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Item 1. Financial Statements

2022-08-19 compared with 2022-05-23 · 150 added, 98 removed, 341 unchanged (42% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2022

June 30, 2022

December 31, 2021

14 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2022

June 30, 2022

December 31, 2021

17 unchanged sentences

Mezzanine Equity:

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.

Convertible Preferred Stock, Series B, $ 10 par value, 3.5 % annual dividend, 2,320,259 and

2,280,289 shares issued and outstanding as of June 30, 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.

58,168,793 and 56,239,715 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively.

Additional Paid in Capital

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

March 31, 2022

March 31, 2021

For the 3 Months ended

For the 6 Months ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Oil, NGL and Gas Sales

8 unchanged sentences

Total Costs and Expenses

Gain on Turnkey Drilling

Gain (Loss) on Turnkey Drilling

Loss From Operations

2 unchanged sentences

Gain on Settlement of Accounts Payable

Gain on Sale of Assets

Loss Before Income Tax Expense

Income Tax Provision

Preferred Stock Dividend

Preferred Stock Dividend in Arrears

Net Loss available to common stock

Shares used in computing Basic and Diluted Net Loss per share

Basic and Diluted Loss per share

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

March 31, 2022

March 31, 2021

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

June 30, 2022

June 30, 2021

CASH FLOWS FROM OPERATING ACTIVITIES

1 unchanged sentence

Depreciation, Depletion and Amortization

Gain on Turnkey Drilling Programs

(Gain) Loss on Sale of Assets

(Gain) Loss on Turnkey Drilling Programs

Gain on Settlement of Accounts Payable

10 unchanged sentences

Proceeds from Turnkey Drilling Programs

Net Cash Provided by (Used in) Investing Activities

Proceeds from Sale of Assets, net

Net Cash Provided by Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Principal Payments on Long-Term Debt

Net Cash Used in Financing Activities

Net Cash Used in by Financing Activities

Net Change in Cash and Cash Equivalents

1 unchanged sentence

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

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:

Cash Paid for Interest

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

Shares Issued and

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

Number of Shares

Issued and Outstanding

Paid in Capital

December 31, 2020 Balance

1 unchanged sentence

Preferred Series B 3.5% Dividend

March 31, 2021 Balance

June 30, 2021 Balance

December 31, 2021 Balance

1 unchanged sentence

Preferred Series B 3.5% Dividend

June 30, 2022 Balance

March 31, 2021 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2021 Balance

March 31, 2022 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2022 Balance

See notes to unaudited condensed consolidated financial statements.

4 unchanged sentences

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.

The results of operations for the three and 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.

8 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, 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.

At June 30, 2022, the Company’s consolidated financial statements reflect a working capital deficiency of $ 6,971,253 and a net loss of $ 312,853 for six months ended June 30, 2022.

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

13 unchanged sentences

For the three months

ended March 31,

ended June 30

For the six months

ended June 30

Oil & Condensate Sales

48 unchanged sentences

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, 2022

June 30, 2022

December 31, 2021

14 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, 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.

At June 30, 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 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.

At June 30, 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 ”.

8 unchanged sentences

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.

The Company accrued $ 202,464 and $ 195,530 for dividends related to the Preferred Shares during the second 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.

6 unchanged sentences

This new Current Expected Credit Losses (“CECL”) model applies to (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and financial assets measured at fair value, and (4) beneficial interests in securitized financial assets.

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, 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.

This ASU was effective for Securities and Exchange Commission (“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 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.

43 unchanged sentences

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

During the three months ended March 31, 2022 and 2021, no impairment losses were incurred.

During the six months ended June 30, 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.

17 unchanged sentences

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

At March 31, 2022 and December 31, 2021, Royale Energy had Deferred Drilling Obligations of $ 8,264,570 and $ 7,824,939 , respectively.

At June 30, 2022 and December 31, 2021, Royale Energy had Deferred Drilling Obligations of $ 8,359,011 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.

2 unchanged sentences

NOTE 3 – SERIES B PREFERRED STOCK

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.

The Series B Preferred Stock has never been registered under the Securities Exchange Act of 1934, and no market exists for the shares.

Additionally, the Series B Convertible Preferred shares will automatically convert to common at any time in which the Volume Weighted Average Price (“VWAP”) of the common stock exceeds $3.50 per share for 20 consecutive trading days, the shares are registered with the SEC and the volume of common shares trades exceeds 200,000 shares per day.

The shareholders of the Series B Convertible Preferred may vote the number of shares into which they would be entitled to convert, beginning in 2020.

The Preferred Shares is convertible at the option of the security holder at the rate of ten shares of common stock for one share of Preferred Shares.

The Preferred Shares have never been registered under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) and no market exists for the shares.

Additionally, the Preferred Shares will automatically convert to common at any time in which the Volume Weighted Average Price (“VWAP”) of the common stock exceeds $3.50 per share for 20 consecutive trading days, the shares are registered with the SEC and the volume of common shares trades exceeds 200,000 shares per day.

The shareholders of the Preferred Shares became entitled to vote the number of shares into which they would be entitled to convert, beginning in 2020.

