What changed in this filing

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Item 1. Financial Statements

2021-08-16 compared with 2021-05-14 · 156 added, 119 removed, 355 unchanged (44% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2021

June 30, 2021

December 31, 2020

6 unchanged sentences

Prepaid Expenses

Deferred Drilling Costs

Prepaid Drilling to RMX Resources, LLC

1 unchanged sentence

Right of Use Assets - Leases

Oil and Gas Properties, (Successful Efforts Basis), Equipment and Fixtures, net

Oil and Gas Properties, (Successful Efforts Basis),

Equipment and Fixtures, net

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2021

June 30, 2021

December 31, 2020

26 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the 3 months ended

March 31, 2021

March 31, 2020

For the three

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Oil, NGL and Gas Sales

2 unchanged sentences

Costs and Expenses:

Oil and Gas Lease Operating

Oil and Natural Gas Operating

Depreciation, Depletion and Amortization

Bad Debt Expense

Geological and Geophysical Expense

Legal and Accounting

1 unchanged sentence

Total Costs and Expenses

Gain on Turnkey Drilling

Gain (Loss) on Turnkey Drilling

Loss From Operations

2 unchanged sentences

Gain (Loss) on Settlement of Accounts Payable

Gain on Investment in Joint Venture

Gain on Sale of Assets

Gain (Loss) on Investment in Joint Venture

Income (Loss) Before Income Tax Expense

1 unchanged sentence

Preferred Stock Dividend

Net Income (Loss) Available to Common Stock

Shares Used in Computing Basic Net Loss Per Share

Basic and Diluted (Loss) Per Share

Net Loss available to common stock

Shares used in computing Basic and Diluted Net Loss per common share

Basic and Diluted Net (Loss) Per Common Share

Shares used in computing Diluted Net Loss per share

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

March 31, 2021

March 31, 2020

FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

June 30, 2021

June 30, 2020

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

Cash Used in Operating Activities:

Adjustments to Reconcile Net Income (Loss) to Net Cash (Used In) Provided By Operating Activities:

Depreciation, Depletion and Amortization

(Gain) on Turnkey Drilling Programs

Gain on Sale of Assets

(Gain) Loss on Turnkey Drilling Programs

(Gain) Loss on Settlement of Accounts Payable

2 unchanged sentences

Stock Based Compensation

Geological & Geophysical Costs

Right of use asset depreciation

Changes in assets and liabilities

Increase (Decrease) in:

Other & Revenue Receivables

2 unchanged sentences

Due to Affiliate

Net Cash (Used in) Operating Activities

Net Cash (Used in) Provided by Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

Expenditures for Oil and Gas Properties and Other Capital Expenditures

Expenditures for Oil and Gas Properties and Turnkey Drilling Costs

Proceeds from Turnkey Drilling Programs

Net Cash (Used in) Investing Activities

Proceeds from Sale of Assets, net

Net Cash Provided by (Used in) Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Long-Term Debt

Principal Payments on Long-Term Debt

Net Cash (Used in) Financing Activities

Net (Decrease in) Cash and Cash Equivalents

Net Cash (Used in) Provided by Financing Activities

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash

Cash, Cash Equivalents, and Restricted Cash at Beginning of Period

Cash, Cash Equivalents, and Restricted Cash at End of Period

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:

Cash Paid for Interest

Cash Paid for Taxes

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:

Increase (Decrease) in Capital Accrued Balance

See notes to unaudited condensed consolidated financial statements.

11 unchanged sentences

Reclassify Preferred B to Mezzanine

March 31, 2020 Balance

Preferred Stock Series B

Shares Issued

and Outstanding

Shares Issued

and Outstanding

Comprehensive Deficit

June 30, 2020 Balance

December 31, 2020 Balance

1 unchanged sentence

Preferred Series B 3.5% Dividend

June 30, 2021 Balance

March 31, 2020 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2020 Balance

March 31, 2021 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2021 Balance

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management, the accompanying unaudited condensed consolidated financial statements (“statements”) include all adjustments necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented.

The results of operations for the three-month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations.

NOTE 1 – In the opinion of management, the accompanying unaudited condensed consolidated financial statements (“statements”) include all adjustments necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented.

The results of operations for the six-month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations.

