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Item 1. Financial Statements

2022-05-23 compared with 2021-11-15 · 112 added, 182 removed, 327 unchanged (47% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2021

March 31, 2022

December 31, 2021

4 unchanged sentences

Revenue Receivables

Assets Held for Sale

Prepaid Expenses

8 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2021

March 31, 2022

December 31, 2021

5 unchanged sentences

Due to RMX Resources, LLC

Accrued Liabilities

Asset Retirement Obligation - Current

9 unchanged sentences

Mezzanine Equity:

Convertible Preferred Stock, Series B, $ 10 par value, 3,000,000 Shares Authorized

Convertible Preferred Stock, Series B, $ 10 par value, 3.5 %

annual dividend, 2,300,406 and 2,280,289 shares issued and outstanding as of

March 31, 2022 and December 31, 2021 respectively.

Stockholders' Equity (Deficit):

Common Stock, .001 Par Value, 280,000,000 Shares Authorized

56,239,715 shares issued and outstanding as of March 31, 2022 and

December 31, 2021 respectively.

Additional Paid in Capital

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the 3 months ended

For the 9 months ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Oil, NGL and Gas Sales

5 unchanged sentences

Bad Debt Expense

Geological and Geophysical Expense

Legal and Accounting

1 unchanged sentence

Total Costs and Expenses

Gain (Loss) on Turnkey Drilling

Gain (Loss) From Operations

Gain on Turnkey Drilling

Loss From Operations

Other Income (Expense):

1 unchanged sentence

Gain on Settlement of Accounts Payable

Gain (Loss) on Sale of Assets

Gain (Loss) on Investment in Joint Venture

Loss Before Income Tax Expense

1 unchanged sentence

Preferred Stock Dividend

Preferred Stock Dividend in Arrears

Net Loss available to common stock

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

September 30, 2021

September 30, 2020

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

March 31, 2022

March 31, 2021

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:

Depreciation, Depletion and Amortization

(Gain) Loss on Sale of Assets

(Gain) Loss on Turnkey Drilling Programs

(Gain) Loss on Settlement of Accounts Payable

(Gain) Loss on Investment in Joint Venture

Gain on Turnkey Drilling Programs

Gain on Settlement of Accounts Payable

Bad Debt Expense

Stock Based Compensation

Geological & Geophysical Costs

Gain on Other

Right of use asset depreciation

Changes in assets and liabilities:

Other & Revenue Receivables

1 unchanged sentence

Accounts Payable and Accrued Expenses

Due to Affiliate

Net Cash Used in Operating Activities

2 unchanged sentences

Proceeds from Turnkey Drilling Programs

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 Provided by (Used in) Financing Activities

Net Decrease in Cash and Cash Equivalents

Net Cash Used in Financing Activities

Net Change in Cash and Cash Equivalents

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

Decrease in Capital Accrued Balance

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:

Increase (Decrease) in Capital Accrued Balance

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Preferred Stock Series B

Shares Issued

and Outstanding

Shares Issued

and Outstanding

Comprehensive Deficit

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

Shares Issued and

December 31, 2020 Balance

1 unchanged sentence

Preferred Series B 3.5% Dividend

Reclassify Preferred B to Mezzanine

September 30, 2020 Balance

March 31, 2021 Balance

December 31, 2021 Balance

1 unchanged sentence

Preferred Series B 3.5% Dividend

September 30, 2021 Balance

June 30, 2020 Balance

Preferred Series B 3.5% Dividend

Stock Issued in lieu of Compensation

September 30, 2020 Balance

June 30, 2021 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2021 Balance

March 31, 2022 Balance

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 – BASIS OF PRESENTATION:

ACCOUNTING STANDARDS

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.

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.

Consolidation

The accompanying financial statements include the accounts of Royale Energy, Inc.

(sometimes called the “Company” “we,” “our,” “us,” “Royale Energy,” or “Royale”), Royale Energy Funds, Inc.

(“REF”), and Matrix Oil Management Corporation and its subsidiaries.

All entities comprising the financial statements of Royale Energy have fiscal years ending December 31.

All material intercompany accounts and transactions have been eliminated in the financial statements.

Liquidity and Going Concern

1 unchanged sentence

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 September 30, 2021, the Company’s consolidated financial statements reflect a working capital deficiency of $ 6,038,231 and a net loss of $ 982,328 and $ 2,577,999 for three months and nine months ended September 30, 2021.

