What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-05-19 compared with 2019-11-14 · 56 added, 77 removed, 19 unchanged (88% of the section changed)

5 unchanged sentences

Results of Operations

The merger between Royale Energy and Matrix Oil Management was completed during the first quarter of 2018.

For the period in 2018, the consolidated amounts represented here are for the nine-month period for Royale Energy, Inc.

and the seven-month period from March through September for Matrix Oil Management and its subsidiaries.

For a further discussion regarding the 2018 merger and subsequent sale of oil and gas assets to RMX Resources, LLC, please refer to our 2018 Form 10-K.

For the nine months ended September 30, 2019, we had a net loss of $800,566, when compared to the net loss of $19,701,406 during the nine months ended September 30, 2018.

This difference was primarily due to the loss in the second quarter 2018 on the transfer of assets of $16,353,600 which was recorded upon the transfer of oil and gas properties to RMX and surface rights in exchange for cash and a 20 percent working interest in RMX under the Contribution Agreement.

Under the Contribution Agreement, we also issued warrants to acquire 4,000,000 shares of Royale common stock and recorded a loss of $1,439,990.

During the third quarter of 2019, we had a net income of $2,304,108, mainly due to a third quarter gain of $1,787,860 on Turnkey drilling.

In the third quarter of 2018, we had a net income of $1,072,910 also mainly due to a $2,194,059 gain on Turnkey drilling during the period in 2018.

Total revenues for the first nine months of 2019 and 2018 were $2,030,792 and $2,391,224, respectively.

During the first nine months of 2019, revenues from oil and gas production increased $153,863 or 12.2% to $1,419,821 from the 2018 nine-month revenues of $1,265,958.

This increase was mainly due to higher production volumes during the period in 2019, due to our 2019 drilling and fourth quarter 2018 Jameson North field acquisition.

The net sales volume of oil and condensate for the nine months ended September 30, 2019, was approximately 14,851 barrels with an average price of $56.03 per barrel, versus 15,358 barrels with an average price of $65.28 per barrel for the first nine months of 2018.

This represents a decrease in net sales volume of 507 barrels.

The net sales volume of natural gas for the nine months ended September 30, 2019, was approximately 198,439 Mcf with an average price of $2.96 per Mcf, versus 95,970 Mcf with an average price of $2.54 per Mcf for the same period in 2018.

This represents an increase in net sales volume of 102,469 Mcf or 106.8%.

The increase in natural gas production volume was due to wells that were drilled and put into production during the period in 2019 and to several of our operated wells being offline during the period in 2018 due to new pipeline equipment requirements by Pacific Gas & Electric.

For the quarter ended September 30, 2019, revenues from oil and gas production increased $297,600 or 95.1% to $610,427 from the 2018 third quarter revenues of $312,827.

This increase was also to the wells which came online during the period in 2019 and to several of our operated wells being offline during the period in 2018.

The net sales volume of oil and condensate for the quarter ended September 30, 2019, was approximately 8,222 barrels with an average price of $57.31 per barrel, versus 3,143 barrels with an average price of $67.17 per barrel for the third quarter of 2018.

This represents an increase in net sales volume of 5,079 barrels for the quarter in 2019.

The net sales volume of natural gas for the quarter ended September 30, 2019, was approximately 62,553 Mcf with an average price of $2.23 per Mcf, versus 33,585 Mcf with an average price of $2.78 per Mcf for the third quarter of 2018.

This represents an increase in net sales volume of 28,968 Mcf or 86.3% for the quarter in 2019.

Oil and natural gas lease operating expenses increased by $32,208 or 2.7%, to $1,237,785 for the nine months ended September 30, 2019, from $1,205,577 for the same period in 2018.

For the third quarter in 2019, lease operating expenses increased $78,868 or 18.0% from the same quarter in 2018.

These were both higher due to the increase in the number of wells operated by the Company during the period in 2019, related to our 2019 drilling and the fourth quarter 2018 Jameson North acquisition.