It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report as filed on Form 10-K.

2 unchanged sentences

There are factors that give rise to substantial doubt about the Company’s ability to meet liquidity demands, and we anticipate that our primary sources of liquidity will be from the issuance of debt and/or equity, the sale of oil and natural gas property participation interests through our normal course of business and the sale of non-strategic assets.

At March 31, 2021, the Company has $1.529 million in Long Lived Assets Held for Sale (see Prospective East LA Sale below).

At March 31, 2021, the Company’s consolidated financial statements reflect a working capital deficiency of $4,337,733 and a net loss from operations of $581,393.

At June 30, 2021, the Company has $ 1.0 million in Long Lived Assets Held for Sale (see Prospective East LA Sale below).

At June 30, 2021, the Company’s consolidated financial statements reflect a working capital deficiency of $ 5,120,939 and a net loss from of $ 1,023,504 and $ 1,595,671 for three months and six months ended June 30 2021.

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

5 unchanged sentences

Prospective East LA Sale

The Company and its joint venture partner, RMX, have entered into a purchase and sales agreement as well as a second amendment to that certain purchase and sales agreement extending the closing date to the second quarter of 2021.

The Company carries these assets on the books for $1.9 million with an ARO amount of approximately $1.1 million for the existing wells and facilities located on the properties providing a net book value of approximately $0.846 million.

The property is surface real estate located in the city of Commerce, California, The Company carries these assets on the books for $ 1.9 million with an ARO amount of approximately $ 1.1 million for the existing wells and facilities located on the properties providing a net book value of approximately $ 0.846 million.

The sale would require the Company to plug and abandon the wells on the property and remove and restore the surface land with an estimated cost of $0.721 million.

The sale price is approximately $ 1.0 million to the Company.

At December 31, 2020 the Company recorded a loss on the pending sale of these properties of $0.567 million and reflect Assets Held for Sale of $1.0 million reflected in current assets with an ARO balance of $0.721 million in current liabilities.

Therefore, the Company recorded a loss on the pending sale of these properties of $ 0.567 million and reflect Assets Held for Sale of $ 1.0 million reflected in current assets with an ARO balance of $ 0.721 million in current liabilities at December 31, 2020.

Non-operated West Texas Property Sale

During the six months ended June 30, 2021, we recorded a gain of $ 291,249 on the sale of asset on the sale of certain non-operated Texas properties.

These non-operated properties were originally acquired during the 2018 merger with Matrix Oil Management Corporation and booked as Held for Sale at the end of 2020.

Consolidation

12 unchanged sentences

The majority of our ongoing revenues are derived from the sale of crude oil and condensate, natural gas liquids ("NGLs") and natural gas under spot and term agreements with our customers.

For the three months ended March 31

For the three months ended June 30

For the six months ended June 30

Oil & Condensate Sales

37 unchanged sentences

The Company manages the performance obligation for the well participants and only records revenue or expense at the time the performance obligation of the Turnkey Agreement has been satisfied.

Funds received in excess of cost are recognized as Gain on Turnkey Drilling, while cost that exceed participant funds are recorded as capitalized drilling costs.

Restricted Cash

Prior to commencement of drilling, Royale classifies turnkey drilling funds as restricted cash based on guidance codified as under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 230-10-50-8.

Royale sponsors turnkey drilling arrangements in proved and unproved properties.

The contracts require that participants pay Royale the full contract price upon execution of the drilling agreement.

Each participant earns an undivided interest in the well bore at the completion of the well.

A portion of the funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling a well.

If something changes, the Company may designate these funds for a substitute well.

Under certain conditions, a portion of these funds may be required to be returned to a participant.

Once the well is drilled, the funds are used to satisfy the drilling cost.

Royale classifies these funds prior to commencement of drilling as restricted cash based on guidance codified as under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 230-10-50-8.

In the event that progress payments are made from these funds, they are recorded as Prepaid Expenses and Other Current Assets.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows.

March 31, 2021

June 30, 2021

December 31, 2020

8 unchanged sentences

When a loss is deemed to have occurred and is other than temporary, the carrying value of the equity method investment is written down to fair value, and the amount of the write-down is included in income.