At March 31, 2022, the Company’s consolidated financial statements reflect a working capital deficiency of $ 6,935,450 and a net loss of $ 52,351 for three months ended March 31, 2022.

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

4 unchanged sentences

There can be no assurance that such a plan will be successful.

The Company and its joint venture partner, RMX, entered into a purchase and sales agreement as well as a second amendment to that certain purchase and sales agreement which closed in September 2021.

During the period in 2021, the Company carried these assets on the books for $ 1.0 million booked as Held for Sale with an current ARO amount of approximately $ 721,000 for the existing wells and facilities located on the properties.

The sale required RMX and the Company to plug and abandon one well on the property and remove and restore the surface land.

The sale price of $ 1.0 million to the Company resulted in recording a loss on the sale of these properties of approximately $ 254,000 .

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 2020.

Consolidation

The accompanying financial statements include the accounts of Royale Energy, Inc.

(sometimes called the “Company” “we,” “our,” “us,” “Royale Energy,” or “Royale”), Royale Energy Funds, Inc.

(“REF”), and Matrix Oil Management Corporation and its subsidiaries.

All entities comprising the financial statements of Royale Energy have fiscal years ending December 31.

All material intercompany accounts and transactions have been eliminated in the financial statements.

Use of Estimates

6 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 September 30

For the nine months ended September 30

For the three months

ended March 31,

Oil & Condensate Sales

35 unchanged sentences

These Turnkey Agreements are managed by the Company for the participants of the well.

The collections of pre-drilling AFE amounts are segregated by the Company and the gains and losses on the Turnkey Agreements are recorded in income or expense at the time of the casing point election in accordance with ASC 932-323-25 and 932-360.

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.

7 unchanged sentences

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.

Royale classifies these funds prior to commencement of drilling as restricted cash based on guidance codified as under 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.

September 30, 2021

March 31, 2022

December 31, 2021

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 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 September 30, 2021.

During the period ended September 30, 2020, the Company recorded a loss of $301,015 reflecting our share of losses directly attributable to this equity method investment.

For the period ending September 30, 2021, no earnings 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 September 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.

At March 31, 2022 and December 31, 2021, the Company maintained an allowance for uncollectable accounts of $ 2,761,398 , 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 September 30, 2021 and December 31, 2020, Royale Energy does not have any financial assets measured and recognized at fair value on a recurring basis.

At March 31, 2022 and December 31, 2021, 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 ”.

6 unchanged sentences

Dividends on Series B Convertible Preferred Stock

The Series B Convertible Preferred Stock, (“Preferred”), has an obligation to pay a 3.5 % cumulative dividend, in kind or cash, on a quarterly basis.

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 $ 199,413 and $ 192,583 for dividends related to the Preferred shares during the third 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.

For further information regarding the Preferred Stock see Note 3, below.

Risks and Uncertainties

In December 2019, a novel strain of coronavirus (which triggers a respiratory disease called COVID-19) was reported in Wuhan, China.

The World health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” The COVID-19 outbreak has caused a major reduction in the consumption of hydrocarbon-based transportation fuels as airlines have grounded flights worldwide and countries around the world have asked residents to suspend automobile travel.

In addition to a substantial loss of demand for crude oil, in March, Saudi Arabia entered into a price war with Russia and added additional supplies of crude oil to an already over supplied market.

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

At September 30, 2021 the price of West Texas Intermediate crude oil had reached $75.03 per barrel.

The Series B Convertible Preferred Stock, (“Preferred Shares”) has an obligation to pay a 3.5 % cumulative dividend, in kind or cash, on a quarterly basis.

The Board of Directors authorized the issuance of Preferred shares, for the settlement of dividends accumulated through December 31, 2022.

The Company accrued $ 198,516 and $ 191,718 for dividends related to the Preferred shares during the first quarters of 2022 and 2021, respectively.

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

For further information regarding the Preferred Shares see Note 3, below.

ACCOUNTING STANDARDS

5 unchanged sentences

This ASU was effective for SEC filers beginning after December 15, 2019;

however, on November 15, 2019, the FASB issued ASU 2019-10, which delayed the effective date for “smaller reporting companies.” Therefore, ASU 2016-13 is effective for "smaller reporting companies" (as defined by the Securities and Exchange Commission) such as Royale, for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under the modified retrospective method.

however, on November 15, 2019, the FASB issued ASU 2019-10, which delayed the effective date for “smaller reporting companies.” Therefore, ASU 2016-13 is effective for "smaller reporting companies" (as defined by the Securities and Exchange Commission, or the “SEC”) such as Royale, for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under the modified retrospective method.

Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those years.

2 unchanged sentences

Oil and gas properties, equipment and fixtures consist of the following:

September 30,

Producing properties, including drilling costs

39 unchanged sentences

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

During the nine months ended September 30, 2021 and 2020, no impairment losses were incurred.

During the three months ended March 31, 2022 and 2021, 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.

The valuation allowances are reviewed at least annually.

Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resultant gain or loss is recorded to Royale Energy’s Statement of Operations.

Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resulting gain or loss is recorded to Royale Energy’s Statement of Operations.

Upon the sale of an entire interest in an unproved property where the property has been assessed for impairment individually, a gain or loss is recognized in Royale Energy’s Statement of Operations.

14 unchanged sentences

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

At September 30, 2021 and December 31, 2020, Royale Energy had Deferred Drilling Obligations of $ 4,922,439 and $ 3,127,500 , respectively.

At March 31, 2022 and December 31, 2021, Royale Energy had Deferred Drilling Obligations of $ 8,264,570 and $ 7,824,939 , 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 nine months ended September 30, 2021, we recorded a gain of $ 36,954 on the sale of asset on the sale of certain non-operated California and 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

Pursuant to the terms of the Merger all Class A limited partnership interests of Matrix Investments, LP (“Matrix Investments”) were exchanged for Royale Common stock using conversion ratios according to the relative value of the Class A limited partnership interests, and $ 20,124,000 of Matrix Investments preferred limited partnership interests were converted into 2,012,400 shares of Series B Convertible Preferred Stock of Royale.

The Board of Directors of Royale Energy, prior to the merger, authorized 3,000,000 shares of Series B Convertible Preferred, which carries a liquidation preference and a 3.5 % annual dividend, payable quarterly in cash or Paid-In-Kind (“PIK”) shares.

The Series B Convertible Preferred Stock is convertible at the option of the security holder at the rate of ten shares of common stock for one share of Series B Convertible Preferred Stock.

4 unchanged sentences

For 2022 and 2021, 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 September 30, 2021, the Company accrued 19,942 shares with a value of $ 199,413 .

For the quarter ending March 31, 2022, the Company accrued 19,852 shares with a value of $ 198,516 .

During 2022 and 2021 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:

Three Months Ended September 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

Nine Months Ended September 30,

For the period ending

March 31, 2022

March 31, 2021

Preferred Stock Dividend

Preferred Stock Dividend In Arrears

Net Loss Attributable to Common Shareholders

2 unchanged sentences

Weighted average common shares, including Dilutive effect

For the nine months ended September 30, 2021 and 2020, Royale Energy had dilutive securities of 26,212,211 and 25,160,750 , respectively.

For the three months ended September 30, 2021 and 2020, Royale Energy had dilutive securities of 26,071,245 and 25,166,967 , respectively.

For the three months ended March 31, 2022 and 2021, Royale Energy had dilutive securities of 26,468,423 and 26,119,183 , respectively.

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

5 unchanged sentences

As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2022.

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

For the nine months ended

September 30, 2021

September 30, 2020

Tax provision (benefit) computed at statutory rate of 21 % at September 30, 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 March 31, 2022 and 2021, respectively, to pretax income is as follows:

For the quarter ended

March 31, 2022

March 31, 2021

Tax benefit computed at statutory rate of 21 % at March 31, 2022 and 2021, respectively

Increase (decrease) in taxes resulting from:

4 unchanged sentences

NOTE 6 – ISSUANCE OF COMMON STOCK

During the nine months ended September 30, 2021, in lieu of cash payments for salaries and board fees, Royale issued 1,634,227 shares of its Common stock valued at approximately $ 176,709 to an executive officer and board members, compared to the issuance of 2,273,245 shares issued with an approximate value of $ 288,876 in the same period of 2020.

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.

There were no Common shares issued during the same period of 2022.

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

3 unchanged sentences

Investors are directed to consider such risks and other uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission.

RESULTS OF OPERATIONS

In late 2019 and continuing into 2021, 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 nine months ended September 30, 2021 and 2020, we had net losses of $2,577,999 and $540,251, respectively.