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 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 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.

For 2022 and 2021, the board authorized the payment of each quarterly dividend of Preferred Shares, as Paid-In-Kind shares (“PIK”) to be paid immediately following the end of the quarter.

For the quarter ending June 30, 2022, the Company accrued 20,246 shares with a value of $ 202,464 .

During 2022 and 2021 no cash was used to pay dividends on Preferred Shares.

NOTE 4 – LOSS PER SHARE

Basic and diluted loss per share are calculated as follows:

For the period ending

March 31, 2022

March 31, 2021

Three Months Ended June 30,

Preferred Stock Dividend

Preferred Stock Dividend In Arrears

Net Loss Attributable to Common Shareholders

Net Loss Attributable to

Common Shareholders

Weighted average common shares outstanding

1 unchanged sentence

Weighted average common shares, including Dilutive effect

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

Six 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

Basic and diluted loss per share are calculated as follows:

For the six months ended June 30, 2022 and 2021, Royale Energy had dilutive securities of 26,683,208 and 26,063,735 , respectively.

For the three months ended June 30, 2022 and 2021, Royale Energy had dilutive securities of 26,698,515 and 25,985,121 , 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 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

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at June 30, 2022 and 2021, respectively, to pretax income is as follows:

For the six months ended

June 30, 2022

June 30, 2021

Tax benefit computed at statutory rate of 21 % at

June 30, 2022 and 2021, 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.

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

During the six months ended June 30, 2022, in lieu of cash payments for salaries and board fees, Royale issued 1,929,078 shares of its Common stock valued at approximately $ 136,000 to an executive officer and board members.

For the six months ended June 30, 2021, Royale issued 1,468,642 shares of its Common stock valued at approximately $ 162,221 to an executive officer and board members.

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

FORWARD-LOOKING STATEMENTS

In addition to historical information contained herein, this discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, subject to various risks and uncertainties that could cause our actual results to differ materially from those in the “forward-looking statements”.

While we believe our forward-looking statements are based upon reasonable assumptions, there are factors that are difficult to predict and that are influenced by economic and other conditions beyond our control.

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 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.

In addition to historical information contained herein, certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the SEC, press releases, conferences or otherwise, may be deemed to be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions.

While we believe our forward-looking statements are based upon reasonable assumptions, we can give no assurance that such expectations will prove to have been correct.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature.

Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” elsewhere in this Quarterly Report on Form 10-Q, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and those described from time to time in our future reports filed with the SEC.

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Royale is an independent oil and natural gas producer.

Royale’s principal lines of business are the production and sale of oil and natural gas, acquisition of oil and gas lease interests and proved reserves, drilling of both exploratory and development wells, and sales of fractional working interests in wells to be drilled by Royale.

Since 1993, Royale has primarily acquired and developed producing and non-producing natural gas properties in California.

In December 2018, Royale became the operator of a newly acquired field in Texas.

The most significant factors affecting the results of operations are (i) changes in oil and natural gas prices, production levels and reserves, (ii) turnkey drilling activities, and (iii) the increase in future cost associated with abandonment of wells.

RESULTS OF OPERATIONS

For the six months ended June 30, 2022 and 2021, we had net losses of $312,853 and $1,595,671, respectively.

The difference was primarily due to the completion of one oil well in Texas and participating in the drilling and completion of two oil wells in southern California where we recognized a gain on turnkey drilling of $627,136 and to a gain on settlement of accounts payable during the first half of 2022 of approximately $422,614.

During the three months ended June 30, 2022 and 2021, we had net losses of $260,502 and $1,023,504, respectively.

The difference was due to higher oil and gas sales and to a $281,531 turnkey drilling gain during the second quarter in 2022.

During the first six months of 2022, revenues from oil and gas production increased $409,743 or 52.7%, to $1,186,619 from revenues of $776,876 during the first six months of 2021.

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, 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.

The net sales volume of oil and condensate for the six months ended June 30, 2022, was approximately 8,186 barrels with an average price of $99.58 per barrel, versus 10,171 barrels with an average price of $59.32 per barrel for the six months of 2021.

This represents a decrease in net sales volume of 1,985 barrels or 19.5%, which was due to lower production volumes due to natural declines in our wells and to the 2021 sale of certain non-operated wells during the period in 2021.

The net sales volume of natural gas for the six months ended June 30, 2022, was approximately 65,308 Mcf with an average price of $5.61 per Mcf, versus 61,290 Mcf with an average price of $2.83 per Mcf for the same period in 2021.

This represents an increase in net sales volume of 4,018 Mcf or 6.6%.

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

For the quarter ended June 30, 2022, revenues from oil and gas production increased $301,466 or 79.8% to $679,405 from the 2021 second quarter revenues of $377,939.

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, 2022, was approximately 4,297 barrels with an average price of $106.05 per barrel, versus 4,597 barrels with an average price of $63.25 per barrel for the second quarter of 2021.

This represents a decrease in net sales volume of 300 barrels or 6.5% for the quarter in 2022.