At year-end 2020, we evaluated our investment in RMX and determined that an allowance for the full value of the asset was warranted.

As a result of the valuation allowance, the Company has not included any gain or loss on its Investment in Joint Venture for the period ended March 31, 2021.

During the period ended Mach 31, 2020, the Company recorded a gain of $1,309,851 reflecting our share of net earnings or losses directly attributable to this equity method investment.

For the period ending March 31, 2021, no gain or loss was recorded as a result of the valuation allowance.

At year-end 2020, we evaluated our investment in RMX and determined that the investment was fully impaired at December 31, 2020.

As a result of the valuation allowance, the Company has not included any gain or loss on its Investment in Joint Venture for the period ended June 30, 2021.

During the period ended June 30, 2020, the Company recorded a gain of $833,525 reflecting our share of net earnings or losses directly attributable to this equity method investment.

For the period ending June 30, 2021, no gain or loss was recorded as a result of full impairment of the investment balance at December 31, 2020.

Other Receivables

4 unchanged sentences

All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance.

At March 31, 2021 and December 31, 2020, the Company maintained an allowance for uncollectable accounts of $2,582,093, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

At June 30, 2021 and December 31, 2020, the Company maintained an allowance for uncollectable accounts of $ 2,761,398 and $ 2,582,093 , for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

Fair Value Measurements

11 unchanged sentences

These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

At March 31, 2021 and December 31, 2020, Royale Energy does not have any financial assets measured and recognized at fair value on a recurring basis.

At June 30, 2021 and December 31, 2020, Royale Energy does not have any financial assets measured and recognized at fair value on a recurring basis.

The Company estimates asset retirement obligations (ARO’s) pursuant to the provisions of ASC 410, “ Asset Retirement and Environmental Obligations ”.

8 unchanged sentences

In the third quarter of 2020, the Board of Directors authorized the issuance of Preferred shares, for the settlement of dividends accumulated through December 31, 2021.

The Company accrued $191,718 and $187,200 for dividends related to the Preferred shares during the first quarters of 2021 and 2020, respectively.

The Company accrued $ 195,530 and $ 188,834 for dividends related to the Preferred shares during the second quarters of 2021 and 2020, respectively.

Each quarter, the Company charges retained earnings for the accumulating dividend as the amounts add to the liquidation preference of the Preferred.

5 unchanged sentences

The result was a precipitous decline in the price of crude oil received by the Company in 2020.

At March 31, 2021, the price of West Texas Intermediate crude oil had reached $59.16 per barrel.

At June 30, 2021 the price of West Texas Intermediate crude oil had reached $71.30 per barrel.

ACCOUNTING STANDARDS

Recently Adopted

ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12 simplifying the accounting for income taxes.

The updated guidance is intended to simplify the accounting for income taxes by removing certain exceptions contained in existing guidance, and clarifying or amending existing guidance to simplify other income tax accounting matters.

The Company adopted this new standard on January 1, 2021, and there was no material impact on its condensed consolidated financial statements.

Not Yet Adopted

50 unchanged sentences

Impairments are measured by the amount the carrying value exceeds fair value.

During the three months ended March 31, 2021 and 2020, no impairment losses were incurred.

During the six months ended June 30, 2021 and 2020, no impairment losses were incurred.

Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that Royale Energy expects to hold the properties.

17 unchanged sentences

Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations.

At March 31, 2021 and December 31, 2020, Royale Energy had Deferred Drilling Obligations of $2,747,439 and $3,127,500, respectively.

At June 30, 2021 and December 31, 2020, Royale Energy had Deferred Drilling Obligations of $ 4,047,439 and $ 3,127,500 , respectively.

If Royale Energy is unable to drill the wells, and a suitable replacement well is not found, Royale would retain the non-refundable portion of the contract and return the remaining funds to the participant.

1 unchanged sentence

Losses on properties sold are recognized when incurred or when the properties are held for sale and the fair value of the properties is less than the carrying value.

During the six months ended June 30, 2021, we recorded a gain of $ 291,249 on the sale of asset on the sale of certain non-operated Texas properties.

These non-operated properties were originally acquired during the 2018 merger with Matrix Oil Management Corporation and booked as Held for Sale at the end of 2020.