The difference was primarily due to a gain on turnkey drilling of approximately $1 million during nine months in 2020 compared to a loss on turnkey drilling of approximately $65,000 during the period in 2021.

During the nine months ended September 30, 2020, we also recognized a gain of $532,510 relating to our equity method investment in RMX.

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 September 30, 2021 and 2020, we had net losses of $982,328 and $612,229, respectively, mainly due to a loss on sale of assets recognized during the third quarter in 2021 as a result of the completion of the sale of certain properties in California.

During the first nine months of 2021, revenues from oil and gas production increased $64,501 or 5.7% to $1,202,346 from the 2020 first nine months revenues of $1,137,845.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2022, AS COMPARED TO THE QUARTER ENDED MARCH 31, 2021

For the three months ended March 31, 2022 and 2021, we had net losses of $52,351 and $572,167, respectively.

The difference was primarily due to a gain on settlement of accounts payable during the first quarter in 2022 of approximately $409,000.

During the quarter we also participated in the drilling of two oil wells in southern California and recognized a gain on turnkey drilling of $345,605 while during the same period in 2021 we drilled two oil wells in Texas and recognized a gain of $264,780.

During the first three months of 2022, revenues from oil and gas production increased $108,277 or 27.1% to $507,214 from the 2021 first three months revenues of $398,937.

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

The net sales volume of oil and condensate for the nine months ended September 30, 2021, was approximately 14,734 barrels with an average price of $62.02 per barrel, versus 23,432 barrels with an average price of $37.34 per barrel for the first nine months of 2020.

This represents a decrease in net sales volume of 8,698 barrels or 37.1%, which was due to the sales of non-operated oil and gas properties in Texas and California.

The net sales volume of natural gas for the nine months ended September 30, 2021, was approximately 88,287 Mcf with an average price of $3.26 per Mcf, versus 121,097 Mcf with an average price of $2.17 per Mcf for the same period in 2020.

This represents a decrease in net sales volume of 32,810 Mcf or 27.1%.

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 September 30, 2021, revenues from oil and gas production decreased $126,376 or 22.9% to $425,470 from the 2020 third quarter revenues of $551,846.

This decrease was due to lower oil and natural gas production volumes.

The net sales volume of oil and condensate for the quarter ended September 30, 2021, was approximately 4,564 barrels with an average price of $68.05 per barrel, versus 11,933 barrels with an average price of $40.03 per barrel for the third quarter of 2020.

This represents a decrease in net sales volume of 7,369 barrels or 61.8% for the quarter in 2021.

The net sales volume of natural gas for the quarter ended September 30, 2021, was approximately 26,996 Mcf with an average price of $4.24 per Mcf, versus 38,057 Mcf with an average price of $1.94 per Mcf for the third quarter of 2020.

This represents a decrease in net sales volume of 11,061 Mcf or 29.1% for the quarter in 2021.

Oil and natural gas lease operating expenses increased by $9,563 or 0.8%, to $1,172,991 for the nine months ended September 30, 2021, from $1,163,428 for the same period in 2020.

For the third quarter in 2021, lease operating expenses increased $74,950 or 19.5% from the same quarter in 2020.

These increases were mainly due to work on existing wells in our operated Texas field to increase production.

The aggregate of supervisory fees and other income was $25,221 for nine months ended September 30, 2021, a decrease of $6,044 from $31,265 during the same period in 2020.

During the third quarter 2021, supervisory fees and other income decreased $3,190 when compared to the quarter in 2020.

These decreases were primarily due to lower pipeline and compressor fee income due to lower production volumes during the period in 2021.

Depreciation, depletion and amortization expense increased to $397,629 from $249,492, an increase of $148,137 or 59.4% for the nine months ended September 30, 2021, as compared to the same period in 2020.

During the third quarter 2021, depreciation, depletion and amortization expenses also increased $9,401 or 10.0%.

The net sales volume of oil and condensate for the three months ended March 31, 2022, was approximately 3,889 barrels with an average price of $92.44 per barrel, versus 5,574 barrels with an average price of $56.08 per barrel for the first three months of 2021.

This represents a decrease in net sales volume of 1,685 barrels or 30.2%, which was due to lower production volumes due to natural declines in our wells.

