PermRock Royalty Trust 10-Q

ITEM 1. FINANCIAL STATEMENTS The condensed financial statements included herein are presented without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, and Simmons Bank, as Trustee (the “Trustee”), believes that the disclosures are adequate to make the information presented not misleading. These condensed interim financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto included in the Trust’s 2021 Annual Report on Form 10-K (“2021 Annual Report”). In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the assets, liabilities and Trust corpus of PermRock Royalty Trust at September 30, 2022, and December 31, 2021, and the distributable income and changes in Trust corpus for the three- and nine-month periods ended September 30, 2022, and September 30, 2021, have been included. Distributable income for such interim periods is not necessarily indicative of distributable income for the full year. 1 PERMROCK ROYALTY TRUST CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS September 30, 2022 December 31, 2021 (unaudited) ASSETS Cash and short-term investments $ 2,132,267 $ 1,849,906 Net Profits Interest (1) 81,042,172 83,821,848 TOTAL ASSETS $ 83,174,439 $ 85,671,754 LIABILITIES AND TRUST CORPUS Distribution payable to unitholders $ 1,132,267 $ 849,906 Cash reserves (2) 1,000,000 1,000,000 Trust corpus 81,042,172 83,821,848 TOTAL LIABILITIES AND TRUST CORPUS $ 83,174,439 $ 85,671,754 (1) See Note 2 to condensed financial statements for further discussion of the Net Profits Interest. (2) The Trustee is authorized to retain cash from distributions received by the Trust in an amount not to exceed $1.0 million to be used in the event that cash on hand is not sufficient to pay ordinary course administrative expenses and to provide for future liabilities of the Trust. The accompanying notes to condensed financial statements are an integral part of these financial statements. 2 PERMROCK ROYALTY TRUST CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net profits income $ 3,530,590 $ 2,273,583 $ 9,815,297 $ 5,738,514 Interest income 5,191 33 6,188 130 Total revenue 3,535,781 2,273,616 9,821,485 5,738,644 Expenditures – general and administrative (180,772 ) (172,268 ) (735,306 ) (628,657 ) Cash reserves (1) 0 0 0 0 Distributable income $ 3,355,009 $ 2,101,348 $ 9,086,179 $ 5,109,987 Distributable income per unit (2) $ 0.275774 $ 0.172726 $ 0.746867 $ 0.420032 (1) The Trustee is authorized to retain cash from distributions received by the Trust in an amount not to exceed $1.0 million to be used in the event that cash on hand is not sufficient to pay ordinary course administrative expenses and to provide for future liabilities of the Trust. (2) Based on 12,165,732 Trust units issued and outstanding as of November 14, 2022. The accompanying notes to condensed financial statements are an integral part of these financial statements. 3 PERMROCK ROYALTY TRUST CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Trust corpus, beginning of period $ 81,920,770 $ 85,889,411 $ 83,821,848 $ 87,916,359 Amortization of Net Profits Interest (878,598 ) (1,050,372 ) (2,779,676 ) (3,077,320 ) Distributable income $ 3,355,009 $ 2,101,348 $ 9,086,179 $ 5,109,987 Distributions declared (3,355,009 ) (2,101,348 ) (9,086,179 ) (5,109,987 ) Trust corpus, end of period $ 81,042,172 $ 84,839,039 $ 81,042,172 $ 84,839,039 The accompanying notes to condensed financial statements are an integral part of these financial statements. 4 PERMROCK ROYALTY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Organization of Trust PermRock Royalty Trust (the “Trust”) is a Delaware statutory trust formed on November 22, 2017 under the Delaware Statutory Trust Act pursuant to a trust agreement dated November 22, 2017, as amended and restated on May 4, 2018, by and among Boaz Energy II, LLC (“Boaz Energy”), as trustor, Simmons Bank, as Trustee (the “Trustee”), and Wilmington Trust, National Association, as Delaware Trustee (the “Delaware Trustee”) (such amended and restated trust agreement, as amended to date, the “Trust Agreement”). The Trust was created to acquire and hold the Net Profits Interest for the benefit of the Trust unitholders. In connection with the closing of the initial public offering of Trust units, on May 4, 2018, Boaz Energy conveyed the Net Profits Interest to the Trust in exchange for Trust units pursuant to a conveyance agreement between Boaz Energy, the Trustee and the Delaware Trustee (the “Conveyance”). The Net Profits Interest represents an interest in the Underlying Properties. The Net Profits Interest entitles the Trust to receive 80% of the net profits from the sale of oil and natural gas production from the Underlying Properties. The Net Profits Interest is passive in nature and neither the Trust nor the Trustee has any control over, or responsibility for, costs relating to the operation of the Underlying Properties. The Trust has and will continue to make monthly cash distributions of all of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and any cash reserves, to holders of its Trust units as of the applicable record date on or before the 10th business day after the record date. Distributions generally relate to sales from a one-month period. The Trustee may deposit funds awaiting distribution in an account with an FDIC-insured or national bank, including the Trustee, if the interest paid to the Trust at least equals amounts paid by the Trustee on similar deposits, and make other short-term investments with the funds distributed to the Trust. In May 2018, Boaz Energy completed an initial public offering of 6,250,000 of the 12,165,732 total Trust units outstanding, retaining ownership of 5,915,732 Trust units. As of September 30, 2022, Boaz Energy owned 5,756,675 Trust units of the 12,165,732 Trust units issued and outstanding. 