NOTE 3 – SERIES B PREFERRED STOCK

6 unchanged sentences

In accordance with ASC 480-10-S99-1.02, the Company has determined that the conversion or redemption of these shares are outside the sole control of the Company and that they should be classified in mezzanine or temporary equity as redeemable noncontrolling interest beginning at the reporting period, ended March 31, 2020.

For 2021 and 2020, the board authorized the payment of each quarterly dividend of Series B Convertible Preferred shares, as “PIK” to be paid immediately following the end of the quarter.

For the quarter ending March 31, 2021, the Company issued 19,172 shares with a value of $191,718.

For 2021 and 2020, the board authorized the payment of each quarterly dividend of Series B Convertible Preferred shares, as Paid-In-Kind shares (“PIK”) to be paid immediately following the end of the quarter.

For the quarter ending June 30, 2021, the Company accrued 19,553 shares with a value of $ 195,530 .

During 2021 and 2020 no cash was used to pay dividends on Series B preferred shares.

1 unchanged sentence

Basic and diluted loss per share are calculated as follows:

For the period ending

March 31, 2021

March 31, 2020

Three Months Ended June 30,

Preferred Stock Dividend

Net (Loss) Attributable to Common Shareholders

Weighted average common shares outstanding

Effect of dilutive securities

Weighted average common shares, including Dilutive effect

Six Months Ended June 30,

Net Income (Loss)

Preferred Stock Dividend

Preferred Stock Dividend In Arrears

Net Income (Loss) Attributable to Common Shareholders

2 unchanged sentences

Weighted average common shares, including Dilutive effect

Net Income (Loss)

For the three months ended March 31, 2021, Royale Energy had dilutive securities of 26,119,183.

These securities were not included in the dilutive loss per share, due to their antidilutive nature.

For the six months ended June 30, 2021 and 2020, Royale Energy had dilutive securities of 26,063,735 and 25,157,462 , respectively.

For the three months ended June 30, 2021 and 2020, Royale Energy had dilutive securities of 25,985,121 and 25,165,320 , respectively.

In both periods, these securities were not included in the dilutive loss per share, due to their antidilutive nature.

NOTE 5 – INCOME TAXES

4 unchanged sentences

As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2021.

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at March 31, 2021 and 2020, respectively, to pretax income is as follows:

For the quarter ended

March 31, 2021

March 31, 2020

Tax expense (benefit) computed at statutory rate of 21% at March 31, 2021 and 2020, respectively

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at June 30, 2021 and 2020, respectively, to pretax income is as follows:

For the six months ended

June 30, 2021

June 30, 2020

Tax provision (benefit) computed at statutory rate of 21 % at June 30, 2021 and 2020, respectively

Increase (decrease) in taxes resulting from:

4 unchanged sentences

NOTE 6 – ISSUANCE OF COMMON STOCK

During the three months ended March 31, 2021, in lieu of cash payments for salaries and board fees, Royale issued 1,023,413 shares of its Common stock valued at approximately $118,736 to an executive officer and board members, compared to the issuance of 377,763 shares issued with an approximate value of $53,336 in the same period of 2020.

During the six months ended June 30, 2021, in lieu of cash payments for salaries and board fees, Royale issued 1,468,642 shares of its Common stock valued at approximately $ 162,221 to an executive officer and board members, compared to the issuance of 1,390,787 shares issued with an approximate value of $ 169,550 in the same period of 2020.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

7 unchanged sentences

For more information, see Item 3 below.

For the three months ended March 31, 2021, we had a net loss of $572,167 compared to the net income of $384,362, during the three months ended March 31, 2020.

The difference was primarily the result of a gain of $1.3 million relating to our equity method investment in RMX recorded during the three months ended March 31, 2020.

During the fourth quarter in 2020, it was determined that an allowance for the full value of the asset was warranted so there was no comparative gain or loss in the current year period.

During the first three months of 2021, revenues from oil and gas production increased $24,452 or 6.5% to $398,937 from the 2020 first three months revenues of $374,485.

For the six months ended June 30, 2021, we had a net loss of $1,595,671 compared to the net income of $71,978, during the six months ended June 30, 2020.

The difference was primarily the result of a gain of $833,525 relating to our equity method investment in RMX recorded during the six months ended June 30, 2020.

