ROYL 10-Q
Royale Energy, Inc. (ROYL)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
Commission File No.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Check one:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
At August 3, 2022, a total of
TABLE OF CONTENTS
|
PART I. FINANCIAL INFORMATION |
3 |
|
3 |
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
20 |
|
20 |
|
|
PART II. OTHER INFORMATION |
21 |
|
21 |
|
|
21 |
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
21 |
|
21 |
|
|
21 |
|
|
21 |
|
|
21 |
|
|
22 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROYALE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
June 30, 2022 |
December 31, 2021 |
|||||||
|
ASSETS |
(unaudited) |
|||||||
|
Current Assets |
||||||||
|
Cash and Cash Equivalents |
||||||||
|
Restricted Cash |
||||||||
|
Other Receivables, net |
||||||||
|
Revenue Receivables |
||||||||
|
Prepaid Expenses |
||||||||
|
Deferred Drilling Costs |
||||||||
|
Prepaid Drilling to RMX Resources, LLC |
||||||||
|
Total Current Assets |
||||||||
|
Right of Use Assets - Leases |
||||||||
|
Other Assets |
||||||||
|
Oil and Gas Properties, (Successful Efforts Basis), Equipment and Fixtures, net |
||||||||
|
Total Assets |
||||||||
See notes to unaudited condensed consolidated financial statements.
ROYALE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
June 30, 2022 |
December 31, 2021 |
|||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
(unaudited) |
|||||||
|
Current Liabilities: |
||||||||
|
Accounts Payable and Accrued Expenses |
||||||||
|
Royalties Payable |
||||||||
|
Notes Payable |
||||||||
|
Due to RMX Resources, LLC |
||||||||
|
Accrued Liabilities |
||||||||
|
Asset Retirement Obligation - Current |
||||||||
|
Deferred Drilling Obligation |
||||||||
|
Operating Leases - Current |
||||||||
|
Total Current Liabilities |
||||||||
|
Noncurrent Liabilities: |
||||||||
|
Accrued Liabilities - Long Term |
||||||||
|
Accrued Unpaid Guaranteed Payments |
||||||||
|
Operating Leases - Long-Term |
||||||||
|
Asset Retirement Obligation |
||||||||
|
Total Liabilities |
||||||||
|
Mezzanine Equity: |
||||||||
| Convertible Preferred Stock, Series B, $ |
||||||||
|
Stockholders' Equity (Deficit): |
||||||||
| Common Stock, |
||||||||
|
Additional Paid in Capital |
||||||||
|
Accumulated Deficit |
( |
) | ( |
) | ||||
|
Total Stockholders' Equity (Deficit) |
( |
) | ( |
) | ||||
|
Total Liabilities and Stockholders' Equity (Deficit) |
||||||||
See notes to unaudited condensed consolidated financial statements.
ROYALE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
For the 3 Months ended |
For the 3 Months ended |
For the 6 Months ended |
For the 6 Months ended |
|||||||||||||
|
June 30, 2022 |
June 30, 2021 |
June 30, 2022 |
June 30, 2021 |
|||||||||||||
|
Revenues: |
||||||||||||||||
|
Oil, NGL and Gas Sales |
||||||||||||||||
|
Supervisory Fees and Other |
||||||||||||||||
|
Total Revenues |
||||||||||||||||
|
Costs and Expenses: |
||||||||||||||||
|
Oil and Gas Lease Operating |
||||||||||||||||
|
Depreciation, Depletion and Amortization |
||||||||||||||||
|
Bad Debt Expense |
||||||||||||||||
|
Legal and Accounting |
||||||||||||||||
|
Marketing |
||||||||||||||||
|
General and Administrative |
||||||||||||||||
|
Total Costs and Expenses |
||||||||||||||||
|
Gain (Loss) on Turnkey Drilling |
( |
) |
( |
) |
||||||||||||
|
Loss From Operations |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
Other Income (Expense): |
||||||||||||||||
|
Interest Expense |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
Gain on Settlement of Accounts Payable |
||||||||||||||||
|
Gain on Sale of Assets |
- | |||||||||||||||
|
Loss Before Income Tax Expense |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
Net Loss |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
Less: Preferred Stock Dividend |
||||||||||||||||
|
Net Loss available to common stock |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
See notes to unaudited condensed consolidated financial statements.