2. Trust Significant Accounting Policies a. Basis of Accounting The Trust uses the modified cash basis of accounting to report Trust receipts of the Net Profits Interest and payments of expenses incurred. The Net Profits Interest represents the right to receive revenues (primarily oil and natural gas sales), less direct operating expenses, lease operating expenses, severance and ad valorem taxes and development expenses of the Underlying Properties, multiplied by 80%, less any payments made or plus any payments received in connection with the settlement of certain hedge contracts. Cash distributions of the Trust are made based on the amount of cash received by the Trust pursuant to terms of the Conveyance creating the Net Profits Interest. The financial statements of the Trust, as prepared on a modified cash basis, reflect the Trust’s assets, liabilities, Trust corpus, earnings and distributions as follows: · Income from the Net Profits Interest is recorded when distributions are received by the Trust; · Distributions to Trust unitholders are recorded when declared by the Trust; 5 PERMROCK ROYALTY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) · Trust general and administrative expenses (which includes the Trustee’s fees as well as accounting, printing, engineering, legal, tax advisory and other professional fees) are recorded when paid; cash reserves for Trust expenses may be established by the Trustee for certain expenditures that would not be recorded as contingent liabilities under United States generally accepted accounting principles (“GAAP”); · Amortization of the investment in the Net Profits Interest is calculated on a unit-of-production basis and is charged directly to Trust corpus, and such amortization does not affect distributions from the Trust; and · The Trust’s investment in the Net Profits Interest is periodically assessed to determine whether its aggregate value has been impaired below its total capitalized cost basis. In general, neither the Trustee nor Boaz Energy view temporarily low prices as an indication of impairment. The markets for crude oil and natural gas have a history of significant price volatility and though prices will occasionally drop significantly, industry prices over the long term will continue to be driven by market supply and demand. If events and circumstances indicate the carrying value may not be recoverable, the Trustee would use the estimated undiscounted future net cash flows from the Net Profits Interest to evaluate the recoverability of the Trust assets. If the undiscounted future net cash flows from the Net Profits Interest are less than the Net Profits Interest carrying value, the Trust would recognize an impairment loss for the difference between the Net Profits Interest carrying value and the estimated fair value of the Net Profits Interest. The determination as to whether the Net Profits Interest is impaired is based on the best information available to the Trustee at the time of the evaluation, including information provided by Boaz Energy such as estimates of future production and development and operating expenses . The financial statements of the Trust are prepared on a modified cash basis of accounting, which is considered to be the most meaningful basis of preparation for a royalty trust because monthly distributions to the Trust unitholders are based on net cash receipts. Although this basis of accounting is permitted for royalty trusts by the SEC, the financial statements of the Trust differ from financial statements prepared in accordance with GAAP because net profits income is not accrued in the month of production, expenses are not recognized when incurred and cash reserves may be established for certain contingencies that would not be recorded in GAAP financial statements. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts. b. Interim Financial Statements. The accompanying unaudited financial statements have been prepared by the Trust in accordance with the accounting policies stated in the audited financial statements and notes of the Trust thereto included in the Trust’s 2021 Annual Report and reflect all adjustments that are, in the opinion of the Trustee, necessary to state fairly the information in the Trust’s unaudited interim financial statements. c. Use of Estimates. The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimated future cash flows used to determine amortization and potential impairment of the investment in the Net Profits Interest are subject to change. d. Risks and Uncertainties. The Trust’s revenue and distributions are substantially dependent upon the prevailing and future prices for oil and natural gas, each of which depends on numerous factors beyond the Trust’s control such as economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future. 