The aggregate of supervisory fees and other income was $610,971 for nine months ended September 30, 2019, a decrease of $514,295 from $1,125,266 during the same period in 2018.

During the third quarter 2019, supervisory fees and other income decreased $535,905 or 95.6% when compared to the quarter in 2018, These decreases were due to the cancellation of the service agreement with RMX Resources as of March 31, 2019.

Depreciation, depletion and amortization expense decreased to $217,327 from $344,532, a decrease of $127,205 or 36.9% for the nine months ended September 30, 2019, as compared to the same period in 2018.

During the third quarter 2019, depreciation, depletion and amortization expenses increased $23,884 or 34.8%.

In late 2019 and continuing into 2020, there was a global outbreak of novel coronavirus (COVID-19) that has resulted in changes in global supply and demand of certain mineral and energy products.

While the direct and indirect negative impacts that may affect the Company cannot be determined, they could have a prospective material impact.

For more information, see Item 3 below.

For the three months ended March 31, 2020, we had a net income of $384,362, when compared to the net loss of $2,637,183 during the three months ended March 31, 2019.

This difference was primarily the result of a gain of $1,309,851 recorded relating to our equity method investment in RMX recorded during the three months ended March 31, 2020 compared to a loss of $741,795 recorded in the three months ended March 31, 2019.

In addition, a loss of $1.2M on sale of assets was recorded during the three months ended March 31, 2019, and there was no comparative loss in the current year period.

The gain in RMX in the current period was primarily due to their hedging activities.

During the first three months of 2020, revenues from oil and gas production decreased $28,684 or 7.1% to $374,485 from the 2019 three-month revenues of $403,169.

This decrease was mainly due to lower oil and gas prices and lower natural gas production volumes during the period in 2020 compared to 2019.

The net sales volume of oil and condensate for the three months ended March 31, 2020, was approximately 5,031 barrels with an average price of $47.87 per barrel, versus 3,045 barrels with an average price of $48.02 per barrel for the first three months of 2019.

This represents an increase in net sales volume of 1,986 barrels.

This increase in production volumes was due to various wells drilled in put into production during 2019.

The net sales volume of natural gas for the three months ended March 31, 2020, was approximately 52,453 Mcf with an average price of $2.55 per Mcf, versus 62,467 Mcf with an average price of $4.11 per Mcf for the same period in 2019.

This represents a decrease in net sales volume of 10,114 Mcf or 16.0%.

The decrease in natural gas production volume was due to the natural declines on some of our wells.

Oil and natural gas lease operating expenses increased by $47,843 or 13.5%, to $403,453 for the three months ended March 31, 2020, from $355,610 for the same period in 2019.

These were higher due to the increase in the number of wells operated by the Company during the period in 2020, related to our 2019 drilling.

The aggregate of supervisory fees and other income was $9,329 for three months ended March 31, 2020, a decrease of $560,778 from $570,107 during the same period in 2019.

These decreases were due to the cancellation of the service agreement with RMX Resources as of March 31, 2019.

Depreciation, depletion, and amortization expense increased to $79,935 from $52,083, an increase of $27,852 or 53.5% for the three months ended March 31, 2020, as compared to the same period in 2019.

The depletion rate is calculated using production as a percentage of reserves.

The nine-month decrease in depreciation expense was due to the decrease in the number of wells and related equipment, as a result of the transfer of properties during the sale and final settlement with RMX Resources, LLC.

General and administrative expenses decreased by $581,970 or 26.0% from $2,242,891 for the nine months ended September 30, 2018, to $1,660,921 for the same period in 2019, due to reductions in employee related costs and outside consulting services, in an effort for the Company to reduce costs and lower fees, and was also due to higher costs in 2018, related to a loan Matrix had at the time of the merger.

For the third quarter 2019, general and administrative expenses decreased $417,242 or 53.8% when compared to the same period in 2018, also due to decreases in employee related costs and outside consulting services.

