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Item 2. Management’s Discussion and Analysis

2020-08-14 compared with 2020-05-19 · 65 added, 47 removed, 28 unchanged (80% of the section changed)

8 unchanged sentences

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.

For the six months ended June 30, 2020, we had a net income of $71,978, when compared to the net loss of $3,104,674, during the six months ended June 30, 2019.

This difference was primarily the result of a gain of $910,448 on our Turnkey drilling as we drilled three wells during the six month period in 2020.

We also had an $833,525 gain relating to our equity method investment in RMX recorded during the six months ended June 30, 2020, compared to a loss of $458,269 recorded during the six months ended June 30, 2019.

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

In addition, a loss of $1.2M on sale of assets was recorded during the first quarter of 2019 and there was no comparative loss in the current year period.

Our net loss for the second quarter of 2020 was $312,384, while in the second quarter of 2019 the net loss was $467,491, mainly due to a gain on turnkey drilling in 2020.

Total revenues for the first six months of 2020 and 2019 were $606,955 and $1,395,404, respectively.

During the first six months of 2020, revenues from oil and gas production decreased $223,395 or 27.6% to $585,999 from the 2019 first six months revenues of $809,394.

This decrease was mainly due to lower oil and natural gas commodity prices as demand decreased due to federal and state government stay-at-home orders.

The net sales volume of oil and condensate for the six months ended June 30, 2020, was approximately 11,499 barrels with an average price of $34.54 per barrel, versus 6,629 barrels with an average price of $54.44 per barrel for the first half of 2019.

This represents an increase in net sales volume of 4,869 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.

The net sales volume of natural gas for the six months ended June 30, 2020, was approximately 83,040 Mcf with an average price of $2.27 per Mcf, versus 135,887 Mcf with an average price of $3.30 per Mcf for the same period in 2019.

This represents a decrease in net sales volume of 52,847 Mcf or 38.9%.

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 decrease in natural gas production volume was due to certain wells that were offline and waiting on workovers and to lower volumes on existing wells due to natural declines.

For the quarter ended June 30, 2020, revenues from oil and gas production decreased $194,711 or 47.9% to $211,514 from the 2019 second quarter revenues of $406,225.

This decrease was also due to wells that were offline and waiting on workovers.

The net sales volume of oil and condensate for the quarter ended June 30, 2020, was approximately 6,468 barrels with an average price of $24.18 per barrel, versus 3,584 barrels with an average price of $59.89 per barrel for the second quarter of 2019.

This represents an increase in net sales volume of 2,884 barrels or 80.5% for the quarter in 2020.

The net sales volume of natural gas for the quarter ended June 30, 2020, was approximately 30,587 Mcf with an average price of $1.80 per Mcf, versus 73,420 Mcf with an average price of $2.61 per Mcf for the second quarter of 2019.

This represents a decrease in net sales volume of 42,833 Mcf or 58.3% for the quarter in 2020.

Oil and natural gas lease operating expenses increased by $58,600 or 8.1%, to $778,758 for the six months ended June 30, 2020, from $720,158 for the same period in 2019.

For the second quarter in 2020, lease operating expenses increased $10,757 or 3.0% from the same quarter in 2019.

These were both higher due to the increase in the number of wells operated due mainly to 2019 and 2020 drilling.

The aggregate of supervisory fees and other income was $20,956 for six months ended June 30, 2020, a decrease of $565,054 from $586,010 during the same period in 2019.

The decrease was mainly due to the cancellation of the service agreement with RMX Resources as of March 31, 2019.

During the second quarter 2020, supervisory fees and other income decreased $4,276 or 26.9% when compared to the quarter in 2019, due mainly to lower interest income received on cash deposits.

Depreciation, depletion and amortization expense increased to $155,625 from $124,857, an increase of $30,768 or 24.6% for the six months ended June 30, 2020, as compared to the same period in 2019.

During the second quarter 2019, depreciation, depletion and amortization expenses also increased $2,916 or 4.0%.

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

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.

This increase in depreciation expense was due to the increase in production and wells and related equipment due to drilling activity in 2019 and the first six months of 2020.

At June 30, 2020, Royale Energy had a Deferred Drilling Obligation of $2,531,094.

During the first six months of 2020, we disposed of $3,901,582 of drilling obligations upon completing the drilling of three oil wells, one in California and two wells in Texas, while incurring expenses of $2,991,134, resulting in a gain of $910,448.

At June 30, 2019, Royale Energy had a Deferred Drilling Obligation of $8,746,276.

During the first six months of 2019, we disposed of $4,420,662 of drilling obligations upon completing two natural gas wells in Northern California and two oil wells in Southern California, while incurring expenses of $4,310,263, resulting in a gain of $110,399.

General and administrative expenses decreased by $227,562 or 17.5% from $1,302,902 for the six months ended June 30, 2019, to $1,075,340 for the same period in 2020.

For the second quarter 2020, general and administrative expenses decreased $50,462 or 8.3% when compared to the same period in 2019.

These decreases were mainly due to reductions in employee related costs and outside consulting services, in an effort by the Company to reduce costs.

Marketing expense for the six months ended June 30, 2020, decreased $105,476, or 65.7%, to $55,064, compared to $160,540 for the same period in 2019.

For the second quarter 2020, marketing expenses decreased $72,739 or 77.9% when compared to the second quarter 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 $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 period in 2020 fewer marketing events were attended as the governmental mandate against large gatherings was implemented.

Legal and accounting expense decreased to $174,660 for the six month period in 2020, compared to $388,804 for the same period in 2019, a $214,144 or 55.1% decrease.

For the second quarter 2020, legal and accounting expenses decreased $22,907 or 20.6%, when compared to the second quarter in 2019.

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

During the six months ended June 30, 2020, we recorded a gain of $833,525, on investment in joint venture as our 20% share of RMX Resources, LLC’s, compared to a loss of $458,269 in 2019.

During the second quarter in 2020 we recorded a gain of $200,001 on the receipt of a pre-Matrix merger prepayment refund.

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.

During the six months ended June 30, 2019, we recorded a gain of $62,972, on the settlement of accounts payable.

During the six-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 recorded $14,392 in geological and geophysical expenses.

Bad debt expense for the periods ended June 30, 2020, and 2019 were $186,168 and $5,863, respectively.

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

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.

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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.

Interest expense decreased to $7,444 for the six months ended June 30, 2020, from $12,344 for the same period in 2019, a $4,900 decrease.

This decrease was mainly due to lower principal balances on notes payable during the six month period in 2020.

Capital Resources and Liquidity

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.

At June 30, 2020, we had current assets totaling $4,085,459 and current liabilities totaling $8,951,792, a $4,866,333 working capital deficit.

We had $309,835 in cash and $1,281,250 in restricted cash at June 30, 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.

At June 30, 2020, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $1,215,706, compared to $1,189,892 at December 31, 2019, a $25,814 increase.

This increase was mainly due to an increase in receivable from an industry partner for drilling costs incurred during the period in 2020.

At June 30, 2020, revenue receivable was $304,111, an decrease of $285,040, compared to $589,151 at December 31, 2019, due to lower commodity prices and lower natural gas production volumes on existing wells.

At June 30, 2020, our accounts payable and accrued expenses totaled $5,273,092, a decrease of $757,942 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 $4,866,333 and an accumulated deficit of $73,691,794.

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

We anticipate that our primary sources of liquidity will be from the sale of oil & gas in the course of normal operations, the sale of oil and gas property, sales of participation interest and possible issuance of debt and/or equity.

We anticipate that our primary sources of liquidity will be from the sale of oil and gas in the course of normal operations, the sale of oil and gas property, sales of participation interest and possible issuance of debt and/or equity.

If the Company is unable to generate sufficient cash from operations or financing sources, it may become necessary to curtail, suspend or cease operations, sell property, or enter into financing transaction(s) on less favorable terms;

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Operating Activities.

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.

Net cash provided by operating activities totaled $355,958 and compared to $281,352 used for the six months ended June 30, 2020, and 2019, respectively.

This difference in cash used was mainly due to a loss on the sale of assets during the first quarter in 2019 and the decrease in prepaid drilling in 2020 as they were applied to actual costs.

Investing Activities.

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.

Net cash used by investing activities totaled $2,788,721 compared to $2,564,895 provided for the six months ended June 30, 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 $3.9 million in the drilling and completing of one Southern California oil well and two Texas oil wells.

During the 2019 period, we received approximately $7 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $4.2 million in the drilling and completing of two Northern California natural gas wells and two Southern California oil wells.

Financing Activities.

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.

Net cash provided by financing activities totaled $147,319 compared to net cash of $94,780 used for the six months ended June 30, 2020, and 2019, respectively.

During the period in 2020, we received $207,800 in SBA-PPP loan as discussed in Note 7.

There were principal payments of approximately $56,000 on our notes payable.

During the six month 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 $53,000.

Additionally, in 2019, there were principal payments of approximately $259,000 on our note with Forza Operating.

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