ROYALE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
|
June 30, 2022 |
June 30, 2021 | |||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
|
Net (Loss) |
( |
) | ( |
) | ||||
|
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: |
||||||||
|
Depreciation, Depletion and Amortization |
||||||||
|
(Gain) Loss on Sale of Assets |
( |
) | ||||||
|
(Gain) Loss on Turnkey Drilling Programs |
( |
) | ||||||
|
Gain on Settlement of Accounts Payable |
( |
) | ( |
) | ||||
|
Bad Debt Expense |
||||||||
|
Stock Based Compensation |
||||||||
|
Right of use asset depreciation |
||||||||
| Changes in assets and liabilities: | ||||||||
|
Other & Revenue Receivables |
( |
) | ( |
) | ||||
|
Prepaid Expenses and Other Assets |
( |
) | ||||||
|
Accounts Payable and Accrued Expenses |
||||||||
|
Net Cash Used in Operating Activities |
( |
) | ( |
) | ||||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
|
Expenditures for Oil and Gas Properties and Other Capital Expenditures |
( |
) | ( |
) | ||||
|
Proceeds from Turnkey Drilling Programs |
||||||||
|
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 by Financing Activities |
( |
) | ( |
) | ||||
|
Net Change in Cash and Cash Equivalents |
( |
) | ||||||
|
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period |
||||||||
|
Cash, Cash Equivalents, and Restricted Cash at End of Period |
||||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: |
||||||||
|
Cash Paid for Interest |
||||||||
|
Cash Paid for Taxes |
||||||||
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS: |
||||||||
|
Increase (Decrease) in Capital Accrued Balance |
||||||||
See notes to unaudited condensed consolidated financial statements.
ROYALE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(UNAUDITED)
|
Number of Shares Issued and Outstanding |
Amount |
Additional Paid in Capital |
Accumulated Deficit |
Total |
||||||||||||||||
|
December 31, 2020 Balance |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
|
Stock Issued in lieu of Compensation |
- | |||||||||||||||||||
|
Preferred Series B 3.5% Dividend |
- | - | ( |
) | ( |
) | ||||||||||||||
|
Net Loss |
- | - | - | ( |
) | ( |
) | |||||||||||||
|
June 30, 2021 Balance |
$ | $ | ( |
) | $ | ( |
) | |||||||||||||
|
December 31, 2021 Balance |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
|
Stock Issued in lieu of Compensation |
- | |||||||||||||||||||
|
Preferred Series B 3.5% Dividend |
- | - | - | ( |
) | ( |
) | |||||||||||||
|
Net Loss |
- | - | - | ( |
) | ( |
) | |||||||||||||
|
June 30, 2022 Balance |
$ | $ | ( |
) | $ | ( |
) | |||||||||||||
|
March 31, 2021 Balance |
( |
) | ( |
) | ||||||||||||||||
|
Stock Issued in lieu of Compensation |
- | |||||||||||||||||||
|
Preferred Series B 3.5% Dividend |
- | - | - | ( |
) | ( |
) | |||||||||||||
|
Net Loss |
- | - | - | ( |
) | ( |
) | |||||||||||||
|
June 30, 2021 Balance |
( |
) | ( |
) | ||||||||||||||||
|
March 31, 2022 Balance |
( |
) | ( |
) | ||||||||||||||||
|
Stock Issued in lieu of Compensation |
- | |||||||||||||||||||
|
Preferred Series B 3.5% Dividend |
- | - | - | ( |
) | ( |
) | |||||||||||||
|
Net Loss |
- | - | - | ( |
) | ( |
) | |||||||||||||
|
June 30, 2022 Balance |
( |
) | ( |
) | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
ROYALE ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION: ACCOUNTING STANDARDS
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. 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.
Consolidation
The accompanying financial statements include the accounts of Royale Energy, Inc. (sometimes called the “Company” “we,” “our,” “us,” “Royale Energy,” or “Royale”), Royale Energy Funds, Inc. (“REF”), and Matrix Oil Management Corporation and its subsidiaries. All entities comprising the financial statements of Royale Energy have fiscal years ending December 31. All material intercompany accounts and transactions have been eliminated in the financial statements.
Liquidity and Going Concern
The primary sources of liquidity have historically been issuances of common stock, oil and gas sales through ongoing operations and the sale of oil and gas properties. 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 $
Use of Estimates
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the estimate of Company oil and gas reserves prepared by an independent engineering consultant. Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proven reserves. Estimated reserves are used in the calculation of depletion, depreciation and amortization, unevaluated property costs, impairment of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.