Marketing expense for the nine months ended September 30, 2019, increased $35,097, or 12.3%, to $319,906, compared to $284,809 for the same period in 2018.

For the third quarter 2019, marketing expenses decreased $1,750 or 1.1% when compared to the third quarter in 2018.

The increase in depreciation expense was due to the increase in production and the number of wells and related equipment, as a result of drilling activity.

General and administrative expenses decreased by $177,100 or 25.4% from $698,163 for the three months ended March 31, 2019, to $521,063 for the same period in 2020, due to reductions in employee related costs and outside consulting services, in an effort for the Company to reduce costs.

Marketing expense for the three months ended March 31, 2020, decreased $32,737, or 48.8%, to $34,394, compared to $67,131 for the same period in 2019.

Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs.

Legal and accounting expense decreased to $502,995 for the nine month period in 2019, compared to $1,267,896 for the same period in 2018, a $764,901 or 60.3% decrease.

For the third quarter 2019, legal and accounting expenses decreased $76,403 or 40.1%, when compared to the third quarter in 2018.

These decreases were primarily due to legal fees related to the Matrix merger during the periods in 2018.

During the first quarter in 2019 we recorded a loss on the sale of assets of $1,237,126 related a settlement agreement with RMX Resources, LLC, see Note 1, Settlement Agreement and Well Participation Agreement with RMX.

During the nine-month period in 2019, we recorded geological and geophysical expense of $263,277 related mainly to the acquisition of a seismic survey of a Northern California field.

During the nine months ended September 30, 2019 and 2018, we recorded losses of $124,716 and $1,026,404, respectively on investment in joint venture as our 20% share of RMX Resources, LLC’s period net losses of $623,579 and $5,132,019.

During the nine months ended September 30, 2019, we recorded a gain of $897,708, mainly on the reconciliation and settlement of royalties payable.

We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense.

During the nine months ended September 30, 2019, we recorded a lease impairment of $40,223 on various lease and land costs that were no longer viable.

During the nine months ended September 30, 2018, we recorded gains of $163,681 on the settlement of accounts payable.

During the period ended September 30, 2018, we recorded a $105,130 loss on derivative instruments, reflecting the period end market-to market changes in the fair value positions, related to Matrix operations prior to the conclusion of the merger.

During the nine months ended September 30, 2018, we recorded a write down of $9,790 on certain well equipment that was no longer useable.

During the first nine months of 2019, we disposed of $9,382,519 of drilling obligations upon completing the drilling of eight wells, six natural gas wells in Northern California and two oil wells in Southern California, while incurring expenses of $7,484,260, resulting in a gain of $1,898,259.

At September 30, 2019, Royale Energy had a remaining Deferred Drilling Obligation of $6,077,583.

During the same period in 2018, we disposed of $4,797,720 of drilling obligations upon completing the drilling of three natural gas wells in Northern California, while incurring expenses of $2,603,262, resulting in a gain of $2,194,459.

At September 30, 2018, Royale Energy had a Deferred Drilling Obligation of $5,406,678.

Interest expense decreased to $17,186 for the nine months ended September 30, 2019, from $170,151 for the same period in 2018, a $152,965 decrease.

This decrease resulted from interest accrued during the period in 2018 on the term loan agreement originated by Matrix.

Further details concerning this agreement can be found in Capital Resources and Liquidity , below.

Legal and accounting expense decreased to $86,535 for the three month period in 2020, compared to $277,772 for the same period in 2019, a $191,237 or 68.9% decrease.

These decreases were primarily due to accounting fees related to the Matrix post-merger reporting incurred during the period in 2019.

During the first quarter in 2020, we recorded a loss on settlement of $31,500 related to a 2018 seismic sales agreement.

During the three-month period in 2019, we recorded geological and geophysical expense of $262,586 related mainly to the acquisition of a seismic survey of a Northern California field, during the same period in 2020, we had no geological and geophysical expenses.

