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 2020, 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 three months ended March 31, 2020, we had a net income of $384,362, when
compared to the net loss of $2,637,183 during the three months ended March 31,
2019. This difference was primarily the result of a gain of $1,309,851 recorded
relating to our equity method investment in RMX recorded during the three months
ended March 31, 2020 compared to a loss of $741,795 recorded in the three months
ended March 31, 2019. In addition, a loss of $1.2M on sale of assets was
recorded during the three months ended March 31, 2019, and there was no
comparative loss in the current year period. The gain in RMX in the current
period was primarily due to their hedging activities.
During the first three months of 2020, revenues from oil and gas production
decreased $28,684 or 7.1% to $374,485 from the 2019 three-month revenues of
$403,169. This decrease was mainly due to lower oil and gas prices and lower
natural gas production volumes during the period in 2020 compared to 2019. The
net sales volume of oil and condensate for the three months ended March 31,
2020, was approximately 5,031 barrels with an average price of $47.87 per
barrel, versus 3,045 barrels with an average price of $48.02 per barrel for the
first three months of 2019. This represents an increase in net sales volume of
1,986 barrels. This increase in production volumes was due to various wells
drilled in put into production during 2019. The net sales volume of natural gas
for the three months ended March 31, 2020, was approximately 52,453 Mcf with an
average price of $2.55 per Mcf, versus 62,467 Mcf with an average price of $4.11
per Mcf for the same period in 2019. This represents a decrease in net sales
volume of 10,114 Mcf or 16.0%. The decrease in natural gas production volume
was due to the natural declines on some of our wells.
Oil and natural gas lease operating expenses increased by $47,843 or 13.5%, to
$403,453 for the three months ended March 31, 2020, from $355,610 for the same
period in 2019. These were higher due to the increase in the number of wells
operated by the Company during the period in 2020, related to our 2019
drilling.
The aggregate of supervisory fees and other income was $9,329 for three months
ended March 31, 2020, a decrease of $560,778 from $570,107 during the same
period in 2019. These decreases were due to the cancellation of the service
agreement with RMX Resources as of March 31, 2019.
Depreciation, depletion, and amortization expense increased to $79,935 from
$52,083, an increase of $27,852 or 53.5% for the three months ended March 31,
2020, as compared to the same period in 2019. The depletion rate is calculated
using production as a percentage of reserves. The increase in depreciation
expense was due to the increase in production and the number of wells and
related equipment, as a result of drilling activity.
General and administrative expenses decreased by $177,100 or 25.4% from $698,163
for the three months ended March 31, 2019, to $521,063 for the same period in
2020, due to reductions in employee related costs and outside consulting
services, in an effort for the Company to reduce costs. Marketing expense for
the three months ended March 31, 2020, decreased $32,737, or 48.8%, to $34,394,
compared to $67,131 for the same period in 2019. 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 $86,535 for the three month period in
2020, compared to $277,772 for the same period in 2019, a $191,237 or 68.9%
decrease. These decreases were primarily due to accounting fees related to the
Matrix post-merger reporting incurred during the period in 2019.
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During the first quarter in 2020, we recorded a loss on settlement of $31,500
related to a 2018 seismic sales agreement. During the three-month period in
2019, we recorded geological and geophysical expense of $262,586 related mainly
to the acquisition of a seismic survey of a Northern California field, during
the same period in 2020, we had no geological and geophysical expenses. During
the three months ended March 31, 2020 and 2019, we recorded a gain of $1,309,851
and a loss of $741,795 , respectively on investment in joint venture as our 20%
share of RMX Resources, LLC's period net income of $6,549,253 and net loss of
$3,708,976. During the three months ended March 31, 2019, we recorded gains of
$62,972 on the settlement of accounts payable.
During the first three months of 2020, we disposed of $2,382,086 of drilling
obligations upon completing the drilling of two wells, one oil well in Southern
California and one oil well in Texas, while incurring expenses of $2,344,311,
resulting in a gain of $37,775. At March 31, 2020, Royale Energy had a
remaining Deferred Drilling Obligation of $4,025,589. During the same period in
2019, we disposed of $2,627,520 of drilling obligations upon completing the
drilling of two natural gas wells in Northern California, while incurring
expenses of $2,601,051, resulting in a gain of $26,469. At March 31, 2019,
Royale Energy had a Deferred Drilling Obligation of $5,782,285.
Bad debt expense for the period ended March 31, 2020 and 2019, were $186,168 and
$1,927, respectively. Approximately $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 $4,030 for the three months ended March 31, 2020,
from $5,707 for the same period in 2019, a $1,677 decrease. This decrease was
mainly due to lower principal balances on notes payable.
Capital Resources and Liquidity
At March 31, 2020, we had current assets totaling $6,435,227 and current
liabilities totaling $10,985,674, a $4,550,447 working capital deficit. We had
$779,218 in cash and $1,760,841 in restricted cash at March 31, 2020, compared
to $1,031,014 in cash and $2,845,515 in restricted cash at December 31, 2019.
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, 2020, our other receivables, which consist of joint interest
billing receivables from direct working interest investors and industry
partners, totaled $1,139,212, compared to $1,189,892 at December 31, 2019, a
$50,680 decrease. This decrease was mainly due to the increase in allowance for
doubtful accounts during the period in 2020. At March 31, 2020, revenue
receivable was $263,458, an decrease of $325,693, compared to $589,151 at
December 31, 2019, due to lower commodity prices and lower natural gas
production volumes on existing wells. At March 31, 2020, our accounts payable
and accrued expenses totaled $6,006,235, a decrease of $24,799 from the accounts
payable at December 31, 2019 of $6,031,034, which was related to payments made
on account during the period in 2020.
The Company has had recurring operating and net losses and cash used in
operations and the financial statements reflect a working capital deficiency of
$4,550,447 and an accumulated deficit of $73,190,576. 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 &
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 provided by operating activities totaled $298,442
and compared to $595,876 used for the three months ended March 31, 2020 and
2019, respectively. This increase in cash used was mainly due to a loss on the
sale of assets during the period in 2019.
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Investing Activities. Net cash used by investing activities totaled $1,499,655
and $322,789 for the three months ended March 31, 2020 and 2019, respectively.
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 $2.3 million in the drilling of one Southern
California oil well and one Texas oil well along with an additional
approximately $300,000 in completion costs related to wells drilled in 2019.
During the 2019 period, we received approximately $2.2 million in direct working
interest investor turnkey drilling investments while our drilling expenditures
were approximately $2.5 million in the drilling of two Northern California
natural gas wells.
Financing Activities. Net cash used by financing activities totaled $135,257 and
compared to net cash of $53,320 provided for the three months ended March 31,
2020 and 2019, respectively. During the period in 2020, there were principal
payments of approximately $95,000 on our notes payable and payments of
approximately $40,000 on our leasing obligations. During the period in 2019, a
financing agreement for a seismic survey was recognized when the terms were
finalized, on which there were principal payments of approximately $25,000.
Additionally, in 2019, there were principal payments of approximately $128,000
on our note with Forza Operating and payments of approximately $35,000 on our
leasing obligations.
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