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
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 six months ended June 30, 2021, we had a net loss of $1,595,671 compared
to the net income of $71,978, during the six months ended June 30, 2020. The
difference was primarily the result of a gain of $833,525 relating to our equity
method investment in RMX recorded during the six months ended June 30, 2020.
During the fourth quarter in 2020, it was determined that a full impairment of
the equity method investment was warranted, so there was no comparative gain or
loss in the current year period. During the three months ended June 30, 2021 and
2020, we had net losses of $1,023,504 and $312,384, respectively mainly due to
higher turnkey drilling costs during the second quarter in 2021 as additional
work on wells drilled during the first quarter was performed to improve
production.
During the first six months of 2021, revenues from oil and gas production
increased $190,877 or 32.6% to $776,876 from the 2020 first six months revenues
of $585,999. This increase was mainly due to higher oil and natural gas
commodity prices. The net sales volume of oil and condensate for the six months
ended June 30, 2021, was approximately 10,171 barrels with an average price of
$59.32 per barrel, versus 11,499 barrels with an average price of $34.54 per
barrel for the first half of 2020. This represents a decrease in net sales
volume of 1,328 barrels or 11.5%. The net sales volume of natural gas for the
six months ended June 30, 2021, was approximately 61,290 Mcf with an average
price of $2.83 per Mcf, versus 83,040 Mcf with an average price of $2.27 per Mcf
for the same period in 2020. This represents a decrease in net sales volume of
21,750 Mcf or 26.2%. The decrease in natural gas production volume was due to
certain wells that were offline and waiting on workovers and to lower volumes on
existing wells due to natural declines. For the quarter ended June 30, 2021,
revenues from oil and gas production increased $166,425 or 78.7% to $377,939
from the 2020 second quarter revenues of $211,514. This increase was also due to
higher oil and natural gas commodity prices. The net sales volume of oil and
condensate for the quarter ended June 30, 2021, was approximately 4,597 barrels
with an average price of $63.25 per barrel, versus 6,468 barrels with an average
price of $24.18 per barrel for the second quarter of 2020. This represents a
decrease in net sales volume of 1,871 barrels or 28.9% for the quarter in 2020.
The net sales volume of natural gas for the quarter ended June 30, 2021, was
approximately 31,631 Mcf with an average price of $2.76 per Mcf, versus 30,587
Mcf with an average price of $1.80 per Mcf for the second quarter of 2020. This
represents an increase in net sales volume of 1,044 Mcf or 3.4% for the quarter
in 2021.
Oil and natural gas lease operating expenses decreased by $65,387 or 8.4%, to
$713,371 for the six months ended June 30, 2021, from $778,758 for the same
period in 2020. This was due mainly to lower outside operated lease costs due to
the sale of certain non-operated Texas wells during the period in 2021. For the
second quarter in 2021, lease operating expenses increased $37,904 or 10.1% from
the same quarter in 2020, mainly due to work on existing wells in our operated
Texas field to increase production.
The aggregate of supervisory fees and other income was $18,102 for six months
ended June 30, 2021, a decrease of $2,854 from $20,956 during the same period in
2020. During the second quarter 2021, supervisory fees and other income
increased $4,149 or 35.7% when compared to the quarter in 2020, due mainly to
higher rental income.
Depreciation, depletion and amortization expense increased to $294,361 from
$155,625, an increase of $138,736 or 89.1% for the six months ended June 30,
2021, as compared to the same period in 2020. During the second quarter 2021,
depreciation, depletion and amortization expenses also increased $94,266 or
124.5%. The depletion rate is calculated using production as a percentage of
reserves. This increase in depreciation expense was due to a decrease in
expected recoverable reserves which increased the depletion rate.
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At June 30, 2021, Royale Energy had a Deferred Drilling Obligation of
$4,047,439. During the first six months of 2021, we disposed of $1,841,061 of
drilling obligations upon completing the drilling of two oil wells in Texas,
while incurring expenses of $1,900,199, resulting in a loss of $59,138. Although
these two wells were originally drilled during the first quarter of 2021, we
continued additional work during second quarter 2021 to increase production. At
June 30, 2020, Royale Energy had a Deferred Drilling Obligation of $2,531,094.
During the first six months of 2020, we disposed of $3,901,582 of drilling
obligations upon completing the drilling of three oil wells, one in California
and two wells in Texas, while incurring expenses of $2,991,134, resulting in a
gain of $910,448.
General and administrative expenses increased by $1,325 or 0.1% from $1,075,340
for the six months ended June 30, 2020, to $1,076,665 for the same period in
2021. For the second quarter 2021, general and administrative expenses decreased
$42,595 or 7.7% when compared to the same period in 2020. Marketing expense for
the six months ended June 30, 2021, increased $27,431, or 49.8%, to $82,495,
compared to $55,064 for the same period in 2020. For the second quarter 2021,
marketing expenses increased $22,776 or 110.2% when compared to the second
quarter in 2020. Marketing expense varies from period to period according to the
number of marketing events attended by personnel and their associated costs.