During the three months ended March 31, 2020 and 2019, we recorded a gain of $1,309,851 and a loss of $741,795 , respectively on investment in joint venture as our 20% share of RMX Resources, LLC’s period net income of $6,549,253 and net loss of $3,708,976.

During the three months ended March 31, 2019, we recorded gains of $62,972 on the settlement of accounts payable.

During the first three months of 2020, we disposed of $2,382,086 of drilling obligations upon completing the drilling of two wells, one oil well in Southern California and one oil well in Texas, while incurring expenses of $2,344,311, resulting in a gain of $37,775.

At March 31, 2020, Royale Energy had a remaining Deferred Drilling Obligation of $4,025,589.

During the same period in 2019, we disposed of $2,627,520 of drilling obligations upon completing the drilling of two natural gas wells in Northern California, while incurring expenses of $2,601,051, resulting in a gain of $26,469.

At March 31, 2019, Royale Energy had a Deferred Drilling Obligation of $5,782,285.

Bad debt expense for the period ended March 31, 2020 and 2019, were $186,168 and $1,927, respectively.

Approximately $80,000 of the expenses in 2020 arose from identified uncollectable receivables relating to our oil and natural gas properties either plugged and abandoned or scheduled for plugging and abandonment and our period end oil and natural gas reserve values.

We periodically review our accounts receivable from working interest owners to determine whether collection of any of these charges appears doubtful.

By contract, the Company may not collect some charges from its Direct Working Interest owners for certain wells that ceased production or had been sold during the year, to the extent that these charges exceed production revenue.

During the period in 2020, approximately $106,000 was related to revenue receivable from an industry partner whose collectability was in doubt.

Interest expense decreased to $4,030 for the three months ended March 31, 2020, from $5,707 for the same period in 2019, a $1,677 decrease.

This decrease was mainly due to lower principal balances on notes payable.

Capital Resources and Liquidity

At September 30, 2019, Royale Energy had current assets totaling $9,181,971 and current liabilities totaling $14,844,417, a $5,662,446 working capital deficit.

We had $724,994 in cash and $5,622,772 in restricted cash at September 30, 2019, compared to $1,853,742 in cash and $4,501,300 in restricted cash at December 31, 2018.

At September 30, 2019, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $1,218,527, compared to $1,411,144 at December 31, 2018, a $192,617 decrease.

This decrease was mainly due to receipts from RMX Resources for contracted services.

At September 30, 2019, revenue receivable was $910,663, an increase of $593,689, compared to $316,974 at December 31, 2018, due to higher oil and gas production volumes on wells drilled during the period in 2019.

At September 30, 2019, our accounts payable and accrued expenses totaled $6,597,640, an increase of $1,702,107 from the accounts payable at December 31, 2018 of $4,895,533, which was related to increased drilling activities during the period in 2019.

The Company has had recurring operating and net losses and cash used in operations and the consolidated financial statements reflect a working capital deficiency of $5,662,446 and an accumulated deficit of $73,652,310.

At March 31, 2020, we had current assets totaling $6,435,227 and current liabilities totaling $10,985,674, a $4,550,447 working capital deficit.

We had $779,218 in cash and $1,760,841 in restricted cash at March 31, 2020, compared to $1,031,014 in cash and $2,845,515 in restricted cash at December 31, 2019.

In accordance with ASC 480-10-S99, the Company reclassified the Series B Convertible Preferred Stock from Permanent Equity to Mezzanine capital as a result of the change in voting rights provided at the time it of issuance.

For more information, see Note 3 – Series B Convertible Preferred Stock.

At March 31, 2020, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $1,139,212, compared to $1,189,892 at December 31, 2019, a $50,680 decrease.

This decrease was mainly due to the increase in allowance for doubtful accounts during the period in 2020.