During the fourth quarter in 2020, it was determined that a full impairment of the equity method investment was warranted, so there was no comparative gain or loss in the current year period.

During the three months ended June 30, 2021 and 2020, we had net losses of $1,023,504 and $312,384, respectively mainly due to higher turnkey drilling costs during the second quarter in 2021 as additional work on wells drilled during the first quarter was performed to improve production.

During the first six months of 2021, revenues from oil and gas production increased $190,877 or 32.6% to $776,876 from the 2020 first six months revenues of $585,999.

This increase was mainly due to higher oil and natural gas commodity prices.

The net sales volume of oil and condensate for the three months ended March 31, 2021, was approximately 5,574 barrels with an average price of $56.08 per barrel, versus 5,031 barrels with an average price of $47.87 per barrel for the first three months of 2020.

This represents an increase in net sales volume of 543 barrels or 10.8%.

This increase was due to wells drilled and placed into production during the year in 2020 and to lower volumes produced during the first quarter of 2020.

The net sales volume of natural gas for the three months ended March 31, 2021, was approximately 29,659 Mcf with an average price of $2.91 per Mcf, versus 52,453 Mcf with an average price of $2.55 per Mcf for the same period in 2020.

The net sales volume of oil and condensate for the six months ended June 30, 2021, was approximately 10,171 barrels with an average price of $59.32 per barrel, versus 11,499 barrels with an average price of $34.54 per barrel for the first half of 2020.

This represents a decrease in net sales volume of 1,328 barrels or 11.5%.

The net sales volume of natural gas for the six months ended June 30, 2021, was approximately 61,290 Mcf with an average price of $2.83 per Mcf, versus 83,040 Mcf with an average price of $2.27 per Mcf for the same period in 2020.

This represents a decrease in net sales volume of 21,750 Mcf or 26.2%.

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.

Oil and natural gas lease operating expenses decreased by $103,291 or 25.6%, to $300,162 for the three months ended March 31, 2021, from $403,453 for the same period in 2020.

This was lower due mainly to decreases in outside operated lease operating costs as certain non-operated wells were either disposed of during the year in 2020 or offline and waiting on workovers.

Depreciation, depletion and amortization expense increased to $124,405 from $79,935, an increase of $44,470 or 55.6% for the three months ended March 31, 2021, as compared to the same period in 2020.

For the quarter ended June 30, 2021, revenues from oil and gas production increased $166,425 or 78.7% to $377,939 from the 2020 second quarter revenues of $211,514.

This increase was also due to higher oil and natural gas commodity prices.

The net sales volume of oil and condensate for the quarter ended June 30, 2021, was approximately 4,597 barrels with an average price of $63.25 per barrel, versus 6,468 barrels with an average price of $24.18 per barrel for the second quarter of 2020.

This represents a decrease in net sales volume of 1,871 barrels or 28.9% for the quarter in 2020.

The net sales volume of natural gas for the quarter ended June 30, 2021, was approximately 31,631 Mcf with an average price of $2.76 per Mcf, versus 30,587 Mcf with an average price of $1.80 per Mcf for the second quarter of 2020.

This represents an increase in net sales volume of 1,044 Mcf or 3.4% for the quarter in 2021.

Oil and natural gas lease operating expenses decreased by $65,387 or 8.4%, to $713,371 for the six months ended June 30, 2021, from $778,758 for the same period in 2020.

This was due mainly to lower outside operated lease costs due to the sale of certain non-operated Texas wells during the period in 2021.

For the second quarter in 2021, lease operating expenses increased $37,904 or 10.1% from the same quarter in 2020, mainly due to work on existing wells in our operated Texas field to increase production.

The aggregate of supervisory fees and other income was $18,102 for six months ended June 30, 2021, a decrease of $2,854 from $20,956 during the same period in 2020.

During the second quarter 2021, supervisory fees and other income increased $4,149 or 35.7% when compared to the quarter in 2020, due mainly to higher rental income.

Depreciation, depletion and amortization expense increased to $294,361 from $155,625, an increase of $138,736 or 89.1% for the six months ended June 30, 2021, as compared to the same period in 2020.

During the second quarter 2021, depreciation, depletion and amortization expenses also increased $94,266 or 124.5%.