Legal and accounting expense increased to $276,000 for the six-month period in
2021, compared to $174,660 for the same period in 2020, a $101,340 or 58.0%
increase. This increase was primarily due to higher audit related expenses
during the period in 2021. For the second quarter 2021, legal and accounting
expenses decreased $30,888 or 35.1%, when compared to the second quarter in
2020, mainly due to lower legal fees.
During the six months ended June 30, 2021, we recorded a gain of $291,249 on the
sale of asset on the sale of certain non-operated Texas properties. These
non-operated properties were originally acquired during the merger with Matrix
and booked as Held for Sale at the end of 2020. During the first quarter of
2021, we recorded a gain on settlement of $10,061 due to the payment by the SBA
of the remaining balance on our PPP loan obtained in 2020. During the six months
ended June 30, 2020, we recorded a gain of $833,525, on investment in joint
venture as our 20% share of RMX Resources, LLC's. As a result of recognizing an
impairment for the full value of the investment, the company did not recognize
any gain or loss in subsequent periods. See note Equity Method Investment in
Note 1 above. During the second quarter in 2020 we recorded a gain of $200,001
on the receipt of a pre-Matrix merger prepayment refund. During the first
quarter in 2020, we recorded a loss on settlement of $31,500 related to a 2018
seismic sales agreement. During the six-month period in 2020, we recorded
$14,392 in geological and geophysical expenses.
Bad debt expense for the six months ended June 30, 2021, and 2020 were $187,348
and $186,168, respectively. Approximately $180,000 of the expenses in 2021 and
$80,000 of the expenses in 2020 arose from identified uncollectable receivables
relating to our oil and natural gas properties either plugged and abandoned or
scheduled for plugging and abandonment and our period end oil and natural gas
reserve values. We periodically review our accounts receivable from working
interest owners to determine whether collection of any of these charges appears
doubtful. By contract, the Company may not collect some charges from its Direct
Working Interest owners for certain wells that ceased production or had been
sold during the year, to the extent that these charges exceed production
revenue. During the period in 2020 approximately $106,000 was related to revenue
receivable from an industry partner whose collectability was in doubt.
Interest expense decreased to $4,591 for the six months ended June 30, 2021,
from $7,444 for the same period in 2020, a $2,853 decrease. This decrease was
mainly due to lower principal balances on notes payable during the six-month
period in 2021.
CAPITAL RESOURCES AND LIQUIDITY
At June 30, 2021, we had current assets totaling $4,984,552 and current
liabilities totaling $10,105,491, a $5,120,939 working capital deficit. We had
$603,075 in cash and $2,271,556 in restricted cash at June 30, 2021, compared to
$255,112 in cash and $2,146,571 in restricted cash at December 31, 2020.
In accordance with ASC 480-10-S99 the Company reclassified the Series B
Convertible Preferred Stock from Permanent Equity to Mezzanine capital as a
result of the change in voting rights provided at the time it of issuance. For
more information, see Note 3 - Series B Convertible Preferred Stock.
At June 30, 2021, our other receivables, which consist of joint interest billing
receivables from direct working interest investors and industry partners,
totaled $274,884 compared to $462,777 at December 31, 2020, a $187,893
decrease. This decrease was mainly due to the increase in the accounts
receivable allowance from direct working interest owners. At June 30, 2021,
revenue receivable was $355,990, an increase of $151,841, compared to $204,149
at December 31, 2020, due to higher commodity prices during the quarter in
2021. At June 30, 2021, our accounts payable and accrued expenses totaled
$4,481,815, an increase of $320,706 from the accounts payable at December 31,
2020 of $4,161,109, which was mainly due to drilling costs and lease operating
costs during the first six months in 2021.
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The Company has had recurring operating and net losses and cash used in
operations and the financial statements reflect a working capital deficiency of
$5,120,939 and an accumulated deficit of $84,281,704. 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 $882,420 for
the six months ended June 30, 2021. Net cash provided by operating activities
was $334,538 for the six months ended June 30, 2020. This difference in cash was
due to accounts payable and accrued expenses and prepaid assets during the
periods related mainly to the wells drilled during the periods, as we used more
prepaid drilling funds during the period in 2020.
Investing Activities. Net cash provided by investing activities totaled
$1,380,582 and net cash used in investing activities totaled $2,767,301 for the
six months ended June 30, 2021, and 2020, respectively. During the six month
period in 2021, we received approximately $2.8 million in direct working
interest investor turnkey drilling investments while our drilling expenditures
were approximately $2.0 million in the drilling and completing of two Texas oil
wells. During the period in 2021, we also received approximately $672,000 for
the sale of non-operated properties in Texas. During the period in 2020, we
received approximately $1.2 million in direct working interest investor turnkey
drilling investments while our drilling expenditures were approximately $4.0
million in the drilling and completing of one Southern California oil well and
two Texas oil wells.
Financing Activities. Net cash used in financing activities totaled $25,214 and
net cash provided by financing activities was $147,319 for the six months ended
June 30, 2021, and 2020, respectively. During the period in 2021, the total used
was for note and financing lease payments while during the period in 2020, we
received $207,800 in SBA-PPP loan and made principal payments of approximately
$56,000 on existing notes payable.
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ROYALE ENERGY, INC. 