The net sales volume of natural gas for the quarter ended June 30, 2022, was approximately 31,781 Mcf with an average price of $6.92 per Mcf, versus 31,631 Mcf with an average price of $2.76 per Mcf for the second quarter of 2021.

This represents an increase in net sales volume of 150 Mcf or 0.5% for the quarter in 2022.

Oil and natural gas lease operating expenses increased by $99,607 or 14.0%, to $812,978 for the six months ended June 30, 2022, from $713,371 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.

For the second quarter in 2022, lease operating expenses decreased $14,699 or 3.6% from the same quarter in 2021 due to lower outside non-operated costs and well servicing during the quarter in 2022 when compared to the same quarter in 2021.

The aggregate of supervisory fees and other income was $17,041 for six months ended June 30, 2022, an decrease of $1,061 from $18,102 during the same period in 2021.

During the second quarter 2022, supervisory fees and other income decreased $8,026 or 50.9% when compared to the quarter in 2021.

These decreases were mainly due to lower rental income and compressor fee income during the periods in 2022.

Depreciation, depletion and amortization expense decreased to $244,208 from $294,361, a decrease of $50,153 or 17.0% for the six months ended June 30, 2022, as compared to the same period in 2021.

During the second quarter 2022, depreciation, depletion and amortization expenses also decreased $50,424 or 29.7%.

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 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.

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

At June 30, 2022, Royale Energy had a Deferred Drilling Obligation of $8,359,011.

During the first six months of 2022, we removed $3,185,928 of drilling obligations as we completed one oil well in Texas and participated in completing the drilling of two oil wells in southern California, while incurring expenses of $2,558,792, resulting in a gain of $627,136.

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.

General and administrative expenses decreased by $52,848 or 4.9% from $1,076,665 for the six months ended June 30, 2021 to $1,023,817 for the same period in 2022.

For the second quarter 2022, general and administrative expenses decreased $25,332 or 5.0% when compared to the same period in 2021.

These decreases were mainly due to lower employee related expenses during the periods in 2022.

For the first six months of 2022, marketing expenses increased $51,824 or 62.8% to $134,319, compared to $82,495 for the first six months of 2021.

For the second quarter 2022, marketing expenses increased $34,927 or 80.4% when compared to the second quarter in 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 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.

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

Legal and accounting expense increased to $346,410 for the six-month period in 2022, compared to $276,000 for the same period in 2021, a $70,410 or 25.5% increase.

For the second quarter 2021, legal and accounting expenses increased $100,902 or 176.1%, when compared to the second quarter in 2021.

These increases were primarily due to higher fees related to conversion of our accounting software during the period in 2022.

During the six months ended June 30, 2022, we recorded a gain of $422,614 on settlement of accounts payable for a reduced amount.

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 period in 2021, we also recorded a gain on settlement of $12,071 mainly due to the payment by the SBA of the remaining balance on our PPP loan obtained in 2020.

Bad debt expense for the six months ended June 30, 2022, and 2021 were $0 and $187,348, respectively.

Approximately $180,000 of the expenses in 2021 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 increased to $2,277 for the three months ended March 31, 2022, from $835 for the same period in 2021, a $1,442 increase.

Interest expense decreased to $4,531 for the six months ended June 30, 2022, from $4,591 for the same period in 2021, a $60 decrease.

CAPITAL RESOURCES AND LIQUIDITY

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.

At June 30, 2022, we had current assets totaling $8,401,185 and current liabilities totaling $15,372,438, a $6,971,253 working capital deficit.

We had $563,971 in cash and $3,604,893 in restricted cash at June 30, 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 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.

At June 30, 2022, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $510,051 compared to $413,133 at December 31, 2021, a $96,918 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 period in 2022.

At June 30, 2022, revenue receivable was $592,700, a increase of $227,550, compared to $365,150 at December 31, 2021, due to higher commodity prices during the second quarter in 2022.

At June 30, 2022, our accounts payable and accrued expenses totaled $5,379,273 an increase of $218,789 from the accounts payable at December 31, 2021 of $5,160,484, which was mainly due to higher drilling costs and lease operating costs during the first half of 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 $6,971,253 and an accumulated deficit of $87,398,869.

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

Although, in recent months oil and gas revenues have increased due to higher commodity prices, drilling and lease operating expenses have also increased due to higher transportation costs, manpower costs and manpower shortages.

The Company has commitments to continue to drill and workover wells in the Texas Jameson field and is participating in the redrill and completing of a Southern California well.

Operating Activities.

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

Net cash used in operating activities totaled $1,078,217 and $882,420 for the six months ended June 30, 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 $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.

Net cash provided by investing activities totaled $1,100,610 and $1,380,852 for the six months ended June 30, 2022, and 2021, respectively.

During the six-month period in 2022, we received approximately $3.7 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.6 million as we drilled and completed one Texas well and participated in the drilling and completing of two southern California oil wells.

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.

Financing Activities.

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.

Net cash used in financing activities totaled $76,333 and $25,214 for the six months ended June 30, 2022, and 2021, respectively.

During the periods in 2022 and 2021, the totals were used for principal payments on our notes payable and financing lease payments.

Critical Accounting Estimates

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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