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

This increase in depletion expense was due to increased capitalized well costs for wells drilled during 2020 and to a decrease in expected recoverable reserves which increased the depletion rate.

At March 31, 2021, Royale Energy had a Deferred Drilling Obligation of $2,747,439.

During the first three months of 2021, we disposed of $1,841,061 of drilling obligations upon completing the drilling of two oil wells in Texas, while incurring expenses of $1,576,280, resulting in a gain of $264,780.

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

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.

General and administrative expenses increased by $43,920 or 8.4% to $564,983 for the three months ended March 31, 2021, from $521,063 for the same period in 2020.

This increase was mainly due to absorption of a greater percentage of drilling management costs.

Production and drilling overhead offset general and administrative costs.

During the first quarter of 2020 four wells were completed.

Marketing expense for the three months ended March 31, 2021, increased $4,655, or 13.5%, to $39,049, compared to $34,394 for the same period in 2020.

This increase in depreciation expense was due to a decrease in expected recoverable reserves which increased the depletion rate.

At June 30, 2021, Royale Energy had a Deferred Drilling Obligation of $4,047,439.

During the first six months of 2021, we disposed of $1,841,061 of drilling obligations upon completing the drilling of two oil wells in Texas, while incurring expenses of $1,900,199, resulting in a loss of $59,138.

Although these two wells were originally drilled during the first quarter of 2021, we continued additional work during second quarter 2021 to increase production.

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.

General and administrative expenses increased by $1,325 or 0.1% from $1,075,340 for the six months ended June 30, 2020, to $1,076,665 for the same period in 2021.

For the second quarter 2021, general and administrative expenses decreased $42,595 or 7.7% when compared to the same period in 2020.

Marketing expense for the six months ended June 30, 2021, increased $27,431, or 49.8%, to $82,495, compared to $55,064 for the same period in 2020.

For the second quarter 2021, marketing expenses increased $22,776 or 110.2% when compared to the second quarter in 2020.

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 increased to $218,763 for the three month period in 2021, compared to $86,535 for the same period in 2020, a $132,228 or 152.8% increase.

These increases were primarily due to the timing of the receipt of invoices for audit related expenses during the periods in 2021 and 2020.

During the three months ended March 31, 2020, we recorded a gain of $1,309,851, on investment in joint venture as our 20% share of RMX Resources, LLC’s.

Legal and accounting expense increased to $276,000 for the six-month period in 2021, compared to $174,660 for the same period in 2020, a $101,340 or 58.0% increase.

This increase was primarily due to higher audit related expenses during the period in 2021.

For the second quarter 2021, legal and accounting expenses decreased $30,888 or 35.1%, when compared to the second quarter in 2020, mainly due to lower legal fees.

During the six months ended June 30, 2021, we recorded a gain of $291,249 on the sale of asset on the sale of certain non-operated Texas properties.

These non-operated properties were originally acquired during the merger with Matrix and booked as Held for Sale at the end of 2020.

During the first quarter of 2021, we recorded a gain on settlement of $10,061 due to the payment by the SBA of the remaining balance on our PPP loan obtained in 2020.

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.

As a result of recognizing an impairment for the full value of the investment, the company did not recognize any gain or loss in subsequent periods.

See note Equity Method Investment in Note 1 above.

During the quarter ended March 31, 2021, we recorded a gain on settlement of $10,061 due to the payment by the SBA of the remaining balance on our PPP loan obtained in 2020.

During the three months ended March 31, 2020, we recorded a loss on settlement of $31,500 related to a 2018 seismic sales agreement.

Bad debt expense for the periods ended March 31, 2021 and 2020 were $74 and $186,168, 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.

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 six-month period in 2020, we recorded $14,392 in geological and geophysical expenses.

Bad debt expense for the six months ended June 30, 2021, and 2020 were $187,348 and $186,168, respectively.

Approximately $180,000 of the expenses in 2021 and $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.

Interest expense decreased to $835 for the three months ended March 31, 2021, from $4,030 for the same period in 2020, a $3,195 decrease.

This decrease was mainly due to lower principal balances on notes payable during the three-month period in 2021.

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 $4,591 for the six months ended June 30, 2021, from $7,444 for the same period in 2020, a $2,853 decrease.