At March 31, 2020, revenue receivable was $263,458, an decrease of $325,693, compared to $589,151 at December 31, 2019, due to lower commodity prices and lower natural gas production volumes on existing wells.

At March 31, 2020, our accounts payable and accrued expenses totaled $6,006,235, a decrease of $24,799 from the accounts payable at December 31, 2019 of $6,031,034, which was related to payments made on account during the period in 2020.

The Company has had recurring operating and net losses and cash used in operations and the financial statements reflect a working capital deficiency of $4,550,447 and an accumulated deficit of $73,190,576.

These factors raise substantial doubt about our ability to continue as a going concern.

3 unchanged sentences

Additionally, management has, and plans to continue, to increase revenue and reduce overhead and Lease Operating Expense (LOE) costs.

Matrix Oil Management Corp entered into a term loan agreement with Arena Limited SPV, LLC (Term Loan) for approximately $12.4 million, in conjunction with a Purchase and Sale Agreement on June 15, 2016.

The original maturity date of the Term Loan was June 15, 2018, it was secured by the assets of Matrix, and contained financial covenants commencing June 30, 2016 and thereafter, as defined in the term loan agreement.

The Term Loan contained preferential payment requirements in advance of the amounts outstanding under the subordinated notes payable to partners, as defined in the term loan agreement.

The Term Loan Agreement called for interest at the rate of nine percent (9%) plus the adjusted LIBOR Rate computed on a daily basis.

The loan balance as of March 31, 2018 was $11,140,749.

The Company recognized $164,401 in interest expense for the period ended March 31, 2018.

This loan agreement was paid in full in April 2018.

Operating Activities.

Net cash used by operating activities totaled $630,090 and $1,451,832 for the nine months ended September 30, 2019 and 2018, respectively.

This decrease in cash used was mainly due to lower receivables due from affiliates during the period in 2018 related to the sale of oil and gas assets in the formation of RMX Resources, LLC.

Net cash provided by operating activities totaled $298,442 and compared to $595,876 used for the three months ended March 31, 2020 and 2019, respectively.

This increase in cash used was mainly due to a loss on the sale of assets during the period in 2019.

Investing Activities.

Net cash provided by investing activities totaled $1,240,515 and $6,033,768 for the nine months ended September 30, 2019 and 2018, respectively.

During the period in 2019, we received approximately $9.3 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $7.5 million in the drilling of six Northern California natural gas wells and two Southern California oil wells.

During the 2018 period, the cash provided was due to approximately $4.3 million received in the merger and for the oil and gas asset sale and contribution in the formation of RMX Resources, LLC.

In the 2018 period, we also received $4.3 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.6 million in the drilling of three Northern California natural gas wells.

Net cash used by investing activities totaled $1,499,655 and $322,789 for the three months ended March 31, 2020 and 2019, respectively.

During the period in 2020, we received approximately $1.2 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.3 million in the drilling of one Southern California oil well and one Texas oil well along with an additional approximately $300,000 in completion costs related to wells drilled in 2019.

During the 2019 period, we received approximately $2.2 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.5 million in the drilling of two Northern California natural gas wells.

Financing Activities.

Net cash used by financing activities totaled $617,701 and $2,174,920 for the nine months ended September 30, 2019, respectively.

Net cash used by financing activities totaled $135,257 and compared to net cash of $53,320 provided for the three months ended March 31, 2020 and 2019, respectively.

During the period in 2020, there were principal payments of approximately $95,000 on our notes payable and payments of approximately $40,000 on our leasing obligations.

During the period in 2019, a financing agreement for a seismic survey was recognized when the terms were finalized, on which there were principal payments of approximately $25,000.

Additionally, in 2019, there were principal payments of approximately $128,000 on our note with Forza Operating and payments of approximately $35,000 on our leasing obligations.

During the period in 2018, we paid a $1.9 million settlement payment for the cash advances on pending transactions.

During the period in 2018, we also paid approximately $275,000 for principal and fee payments on the Matrix originated term loan agreement.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis