What changed in this filing

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Item 1. Financial Statements

2022-11-17 compared with 2022-08-19 · 131 added, 116 removed, 375 unchanged (40% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2022

September 30, 2022

December 31, 2021

11 unchanged sentences

Equipment and Fixtures, net

Furniture, Fixtures & Equipment, net

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2022

September 30, 2022

December 31, 2021

17 unchanged sentences

Mezzanine Equity:

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.

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

Stockholders' Equity (Deficit):

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

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

9 unchanged sentences

For the 9 Months ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Oil, NGL and Gas Sales

13 unchanged sentences

Gain on Settlement of Accounts Payable

Gain on Sale of Assets

Gain (Loss) on Sale of Assets

Loss Before Income Tax Expense

Income Tax Provision

Preferred Stock Dividend

Net Loss available to common stock

Shares used in computing Basic Net Loss per share

Basic and Diluted (Loss) Per Share

Shares used in computing Diluted Net Loss per share

Diluted Net Income (Loss) per Share

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

June 30, 2022

June 30, 2021

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

September 30, 2022

September 30, 2021

CASH FLOWS FROM OPERATING ACTIVITIES

3 unchanged sentences

(Gain) Loss on Turnkey Drilling Programs

Gain on Settlement of Accounts Payable

(Gain) Loss on Settlement of Accounts Payable

Bad Debt Expense

5 unchanged sentences

Accounts Payable and Accrued Expenses

Royalties Payable

Net Cash Used in Operating Activities

6 unchanged sentences

Principal Payments on Long-Term Debt

Net Cash Used in by Financing Activities

Net Change in Cash and Cash Equivalents

Net Cash Used in Financing Activities

Net Increase (Decrease) in Cash and Cash Equivalents

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

8 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

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

Number of Shares

Issued and Outstanding

Paid in Capital

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

Common Shares

Common Amount

Additional Paid In Capital

Accumulated Deficit

December 31, 2020 Balance

1 unchanged sentence

Preferred Series B 3.5% Dividend

June 30, 2021 Balance

September 30, 2021 Balance

Common Shares

Common Amount

Additional Paid In Capital

Accumulated Deficit

December 31, 2021 Balance

1 unchanged sentence

Preferred Series B 3.5% Dividend

September 30, 2022 Balance

Common Shares

Common Amount

Additional Paid In Capital

Accumulated Deficit

June 30, 2021 Balance

March 31, 2021 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2021 Balance

Common Shares

Common Amount

Additional Paid In Capital

Accumulated Deficit

June 30, 2022 Balance

March 31, 2022 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2022 Balance

September 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 and six-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 nine-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 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.

At September 30, 2022, the Company’s consolidated financial statements reflect a working capital deficiency of $ 7,094,594 and a net loss of $ 739,184 for the nine months ended September 30, 2022.

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

1 unchanged sentence

Management’s plans to alleviate the going concern by cost control measures that include the reduction of overhead costs and the sale of non-strategic assets.

There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow.

There is no assurance that additional financing will be available when needed or that management will be able to obtain any financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow.

If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, and reduce overhead until sufficient additional capital is raised to support further operations.

8 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 June 30

For the six months

ended June 30

For the three months ended September 30

For the nine months ended September 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.

June 30, 2022

September 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 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.

At September 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 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.

At September 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 ”.

6 unchanged sentences

Dividends on Series B Convertible Preferred Stock

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 $ 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.

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

The Series B Convertible Preferred Stock, (“Preferred Stock”) 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 the Preferred Stock, for the settlement of dividends accumulated through December 31, 2022.

The Company accrued $ 206,485 and $ 199,413 for dividends related to the Preferred Stock during the third 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 Stock.

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

ACCOUNTING STANDARDS

10 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 six months ended June 30, 2022 and 2021, no impairment losses were incurred.

During the nine months ended September 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 June 30, 2022 and December 31, 2021, Royale Energy had Deferred Drilling Obligations of $ 8,359,011 and $ 7,824,939 , respectively.

