the Board declared a regular annual dividend of $0.10 per common share. The Company paid the dividend of $204,600 on June 30, 2026 to the stockholders of record at the close of business on June 15, 2026. On May 13, 2025, the Board declared a regular annual dividend of $0.10 per common share. The Company paid the regular annual dividend of $204,600 on June 16, 2025 to the stockholders of record at the close of business on June 2, 2025. The Company can provide no assurance that dividends will be declared in the future or as to the amount of any future dividend.

Dividends declared by the Board during the period are presented in the Company’s consolidated statements of changes in stockholders’ equity as dividends paid. Dividends paid during the period are presented as cash used in financing activities in the Company’s consolidated statements of cash flows.

**11. Acquisitions **

In April 2026, the Company acquired royalty interests in 144 producing wells in Weld County, Colorado and Atascosa, Howard, LaSalle, Martin, and Yoakum Counties, Texas, and additional royalty interests in 3 properties in which we already owned an interest in Howard County, Texas for an aggregate purchase price of $1,028,600. These acquisitions were effective May 1, 2026.

In June 2026, the Company acquired royalty interests in 256 producing wells in Adams and Larimer Counties, Colorado; Caddo and DeSoto Parishes, Louisiana; Karnes, McMullen, Panola, and Winkler Counties, Texas; and Ashtabula County, Ohio for an aggregate purchase price of $1,066,600. These acquisitions were effective July 1, 2026.

**12. Subsequent Events **

In July 2026, Mexco expended approximately $70,000 to drill and complete three horizontal wells in the Bone Spring formation of the Delaware Basin in Lea County, New Mexico.

In July 2026, the Company entered into an agreement to make a capital commitment of $1,000,000 to a limited liability company formed to acquire non-cost bearing mineral and royalty interests in the Utica Shale play in the state of Ohio.

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.

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