6 PERMROCK ROYALTY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) e. Contingencies. Contingencies related to the Underlying Properties that are unfavorably resolved would generally be expected to result in reductions to cash receipts to the Trust in respect of the Net Profits Interest with corresponding reductions to cash distributions to Trust unitholders. Please see the discussion of litigation in Note 8 to condensed financial statements. Revenue received by the Trust (and its ability to pay distributions) has been and will continue to be directly affected by the volatility in commodity prices in response to the economic effects of the COVID-19 pandemic. Crude oil prices have been higher during the first three quarters of 2022, but fluctuations and depressions could continue for an extended period of time. 3. Income Taxes Tax counsel advised the Trust at the time of formation that for U.S. federal income tax purposes, the Trust is treated as a grantor trust and will not be subject to federal income tax at the trust level. Trust unitholders will be treated for such purposes as owning a direct interest in the assets of the Trust, and each Trust unitholder is taxed directly on its pro rata share of the income and any gain, if sold, attributable to the assets of the Trust and is entitled to claim its pro rata share of deductions and expenses attributable to the assets of the Trust. Each Trust unitholder should consult his or her own tax advisor regarding income tax requirements, if any, applicable to such unitholder’s ownership of Trust units. 4. Cash Reserves Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee began retaining cash from the distributions the Trust receives to be used by the Trust in the event that its cash on hand (including available cash reserves) is not sufficient to pay ordinary course administrative expenses as they become due. The Trustee is authorized to retain cash reserves (i) in an amount not to exceed $1.0 million at any one time and (ii) in such amounts as the Trustee in its discretion deems appropriate to pay for future liabilities of the Trust, but not less than $25,000 per month or more than $100,000 per month. Cash reserves held by the Trustee for administrative expenses totaled $1,000,000 as of September 30, 2022 . Boaz Energy is entitled under the Conveyance to reserve up to $3.0 million from the net profits for certain future taxes and development or operating expenses. As of December 31, 2021, the balance of funds held back to cover certain future capital expenses was $214,157 net to the Trust. As of September 30, 2022 , the balance of funds reserved by Boaz Energy, net to the Trust, was $1,918,156. 5. Distributions to Unitholders The Trust makes monthly cash distributions of the net amount, if any, of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and cash reserves to holders of its Trust units as of the applicable record date on or before the 10th business day after the record date. Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the quarter ended September 30, 2022, were as follows: Record Date Payment Date Distribution per Unit July 29, 2022 August 12, 2022 $ 0.090702 August 31, 2022 September 15, 2022 0.092003 September 30, 2022 October 17, 2022 0.093069 $ 0.275774 7 PERMROCK ROYALTY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 6. Related Party Transactions Trustee Administrative Fee . Under the terms of the Trust Agreement, the Trust pays an annual administrative fee to the Trustee and the Delaware Trustee. The Delaware Trustee’s annual fee is $4,000. For 2022, the Trustee’s annual administrative fee is $198,374, which is divided into twelve equal monthly payments throughout the year. The Trustee’s annual administrative fee increased at a rate of 3% per year for the first three years of the Trust’s existence, increased at a rate of 2% this year, will increase at a rate of 2% next year, and then will increase at a rate of 1% per year until the 20th anniversary of the Trust’s formation and then remain flat thereafter. These costs of the Trust, which are included in administration expenses, are deducted by the Trust before distributions are made to Trust unitholders. Agreements with Boaz Energy . On May 4, 2018, the Trust entered into a registration rights agreement for the benefit of Boaz Energy and certain of its affiliates and transferees, pursuant to which the Trust agreed to register the offering of the Trust units held by Boaz Energy and certain of its affiliates and permitted transferees upon request by Boaz Energy. As of September 30, 2022, Boaz Energy owned 5,756,675 Trust units of the 12,165,732 Trust units issued and outstanding. 7. Development Costs Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s 2022 capital budget for the Underlying Properties is $7.0 million, of which approximately $4.4 million had been expended as of September 30, 2022. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock counties non-operated drilling and recompletion projects, waterflood conformance and reactivations in Terry, Coke and Crane counties, as well as drilling two additional wells in Coke and Terry counties sometime in 2022. The majority of capital spent in 2022 to date has been on non-operated drilling and completions in Crane and Glasscock counties, well reactivations and stimulations across the underlying properties, and on wellbore re-entry opportunities in Coke and Crane counties. The $7.0 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, the pace of regulatory approvals and availability of materials, equipment and labor. 8. Settlements and Litigation On October 1, 2018, a lawsuit styled Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC , et.al, No. 18-10-24761 – CVW in the 143rd District Court in Ward County, Texas (the “2018 Litigation”) was filed, naming, among others, Boaz Energy and the Trust as defendants. The plaintiff is a lessor under two leases operated by Blackbeard Operating LLC. The Underlying Properties include the interests of Boaz Energy in some of the minerals covered by those leases. The litigation sought surface use damages and alleged violations of the terms of the leases, among other things. The court had set a two-day bench trial to commence May 18, 2022, but on May 10, 2022, the court granted motions for summary judgment effectively disposing of the plaintiff’s claims. At a status conference conducted on May 12, 2022, the plaintiff confirmed the court’s rulings disposed of all the plaintiff’s claims. The only remaining issue is whether the court will award attorneys’ fees to the prevailing parties. The court held a hearing regarding attorneys’ fees in June 2022. As of November 11, 2022, the court had not rendered a decision or entered final judgment on the matter. 9. Subsequent Events On October 21, 2022, the Trust declared a cash distribution of $0.093361 per Trust unit based upon production during the month of August 2022. Underlying Sales Volumes Average Price Oil (Bbls) Gas (Mcf) Oil (per Bbl) Gas (per Mcf) August 28,651 34,677 $ 95.15 $ 8.93 9 ITEM 2. TRUSTEE’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The following discussion and analysis is intended to help the reader understand the Trust’s financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the Trust’s unaudited condensed financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the Trust’s audited financial statements and the accompanying notes included in the Trust’s 2021 Annual Report. Cautionary Statement Regarding Forward Looking Statements Certain information included in this Quarterly Report contains, and other materials filed or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Such forward-looking statements generally are accompanied by words such as “may,” “will,” “estimate,” “expect,” “predict,” “project,” “anticipate,” “goal,” “should,” “assume,” “believe,” “plan,” “intend,” or other words that convey the uncertainty of future events or outcomes. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements, including without limitation statements under this “Trustee’s Discussion and Analysis of Financial Conditions and Results of Operations” and all statements regarding Boaz Energy and Simmons Bank’s (as Trustee of the Trust) expectations, beliefs and plans regarding the following: (i) Boaz Energy’s capital projects, timing and estimated costs, and the resulting impact of those activities on the computation of the Net Profits Interest; (ii) outside operators’ capital projects and the resulting impact of those activities on the Net Profits Interest; (iii) implementation or continued use of waterflood projects and workovers and the location of waterflood projects and workovers; (iv) Boaz Energy’s estimated capital expenditures; (v) the timing of capital expenditures and capital reserve amounts; (vi) the expected timing of litigation proceedings; (vii) the impact of current litigation matters on the Trust; (viii) Boaz Energy’s staffing levels or future reductions in staffing on the Underlying Properties; (ix) shut in of wells on the Underlying Properties; (x) the effects of COVID-19 and disputes over production levels; and (xi) distributions to Trust unitholders. Such statements are based on certain assumptions of the Trustee, and certain assumptions of information provided to the Trust by Boaz Energy, the owner of the Underlying Properties; are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Boaz Energy; and involve risks and uncertainties. Certain factors could affect the future results of the energy industry in general, and Boaz Energy and the Trust in particular, and could cause actual results to differ materially from those projected in such forward-looking statements. Those factors include, without limitation, the following: · the effect of changes in commodity prices or alternative fuel prices; · the effect of public health concerns such as the coronavirus disease (COVID-19) and any government response thereto; · political and economic conditions in or affecting other oil and natural gas producing regions or countries; · uncertainties in