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. 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. 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 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 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.
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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. 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.
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.
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.
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. These factors raise
substantial doubt about our ability to continue as a going concern. We
anticipate that our primary sources of liquidity will be from the sale of oil
and gas in the course of normal operations, the sale of oil and gas property,
sales of participation interest and possible issuance of debt and/or equity. If
the Company is unable to generate sufficient cash from operations or financing
sources, it may become necessary to curtail, suspend or cease operations, sell
property, or enter into financing transaction(s) on less favorable terms; any
such outcomes could have a material adverse effect on the Company's business,
results of operations, financial position and liquidity. Additionally,
management has, and plans to continue, to increase revenue and reduce overhead
and Lease Operating Expense (LOE) costs.
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. 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.
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.
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.
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ROYALE ENERGY, INC. 