At September 30, 2022 and December 31, 2021, Royale Energy had Deferred Drilling Obligations of $ 10,084,011 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 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.

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

The Preferred Stock 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 Stock 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 holders of the Preferred Stock became entitled to vote the number of shares of the Company’s common stock into which the shares of Preferred Stock 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 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.

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

For the quarter ending September 30, 2022, the Company accrued 20,650 shares with a value of $ 206,485 .

During 2022 and 2021 no cash was used to pay dividends shares of the on Preferred Stock.

NOTE 4 – LOSS PER SHARE

Three Months Ended June 30,

Basic and diluted loss per share are calculated as follows:

Three Months Ended September 30,

Preferred Stock Dividend

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

Six Months Ended June 30,

Nine Months Ended September 30,

Preferred Stock Dividend

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

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.

For the nine months ended September 30, 2022 and 2021, Royale Energy had dilutive securities of 26,867,129 and 26,212,211 , respectively.

For the three months ended September 30, 2022 and 2021, Royale Energy had dilutive securities of 26,827,162 and 26,071,245 , 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 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

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

For the nine months ended

September 30, 2022

September 30, 2021

Tax benefit computed at statutory rate of 21 % at September 30, 2022 and 2021, respectively

Increase (decrease) in taxes resulting from:

4 unchanged sentences

NOTE 6 – ISSUANCE OF COMMON STOCK

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.

During the nine months ended September 30, 2022, in lieu of cash payments for salaries and board fees, Royale issued 5,637,242 shares of its common stock valued at approximately $ 395,006 to an executive officer and board members.

For the nine months ended September 30, 2021, Royale issued 1,634,227 shares of its common stock valued at approximately $ 176,709 to an executive officer and board members.

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

13 unchanged sentences

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.

For the nine months ended September 30, 2022 and 2021, we had net losses of $739,184 and $2,577,999, respectively.

During the three months ended September 30, 2022 and 2021, we had net losses of $426,331 and $982,328, respectively.

The difference was due to higher oil and gas sales during the third quarter in 2022 and to a $254,295 loss on sale of assets during the third quarter in 2021.

During the first nine months of 2022, revenues from oil and gas production increased $526,783 or 43.8%, to $1,729,129 from revenues of $1,202,346 during the first nine 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 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.

The net sales volume of oil and condensate for the nine months ended September 30, 2022, was approximately 11,330 barrels with an average price of $98.69 per barrel, versus 14,734 barrels with an average price of $62.02 per barrel for the nine months of 2021.

This represents a decrease in net sales volume of 3,404 barrels or 23.1%, which was due to lower production volumes due to natural declines in our wells and to the 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.

The net sales volume of natural gas for the nine months ended September 30, 2022, was approximately 99,830 Mcf with an average price of $6.04 per Mcf, versus 88,287 Mcf with an average price of $3.26 per Mcf for the same period in 2021.

This represents an increase in net sales volume of 11,543 Mcf or 13.1%.

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.

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

For the quarter ended September 30, 2022, revenues from oil and gas production increased $117,040 or 27.5% to $542,510 from the 2021 third quarter revenues of $425,470.

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 net sales volume of oil and condensate for the quarter ended September 30, 2022, was approximately 3,143 barrels with an average price of $96.37 per barrel, versus 4,564 barrels with an average price of $68.05 per barrel for the third quarter of 2021.

This represents a decrease in net sales volume of 1,421 barrels or 31.1% for the third quarter in 2022.

The net sales volume of natural gas for the quarter ended September 30, 2022, was approximately 34,522 Mcf with an average price of $6.86 per Mcf, versus 26,996 Mcf with an average price of $4.24 per Mcf for the third quarter of 2021.

This represents an increase in net sales volume of 7,526 Mcf or 27.9% for the third quarter in 2022.

Oil and natural gas lease operating expenses increased by $56,186 or 4.8%, to $1,229,177 for the nine months ended September 30, 2022, from $1,172,991 for the same period in 2021.

This increase was mainly due to higher trucking and water disposal costs due to increases in manpower and fuel costs from outside vendors.