estimating production and oil and natural gas reserves of the Underlying Properties; · risks associated with the drilling and operation of oil and natural gas wells; · the cost of developing the Underlying Properties; · the ability to maintain anticipated production levels; · the amount of future direct operating expenses, development expenses and other capital expenditures; · availability and terms of capital to fund capital expenditures; · risks associated with Boaz Energy and its ability to transfer operation of the Underlying Properties to third parties without the approval of Trust unitholders; 10 · the performance of such third parties contracted by Boaz Energy and their ability or willingness to provide sufficient facilities and services to Boaz Energy on commercially reasonable terms; · the effect of existing and future laws and regulatory actions; · the actions of the Organizations of Petroleum Exporting Countries (“OPEC”); · conditions in the capital markets; · competition from others in the energy industry; · uncertainty in whether development projects will be pursued; · severe or unseasonable weather that may adversely affect production; · adequacy of Boaz Energy’s insurance coverage; · costs to comply with current and future governmental regulation of the oil and natural gas industry, including environmental, health and safety laws and regulations, and regulations with respect to hydraulic fracturing and the disposal of produced water; · the effect of existing and future laws and regulatory actions, including real estate, bankruptcy and tax legislation and the ability to accurately interpret the impact of such laws; · general economic conditions affecting the Permian Basin; · risks associated with title deficiencies that may arise with respect to the Underlying Properties and Boaz Energy’s ability to cure any such defects; · actions by Boaz Energy, including such that result in conflicts of interest, that adversely affect the Trust; · the ability to successfully estimate the impact of litigation matters, and certain accounting and tax matters; · the cost of inflation; and · the risk factors discussed in Item 1A of Part II of this Quarterly Report and in Part I of the Trust’s 2021 Annual Report. You should not place undue reliance on any forward-looking statements. All forward-looking statements speak as of the date of this Quarterly Report. The Trust does not undertake any obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events, unless required by applicable law. Boaz Energy Information As a holder of a net profits interest, the Trust relies on Boaz Energy for information regarding Boaz Energy and its affiliates; the Underlying Properties, including the operations, acreage, well and completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses, reserves, drilling plans, drilling results and leasehold terms related to the Underlying Properties; and factors and circumstances that have or may affect the foregoing. Overview PermRock Royalty Trust, a Delaware statutory trust formed in November 2017 by Boaz Energy, completed its initial public offering in May 2018. The Trust’s main asset and source of income is the Net Profits Interest, which entitles the Trust to receive 80% of the net profits from oil and natural gas production from the Underlying Properties. The Net Profits Interest is passive in nature and neither the Trust nor the Trustee has any management control over or responsibility for costs relating to the operation of the Underlying Properties. 11 The Trust is required to make monthly cash distributions of substantially all of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and any cash reserves, to holders of its Trust units as of the applicable record date on or before the 10th business day after the record date. The Net Profits Interest is entitled to a share of the profits from and after January 1, 2018, attributable to production occurring on or after such date. The Trust is not subject to any pre-set termination provisions based on a maximum volume of oil or natural gas to be produced or the passage of time. The amount of Trust revenues and cash distributions to Trust unitholders depends on, among other things: · volumes produced; · wellhead prices; · price differentials; · production and development costs; · potential reductions or suspensions of production; and · the amount and timing of Trust administrative expenses. Boaz Energy typically receives payment for oil production 30 to 60 days after it is produced and for natural gas production 60 to 90 days after it is produced. Properties . The Underlying Properties consist of four operating areas in the Permian Basin in Texas, aggregating 35,390 gross (22,997 net) acres. The Permian Clearfork area consists of 2,434 net acres on the Central Basin Platform of the Permian Basin in Hockley and Terry Counties, Texas. The Permian Abo area consists of 1,667 net acres on the Central Basin Platform of the Permian Basin in Terry and Cochran Counties, Texas. The Permian Shelf area consists of 14,727 net acres on the Eastern Shelf of the Permian Basin in Glasscock, Schleicher, Stonewall and Coke Counties, Texas. The Permian Platform area consists of 4,169 net acres on the Central Basin Platform of the Permian Basin in Ward, Crane, Terry and Ector Counties, Texas. Outlook Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s 2022 capital budget for the Underlying Properties is $7.0 million, of which approximately $4.4 million had been expended as of September 30, 2022. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock counties non-operated drilling and recompletion projects, waterflood conformance and reactivations in Terry, Coke and Crane counties, as well as drilling two additional wells in Coke and Terry counties sometime in 2022. The majority of capital spent in 2022 to date has been on non-operated drilling and completions in Crane and Glasscock counties, well reactivations and stimulations across the underlying properties, and on wellbore re-entry opportunities in Coke and Crane counties. The $7.0 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, the pace of regulatory approvals and availability of materials, equipment and labor. RESULTS OF OPERATIONS Distributable Income Three Months Ended September 30, 2022 For the three months ended September 30, 2022, net profits income received by the Trust was $3,530,590 compared to $ 2,273,583 for the same period of the prior year. This increase in net profits income was primarily due to higher oil and gas prices . See “Computation of Income from the Net Profits Interest Received by the Trust” below. After considering interest income of $ 5,191 and general and administrative expenditures of $ 180,772 , distributable income for the three months ended September 30, 2022, was $3,355,009 , or $ 0.275774 per Trust unit. For the three months ended September 30, 2021, total distributable income was $ 2,101,348 , or $0.172726 per unit. 12 Interest income was higher for the quarter ended September 30, 2022, as compared to the prior year, due to higher interest rates. General and administrative expenditures increased by $ 8,504 for the three months ended September 30, 2022, as compared to the prior year, primarily due to the timing of payments. Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee is authorized to retain cash reserves for administrative expenses. The Trustee did not retain any cash reserves during the three months ended September 30, 2022, or September 30, 2021. Total cash reserves were $1,000,000 as of September 30, 2022, and September 30, 2021. Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the quarter ended September 30, 2022, were as follows: Record Date Payment Date Distribution per Unit July 29, 2022 August 12, 2022 $ 0.090702 August 31, 2022 September 15, 2022 0.092003 September 30, 2022 October 17, 2022 0.093069 $ 0.275774 Nine Months Ended September 30, 2022 For the nine months ended September 30, 2022, net profits income received by the Trust was $9,815,297 compared to $5,738,514 for the same period of the prior year. This increase in net profits income was primarily due to higher oil and gas prices. See “Computation of Income from the Net Profits Interest Received by the Trust” below. After considering interest income of $6,188 and general and administrative expenditures of $735,306 , distributable income for the nine months ended September 30, 2022, was $9,086,179, or $0.746867 per Trust unit. For the nine months ended September 30, 2021, total distributable income was $5,109,987, or $0.420032 per Trust unit. Interest income increased for the nine months ended September 30, 2022, as compared to the prior year, due to higher interest rates. General and administrative expenditures increased by $106,649 for the nine months ended September 30, 2022, as compared to the prior year, primarily due to timing of payment of expenses. Pursuant the terms of the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses in May of 2019. The Trustee did not retain any cash reserves during the nine months ended September 30, 2022, or September 30, 2021. Total cash reserves were $1,000,000 as of September 30, 2022, and September 30, 2021. 13 Computation of Income from the Net Profits Interest Received by the Trust The Net Profits Interest entitles the Trust to receive 80% of the net profits attributable to Boaz Energy’s interest from the sale of oil and natural gas production from the Underlying Properties. The Trust’s income from the Net Profits Interest consists of monthly net profits attributable to income from the Underlying Properties. Because of the interval between the time of production and receipt of net profits income by the Trust, the Trust recognizes production during the month in which the related net profits income is paid to the Trust. Net profits income for the three months ended September 30, 2022, was based on production during the months of May 2022 through July 2022. Net profits income for the nine months ended September 30, 2022, was based on production during the months of November 2021 through July 2022. The table below outlines the computation of income from the Net Profits Interest received by the Trust for the three and nine months ended September 30, 2022, and September 30, 2021: Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Underlying Properties sales