This decrease was mainly due to lower principal balances on notes payable during the six-month period in 2021.

CAPITAL RESOURCES AND LIQUIDITY

At March 31, 2021, we had current assets totaling $4,813,096 and current liabilities totaling $9,150,829, a $4,337,733 working capital deficit.

We had $310,617 in cash and $1,999,256 in restricted cash at March 31, 2021, compared to $255,112 in cash and $2,146,571 in restricted cash at December 31, 2020.

At June 30, 2021, we had current assets totaling $4,984,552 and current liabilities totaling $10,105,491, a $5,120,939 working capital deficit.

We had $603,075 in cash and $2,271,556 in restricted cash at June 30, 2021, compared to $255,112 in cash and $2,146,571 in restricted cash at December 31, 2020.

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, 2021, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $526,252, compared to $462,777 at December 31, 2020, a $63,475 increase.

This increase was mainly due to higher receivables from direct working interest owners for lease operating expenses for new wells that began production at the end of 2020.

At March 31, 2021, revenue receivable was $208,534, an increase of $4,385, compared to $204,149 at December 31, 2020, due to higher commodity prices during the quarter in 2021.

At March 31, 2021, our accounts payable and accrued expenses totaled $4,622,556, an increase of $461,447 from the accounts payable at December 31, 2020, of $4,161,109, which was mainly due to drilling costs of two wells during the first quarter in 2021.

At June 30, 2021, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $274,884 compared to $462,777 at December 31, 2020, a $187,893 decrease.

This decrease was mainly due to the increase in the accounts receivable allowance from direct working interest owners.

At June 30, 2021, revenue receivable was $355,990, an increase of $151,841, compared to $204,149 at December 31, 2020, due to higher commodity prices during the quarter in 2021.

At June 30, 2021, our accounts payable and accrued expenses totaled $4,481,815, an increase of $320,706 from the accounts payable at December 31, 2020 of $4,161,109, which was mainly due to drilling costs and lease operating costs during the first six months in 2021.

The Company has had recurring operating and net losses and cash used in operations and the financial statements reflect a working capital deficiency of $5,120,939 and an accumulated deficit of $84,281,704.

5 unchanged sentences

Operating Activities.

Net cash used by operating activities totaled $25,416 and $733,512 for the three months ended March 31, 2021 and 2020, respectively.

This decrease in cash used was mainly due to the difference in accounts payable and accrued expenses during the quarters related mainly to the wells drilled during the periods.

Net cash used in operating activities totaled $882,420 for the six months ended June 30, 2021.

Net cash provided by operating activities was $334,538 for the six months ended June 30, 2020.

This difference in cash was due to accounts payable and accrued expenses and prepaid assets during the periods related mainly to the wells drilled during the periods, as we used more prepaid drilling funds during the period in 2020.

Investing Activities.

Net cash used by investing activities totaled $63,806 and $544,948 for the three months ended March 31, 2021 and 2020, respectively.

During the period in 2021, we received approximately $1.46 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $1.5 million in the drilling and completing of two Texas oil wells.

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 $1.7 million in the drilling and completing of one Southern California oil well and one Texas oil wells.

Net cash provided by investing activities totaled $1,380,582 and net cash used in investing activities totaled $2,767,301 for the six months ended June 30, 2021, and 2020, respectively.

During the six month period in 2021, we received approximately $2.8 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.0 million in the drilling and completing of two Texas oil wells.

During the period in 2021, we also received approximately $672,000 for the sale of non-operated properties in Texas.

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 $4.0 million in the drilling and completing of one Southern California oil well and two Texas oil wells.

Financing Activities.

Net cash used by financing activities totaled $2,588 and $58,010 for the three months ended March 31, 2021 and 2020, respectively.

During the period in 2021, the total used was for financing lease payments while during the period in 2020, approximately $56,000 were principal payments on our notes payable and $2,437 was for financing lease payments.

Net cash used in financing activities totaled $25,214 and net cash provided by financing activities was $147,319 for the six months ended June 30, 2021, and 2020, respectively.

During the period in 2021, the total used was for note and financing lease payments while during the period in 2020, we received $207,800 in SBA-PPP loan and made principal payments of approximately $56,000 on existing notes payable.

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 1. Financial Statements