For the third quarter in 2022, lease operating expenses decreased $43,421 or 9.5% from the same quarter in 2021 due mainly to lower outside plugging and abandonment costs during the quarter in 2022 when compared to the same quarter in 2021.

The aggregate of supervisory fees and other income was $24,349 for nine months ended September 30, 2022, a decrease of $872 from $25,221 during the same period in 2021.

During the third quarter 2022, supervisory fees and other income increased $189 or 2.7% when compared to the quarter in 2021.

Depreciation, depletion and amortization expense decreased to $301,235 from $397,629, a decrease of $96,394 or 24.2% for the nine months ended September 30, 2022, as compared to the same period in 2021.

During the third quarter 2022, depreciation, depletion and amortization expenses also decreased $46,241 or 44.8%.

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

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.

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

While recoverable developed reserves increased, the company’s Proved Undeveloped reserves decreased as a result of a downward revision in the number and working interest in undrilled wells.

At September 30, 2022, Royale Energy had a Deferred Drilling Obligation of $10,084,011.

During the first nine 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 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.

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.

General and administrative expenses decreased by $180,653 or 11.6% to $1,381,282 for the nine months ended September 30, 2022 from $1,561,935 for the same period in 2021.

For the third quarter 2022, general and administrative expenses decreased $127,805 or 26.3% when compared to the same period in 2021.

These decreases were mainly due to lower employee related expenses and other administrative cost reduction measures during the periods in 2022.

For the first nine months of 2022, marketing expenses increased $60,222 or 48.6% to $184,040, compared to $123,818 for the first nine months of 2021.

For the third quarter 2022, marketing expenses increased $8,398 or 20.3% when compared to the third 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 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.

Legal and accounting expense increased to $440,130 for the nine-month period in 2022, compared to $338,870 for the same period in 2021, a $101,260 or 29.9% increase.

For the third quarter 2022, legal and accounting expenses increased $30,850 or 49.1%, when compared to the third quarter in 2021.

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

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

During the nine months ended September 30, 2021, we recorded a loss of $254,295 on the sale of certain non-operated California properties, we also recorded a gain of $291,249 on the sale of certain non-operated Texas properties.

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

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.

Bad debt expense for the nine months ended September 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.

1 unchanged sentence

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

Interest expense for the nine months ended September 30, 2022 and 2021, were $6,548 and $6,857, respectively.

CAPITAL RESOURCES AND LIQUIDITY

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.

At September 30, 2022, we had current assets totaling $10,057,496 and current liabilities totaling $17,152,090, a $7,094,594 working capital deficit.

We had $624,767 in cash and $3,765,777 in restricted cash at September 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 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.

At September 30, 2022, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $471,416 compared to $413,133 at December 31, 2021, a $58,283 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.

At September 30, 2022, revenue receivable was $308,263, a decrease of $56,887, compared to $365,150 at December 31, 2021, mainly due to lower net receivables during the third quarter in 2022.

At September 30, 2022, our accounts payable and accrued expenses totaled $5,452,949 an increase of $292,465 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 period 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 $7,094,594 and an accumulated deficit of $88,031,685.

5 unchanged sentences

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.

During the third and continuing into the fourth quarter of 2022, the Company completed several successful workovers on existing and new wells in its Texas Jameson field.

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 $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.

Net cash used in operating activities totaled $1,331,314 and $2,336,587 for the nine months ended September 30, 2022 and 2021, respectively.

This difference in cash used was mainly due to higher drilling prepayments made during the period in 2021 when compared to the period in 2022.

Investing Activities.

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.

Net cash provided by investing activities totaled $1,598,227 and $2,160,234 for the nine months ended September 30, 2022, and 2021, respectively.

During the nine-month period in 2022, we received approximately $5.4 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $3.8 million as we drilled and completed one Texas well and participated in the drilling and completing of two southern California oil wells, we also have drilling and workovers in progress in our Texas Jameson field.

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 $1.0 million for the sale of non-operated properties in Texas and California.

Financing Activities.

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

Net cash used in financing activities totaled $99,173 and $27,884 for the nine months ended September 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.

4 unchanged sentences

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