The net sales volume of natural gas for the three months ended March 31, 2022, was approximately 33,527 Mcf with an average price of $4.37 per Mcf, versus 29,659 Mcf with an average price of $2.91 per Mcf for the same period in 2021.

This represents an increase in net sales volume of 3,868 Mcf or 13.0%.

The increase in natural gas production volume was due to certain non-operated wells that had been offline which were brought back online at the end of 2021.

Oil and natural gas lease operating expenses increased by $114,306 or 38.1%, to $414,468 for the three months ended March 31, 2022, from $300,162 for the same period in 2021.

These increases were mainly due to higher trucking and water disposal costs due to increases in manpower and fuel costs from outside vendors, and higher plugging costs of non-operated wells.

The aggregate of supervisory fees and other income was $9,291 for three months ended March 31, 2022, an increase of $6,965 from $2,326 during the same period in 2021.

This increase was due to higher rental income and compressor fee income during the quarter in 2022.

Depreciation, depletion and amortization expense increased to $124,676 from $124,405, an increase of $271 or 0.2% for the three months ended March 31, 2022, as compared to the same period in 2021.

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

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

At September 30, 2021, Royale Energy had a Deferred Drilling Obligation of $4,922,439.

During the first nine 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 $1,906,204, resulting in a loss of $65,143.

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 September 30, 2020, Royale Energy had a Deferred Drilling Obligation of $3,870,774.

During the first nine months of 2020, we disposed of $4,386,901 of drilling obligations upon completing the drilling of three oil wells, one in California and two wells in Texas, while incurring expenses of $3,358,206, resulting in a gain of $1,028,695.

General and administrative expenses decreased by $18,702 or 1.2% from $1,580,637 for the nine months ended September 30, 2020, to $1,561,935 for the same period in 2021.

For the third quarter 2021, general and administrative expenses decreased $20,027 or 4.0% when compared to the same period in 2020.

Marketing expense for the nine months ended September 30, 2021, increased $37,317, or 43.1%, to $123,818, compared to $86,501 for the same period in 2020.

For the third quarter 2021, marketing expenses increased $9,886 or 31.5% when compared to the third quarter in 2020.

At March 31, 2022, Royale Energy had a Deferred Drilling Obligation of $8,264,570.

During the first three months of 2022, we removed $2,055,369 of drilling obligations as we participated in the completing the drilling of two oil wells in southern California, while incurring expenses of $1,709,764, resulting in a gain of $345,605.

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

During the first three months of 2021, we removed $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.

General and administrative expenses decreased by $27,516 or 4.9% from $564,983 for the three months ended March 31, 2021 to $537,467 for the same period in 2022.

The decrease was due to higher operations and drilling overhead offsets along with lower employee recruitment fees during the quarter in 2022.

For the first 3 months of 2022, marketing expenses increased $16,897 or 43.3% to $55,946, compared to $39,049 when compared to the first three months of 2021.

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 $338,870 for the nine-month period in 2021, compared to $238,124 for the same period in 2020, a $100,746 or 42.3% increase.

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

For the third quarter 2021, legal and accounting expenses decreased $594 or 0.9%, when compared to the third quarter in 2020.

During the three months ended September 30, 2021, we recorded a loss of $254,295 on sale of asset upon the sale of certain non-operated California properties which was completed during the third quarter of 2021.

We also recorded a gain of $291,249 on the sale of asset upon the sale of certain non-operated Texas properties which was recognized during the second quarter of 2021.

In both instances, these non-operated properties were originally acquired during the 2018 merger with Matrix and booked as Held for Sale at the end of 2020, which resulted in a net gain on sale of assets of $36,954 for the nine months ended September 30, 2021.

Legal and accounting expense decreased to $188,271for the three-month period in 2022, compared to $218,763 for the same period in 2021, a $30,492 or 13.9% decrease.

This decrease was primarily due to lower audit related expenses during the period in 2022.

During the three months ended March 31, 2022, we recorded a gain of $408,644 on settlement of accounts payable for a reduced amount.

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 nine months ended September 30, 2020, we recorded a gain of $532,510, 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 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 nine-month period in 2020, we recorded $14,392 in geological and geophysical expenses, related to costs in our Texas Jameson field.

Bad debt expense for the nine months ended September 30, 2021, and 2020 were $187,348 and $368,417, respectively.

Approximately $180,000 of the expenses in 2021 and $154,000 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.