Revenue Recognition
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 |
For the six months |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Oil & Condensate Sales |
$ | $ | ||||||||||||||
|
Natural Gas Sales |
||||||||||||||||
|
NGL Sales |
||||||||||||||||
|
Total |
$ | $ | ||||||||||||||
The pricing in our hydrocarbon sales agreements are variable, determined using various published benchmarks which are adjusted for negotiated quality and location differentials. As a result, revenue collected under our agreements with customers is highly dependent on the market conditions and may fluctuate considerably as the hydrocarbon market prices rise or fall. Typically, our customers pay us monthly, within a short period of time after we deliver the hydrocarbon products. As such, we do not have any financing element associated with our contracts. We do not have any issues related to returns or refunds, as product specifications are standardized for the industry and are typically measured when transferred to a common carrier or midstream entity, and other contractual mechanisms (e.g., price adjustments) are used when products do not meet those specifications.
We often serve as the operator for jointly owned oil and gas properties. As part of this role, we perform activities to explore, develop and produce oil and gas properties in accordance with the joint operating arrangement and collective decisions of the joint parties. Other working interest owners reimburse us for costs incurred based on our agreements. We determined that these activities are not performed as part of customer relationships, and such reimbursements are recorded as cost reimbursements.
We commonly market the share of production belonging to other working interest owners as the operator of jointly owned oil and gas properties. Those marketing activities are carried out as part of the collaborative arrangement, and we do not purchase or otherwise obtain control of other working interest owners’ share of production. Therefore, we act as a principal only in regards to the sale of our share of production and recognize revenue for the volumes associated with our net production.
The Company frequently sells a portion of the working interest in each well it drills or participates in, to third-party investors and retains a portion of the prospect for its own account. The Company typically guarantees a cost to drill to the third-party drilling participants and records a loss or gain on the difference between the guaranteed price and the actual cost to drill the well. When monies are received from third parties for future drilling obligations, the Company records the liability as Deferred Drilling Obligations. Once the contracted depth for the drilling of the well is reached and a determination as to the commercial viability of the well (typically call “Casing Point Election” or “Logging Point”), the difference in the actual cost to drill and the guaranteed cost is recorded as income or expense depending on whether there was a gain or loss.
Crude oil and condensate
For the crude sales agreements, we satisfy our performance obligations and recognize revenue once customers take control of the crude at the designated delivery points, which include pipelines, trucks or vessels.
Natural gas and NGLs
When selling natural gas and NGLs, we engage midstream entities to process our production stream by separating natural gas from the NGLs. Frequently, these midstream entities also purchase our natural gas and NGLs under the same agreements. In these situations, we determined the performance obligation is complete and satisfied at the tailgate of the processing plant when the natural gas and NGLs become identifiable and measurable products. We determined the plant tailgate is the point in time where control, as defined in the new revenue standard, is transferred to midstream entities and they are entitled to significant risks and rewards of ownership of the natural gas and NGLs.
The amounts due to midstream entities for gathering and processing services are recognized as shipping and handling cost and included as lease operating expense in our consolidated statement of operations, since we make those payments in exchange for distinct services with the exception of natural gas sold to Pacific Gas & Electric (PG&E) where transportation is netted directly against revenue. Under some of our natural gas processing agreements, we have an option to take the processed natural gas and NGLs in-kind and sell to customers other than the processing company. In those circumstances, our performance obligations are complete after delivering the processed hydrocarbons to the customer at the designated delivery points, which may be the tailgate of the processing plant or an alternative delivery point requested by the customer.
Turnkey Drilling
Royale sponsors turnkey drilling arrangements in proved and unproved properties. The contracts require that participants pay Royale the full contract price upon execution of the drilling agreement. Each participant earns an undivided interest in the well bore at the completion of the well. A portion of the funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling a well. If something changes, the Company may designate these funds for a substitute well. Under certain conditions, a portion of these funds may be required to be returned to a participant. Once the well is drilled, the funds are used to satisfy the drilling cost.
These Turnkey Agreements are managed by the Company for the participants of the well. The collections of pre-drilling AFE amounts are segregated by the Company and the gains and losses on the Turnkey Agreements are recorded in income or expense at the time of the casing point election in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 932-323-25 and 932-360. The Company manages the performance obligation for the well participants and only records revenue or expense at the time the performance obligation of the Turnkey Agreement has been satisfied.