volumes (1) : Oil (Bbl) 87,528 93,694 266,920 294,897 Natural gas (Mcf) (2) 101,409 115,370 309,019 389,072 Total sales (Boe) 104,430 112,922 318,423 359,742 Average realized sales price: Oil (per Bbl) $ 107.75 $ 67.82 $ 94.74 $ 56.62 Natural gas (per Mcf) $ 8.95 $ 4.29 $ 7.83 $ 3.69 Calculation of net profits: Gross profits: Oil sales $ 9,427,580 $ 6,353,959 $ 25,249,894 $ 16,698,413 Natural gas sales 908,130 494,853 2,420,365 1,434,600 Income from divestitures 0 0 1,090,386 0 Other revenue 25,386 28,866 80,428 73,190 Total gross profits $ 10,361,096 $ 6,877,678 $ 28,841,073 $ 18,206,203 Costs: Direct operating expenses: $ 655,846 $ 467,981 $ 2,405,787 $ 1,397,328 Lease operating expenses 1,640,906 1,282,395 4,811,630 4,024,011 Severance and ad valorem taxes 661,255 505,470 1,596,865 1,046,298 Development expenses 707,507 1,467,995 4,357,305 3,337,745 Other expenses 417,345 436,857 1,270,365 1,327,686 Total costs $ (4,082,859 ) $ (4,160,698 ) $ (14,441,952 ) $ (11,133,068 ) Net profits $ 6,278,237 $ 2,716,980 $ 14,399,121 $ 7,073,135 Percentage allocable to Net Profits Interest 80 % 80 % 80 % 80 % Net profits income (before capital reserve) $ 5,022,590 $ 2,173,583 $ 11,519,297 $ 5,658,514 Capital reserve (3) (1,492,000 ) 100,000 (1,704,000 ) 80,000 Net Profits Interest audit fee 0 0 0 0 Net profits income received by the Trust $ 3,530,590 $ 2,273,583 $ 9,815,297 $ 5,738,514 (1) Quarterly sales volumes are typically reported for a three-month period, and therefore sales volumes for the three months ended September 30, 2022, reflect production volumes for May 2022 through July 2022. Sales volumes for the nine months ended September 30, 2022, reflect production volumes for November 2021 through July 2022. 14 (2) Sales volumes for natural gas include NGLs. (3) Boaz Energy is entitled under the Conveyance to reserve up to $3.0 million from the net profits for certain future taxes and expenses. As of September 30, 2022, Boaz had reserved $1,918,156 net to the Trust for future capital expense. Important factors used in calculating the Trust’s net profits income include the volumes of oil and natural gas produced from the Underlying Properties and the realized prices received for the sale of those minerals, including oil and natural gas liquids, as well as direct operating expenses, lease operating expenses, severance and ad valorem taxes, development and other expenses and capital reserves. Sales Volumes Oil Oil sales volumes decreased by 6,166 Bbls (6.6%) for the three months ended September 30, 2022, as compared to the same period in 2021 and 27,977 Bbls (9.5%) for the nine months ended September 30, 2022, as compared to the same period in 2021. Boaz Energy reports this decrease was primarily due to a natural decline in the producing properties and a decrease in demand. Natural Gas Natural gas sales volumes decreased by 13,961 Mcf (12.1%) for the three months ended September 30, 2022, as compared to the same period in 2021 and 80,053 Mcf (20.6%) for the nine months ended September 30, 2022, as compared to the same period in the prior year. Boaz Energy reports this decrease was primarily due to a natural decline in the producing properties and a decrease in demand. Sales Prices Oil The average realized oil price per Bbl increased for the three and nine months ended September 30, 2022, as compared to the prior year periods primarily due to an increase in the WTI benchmark oil price. Natural Gas The average realized natural gas price per Mcf increased for the three and nine months ended September 30, 2022, as compared to the prior year periods primarily due to an increase in the Henry Hub benchmark price for natural gas. Qualified De Minimis Sales Boaz Energy informed the Trust that as of March 1, 2022, it had assigned its deep interests in certain leases located in Stonewall County, Texas pursuant to a Qualified De Minimis Sale as contemplated by Section 3.02(c) of the Trust Agreement. Boaz Energy received $452,269 in consideration of the sale of its interest, which amount was received in the second quarter and included in calculating the Trust’s April distributions to unitholders. Boaz Energy informed the Trust that as of May 25, 2022, it had assigned its deep interests in certain leases located in Glasscock County, Texas pursuant to a Qualified De Minimis Sale as contemplated by Section 3.02(c) of the Trust Agreement. Boaz Energy received $638,118 in consideration of the sale of its interest, which amount was received in the second quarter and included in calculating the Trust’s June distributions to unitholders. As of November 14, 2022, Boaz Energy has not provided notice to the Trustee regarding a sale of any other of the Underlying Properties. 