Bad debt expense for the three months ended March 31, 2022, and 2021 were $0 and $74, respectively.

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 $203,000 was related to revenue receivable from an industry partner whose collectability was in doubt.

Interest expense decreased to $6,857 for the nine months ended September 30, 2021, from $10,306 for the same period in 2020, a $3,449 decrease.

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

Interest expense increased to $2,277 for the three months ended March 31, 2022, from $835 for the same period in 2021, a $1,442 increase.

CAPITAL RESOURCES AND LIQUIDITY

At September 30, 2021, we had current assets totaling $4,971,915 and current liabilities totaling $11,010,146, a $6,038,231 working capital deficit.

We had $472,925 in cash and $1,694,521 in restricted cash at September 30, 2021, compared to $255,112 in cash and $2,146,571 in restricted cash at December 31, 2020.

At March 31, 2022, we had current assets totaling $8,680,982 and current liabilities totaling $15,631,432, a $6,950,450 working capital deficit.

We had $1,144,678 in cash and $3,622,572 in restricted cash at March 31, 2022, compared to $220,304 in cash and $4,002,500 in restricted cash at December 31, 2021.

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 September 30, 2021, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $318,913 compared to $462,777 at December 31, 2020, a $143,864 decrease.

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

At September 30, 2021, revenue receivable was $257,067, an increase of $52,918, compared to $204,149 at December 31, 2020, due to higher commodity prices during the quarter in 2021.

At September 30, 2021, our accounts payable and accrued expenses totaled $4,626,077, an increase of $464,968 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 nine months in 2021.

At March 31, 2022, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $483,894 compared to $413,133 at December 31, 2021, a $70,761 increase.

This increase was mainly due to accounts receivables from direct working interest owners for lease operating expenses for two wells that were brought online during the first quarter 2022.

At March 31, 2022, revenue receivable was $344,742, a decrease of $20,408, compared to $365,150 at December 31, 2021, due the netting of revenue receivables due from an industry partner for drilling and operating costs during the period in 2022.

At March 31, 2022, our accounts payable and accrued expenses totaled $5,718,759 an increase of $558,275 from the accounts payable at December 31, 2021 of $5,160,484, which was mainly due to drilling costs and lease operating costs during the first quarter in 2022.

The Company has had recurring operating and net losses and cash used in operations and the financial statements reflect a working capital deficiency of $6,935,450 and an accumulated deficit of $86,935,903.

5 unchanged sentences

Operating Activities.

Net cash used by operating activities totaled $2,366,587 and $645,657 for the nine months ended September 30, 2021, respectively.

This difference in cash used was mainly due to drilling prepayments made during the period in 2021 versus the use of previously made drilling prepayments during the 2020 period.

Net cash used in operating activities totaled $337,470 and $25,416 for the three months ended March 31, 2022 and 2021, respectively.

This difference in cash used was mainly due to higher accounts payable during the period in 2022 for drilling and lease operating expenses in our fields in Texas and southern California.

Investing Activities.

Net cash provided by investing activities totaled $2,160,234 and net cash used in investing activities totaled $992,429 for the nine months ended September 30, 2021, and 2020, respectively.

During the nine month period in 2021, we received approximately $3.6 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.5 million in the drilling and completing of two Texas oil wells.

During the period in 2021, we also received approximately $1 million for the sale of non-operated properties in Texas and California.

During the period in 2020, we received approximately $3 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $4 million in the drilling and completing of one Southern California oil well and two Texas oil wells.

Net cash provided by investing activities totaled $927,761 and net cash used in investing activities totaled $63,806 for the three months ended March 31, 2022, and 2021, respectively.

During the three-month period in 2022, we received approximately $2.5 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $1.6 million as we participated in the drilling and completing of two southern California oil wells.

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.

Financing Activities.

Net cash used in financing activities totaled $27,884 and net cash provided by financing activities was $144,806 for the nine months ended September 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 $63,000 on existing notes payable.

Net cash used in financing activities totaled $45,845 and $2,588 for the three months ended March 31, 2022, and 2021, respectively.

During the period in 2022, the total was used for principal payments on our notes payable while during the period in 2021, the total was used for financing lease payments.

Critical Accounting Estimates

Our critical accounting policies are further disclosed in Note 1 to the consolidated financial statements included in our 2021 Annual Report on Form 10-K.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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