15 Costs Direct Operating Expenses Direct operating expenses increased for the three and nine months ended September 30, 2022, as compared to the prior year periods primarily because of costs incurred in repairing wells and bringing marginal wells back to production in 2022. Lease Operating Expenses Lease operating expenses increased for the three and nine months ended September 30, 2022, as compared to the prior year periods because of an increase in pricing of materials . Severance and ad Valorem Taxes Severance and ad valorem taxes increased for the three and nine months ended September 30, 2022, as compared to the prior year periods primarily because of increased valuation of the Underlying Properties. Development Expenses Related to the Underlying Properties Development expenses related to the Underlying Properties decreased for the three months ended September 30, 2022, as compared to the prior year period as a result of a refund for previously overcharged capital costs related to recompleting a well in Crane County, Texas in 2022 . Development expenses related to the Underlying Properties increased for the nine months ended September 30, 2022, as compared to the prior year period as a result of costs incurred in recompleting a well in Crane County, Texas in 2022. Other Expenses Other expenses decreased for the three and nine months ended September 30, 2022, as compared to the prior year periods primarily due to fewer professional service fees in 2022. Capital Reserve As of September 30, 2022, Boaz Energy had reserved $1,918,156 net to the Trust for future capital expenses. LIQUIDITY AND CAPITAL RESOURCES The Trust’s principal sources of liquidity and capital are cash flow generated from the Net Profits Interest, the amounts held by the Trustee as cash reserves to pay future liabilities, and borrowings, if any to fund administrative expenses. The Trust’s primary uses of cash are distributions to Trust unitholders, payment of Trust administrative expenses, including, if applicable, any reserves established by the Trustee for future liabilities. Administrative expenses include the Trustee and Delaware Trustee fees, accounting, engineering, legal, tax advisory and other professional fees, and tax reporting and distribution expenses. The Trust is also responsible for paying other expenses incurred as a result of being a publicly traded entity, including costs associated with annual, quarterly and current reports to the SEC, New York Stock Exchange listing fees, independent auditor fees and registrar and transfer agent fees. If the Trustee determines that cash on hand and cash to be received in respect of the Net Profits Interest are, or will be, insufficient to cover the Trust’s liabilities and expenses, the Trustee may cause the Trust to borrow funds to pay liabilities of the Trust. As authorized under the Trust Agreement, the Trustee is authorized to retain cash from the distributions the Trust receives (i) in an amount not to exceed $1.0 million at any one time to be used by the Trust in the event that its cash on hand (including available cash reserves) is not sufficient to pay ordinary course administrative expenses as they become due and (ii) in such amounts as the Trustee in its discretion deems appropriate to pay for future liabilities of the Trust, but not less than $25,000 or more than $100,000 per month. Cash reserves previously retained and currently held by the Trustee for future administrative expenses total $1,000,000 as of September 30, 2022. 16 Boaz Energy Capital Expenditure Budget Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s 2022 capital budget for the Underlying Properties is $7.0 million, of which approximately $4.4 million had been expended as of September 30, 2022. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock counties non-operated drilling and recompletion projects, waterflood conformance and reactivations in Terry, Coke and Crane counties, as well as drilling two additional wells in Coke and Terry counties sometime in 2022. The majority of capital spent in 2022 to date has been on non-operated drilling and completions in Crane and Glasscock counties, well reactivations and stimulations across the underlying properties, and on wellbore re-entry opportunities in Coke and Crane counties. The $7.0 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, the pace of regulatory approvals and availability of materials, equipment and labor. Distributions Declared After Quarter End 10. Subsequent Events On October 21, 2022, the Trust declared a cash distribution of $0.093361 per Trust unit based upon production during the month of August 2022. Underlying Sales Volumes Average Price Oil (Bbls) Gas (Mcf) Oil (per Bbl) Gas (per Mcf) August 28,651 34,677 $ 95.15 $ 8.93 Off-Balance Sheet Arrangements As of September 30, 2022, the Trust had no off-balance sheet arrangements. New Accounting Pronouncements As the Trust’s financial statements are prepared on the modified cash basis, most accounting pronouncements are not applicable to the Trust’s financial statements. No new accounting pronouncements have been adopted or issued that would impact the financial statements of the Trust. Critical Accounting Policies and Estimates Refer to Note 2 to the unaudited condensed financial statements contained in this Quarterly Report and the Trust’s 2021 Annual Report on Form 10-K, including the audited financial statements of the Trust and notes thereto included therein, for a description of the Trust’s accounting policies and use of estimates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Trust is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this Item.