Restricted Cash
Royale sponsors turnkey drilling arrangements in proved and unproved properties. The contracts require that participants pay Royale the full contract price upon execution of the drilling agreement. Each participant earns an undivided interest in the well bore at the completion of the well. A portion of the funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling a well. If something changes, the Company may designate these funds for a substitute well. Under certain conditions, a portion of these funds may be required to be returned to a participant. Once the well is drilled, the funds are used to satisfy the drilling cost. Royale classifies these funds prior to commencement of drilling as restricted cash based on guidance codified as under ASC 230-10-50-8. In the event that progress payments are made from these funds, they are recorded as Prepaid Expenses and Other Current Assets.
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 |
December 31, 2021 |
|||||||
|
Cash and Cash Equivalents |
$ | $ | ||||||
|
Restricted Cash |
||||||||
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows |
$ | $ | ||||||
Equity Method Investments
Investments in entities over which we have significant influence, but not control, are accounted for using the equity method of accounting. Income from equity method investments represents our proportionate share of net income generated by the equity method investees and is reflected in revenue and other income in our condensed consolidated statements of operations. Equity method investments are included as noncurrent assets on the consolidated balance sheet.
Equity method investments are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value may have occurred as called for under ASC 323. When a loss is deemed to have occurred and is other than temporary, the carrying value of the equity method investment is written down to fair value, and the amount of the write-down is included in income.
Other Receivables
Other receivables consist of joint interest billing receivables from direct working interest investors and industry partners. We provide for uncollectible accounts receivable using the allowance method of accounting for bad debts. Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected. The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable. 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 $
Fair Value Measurements
According to Fair Value Measurements and Disclosures Topic of the FASB ASC, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. 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. The Company estimates asset retirement obligations (ARO’s) pursuant to the provisions of ASC 410, “Asset Retirement and Environmental Obligations”. The estimates of the fair value the ARO’s are based on discounted cash flow projections using numerous estimates, assumptions and judgements regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates.
The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.
Fair Values - Non-recurring
The Company applies the provisions of the fair value measurement standard to its non-recurring, non-financial measurements including oil and natural gas property impairments and other long-lived asset impairments. These items are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances.
Dividends on Series B Convertible Preferred Stock
The Series B Convertible Preferred Stock, (“Preferred Shares”) has an obligation to pay a
ACCOUNTING STANDARDS
Not Yet Adopted
ASU 2016-13, Credit Impairment
In June of 2016, the FASB issued ASC Topic 326, Financial Instruments – Credit Losses. This new guidance replaces the current incurred loss impairment model with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. 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 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. Adoption of this standard is not expected to have a material impact on our consolidated financial statements and cash flows.
NOTE 2 – OIL AND GAS PROPERTY AND EQUIPMENT AND FIXTURES
Oil and gas properties, equipment and fixtures consist of the following:
|
June 30, |
December 31, |
|||||||
|
2022 |
2021 |
|||||||
|
(Unaudited) |
||||||||
|
Oil and Gas |
||||||||
|
Producing properties, including drilling costs |
$ | $ | ||||||
|
Undeveloped properties |
||||||||
|
Lease and well equipment |
||||||||
|
Accumulated depletion, depreciation & amortization |
( |
) |
( |
) |
||||
|
Net capitalized costs Total |
||||||||
|
Commercial and Other |
||||||||
|
Vehicles |
||||||||
|
Furniture and equipment |
||||||||
|
Accumulated depreciation |
( |
) |
( |
) |
||||
|
Net capitalized costs Total |
$ | $ | ||||||
The guidance set forth in the Continued Capitalization of Exploratory Well Costs paragraph of the Extractive Activities Topic of the FASB ASC requires that we evaluate all existing capitalized exploratory well costs and disclose the extent to which any such capitalized costs have become impaired and are expensed or reclassified during a fiscal period.
Depreciation, depletion and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration. Maintenance and repairs are expensed as incurred. Major renewals and improvements are capitalized and the assets replaced are retired.
The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use. Interest costs, to the extent they are incurred to finance expenditures during the construction phase, are included in property, plant and equipment and are depreciated over the service life of the related assets.
Royale Energy uses the “successful efforts” method to account for its exploration and production activities. Under this method, Royale Energy accumulates its proportionate share of costs on a well-by-well basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred and capitalizes expenditures for productive wells. Royale Energy amortizes the costs of productive wells under the unit-of-production method.
Royale Energy carries, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where Royale Energy is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expense. Other exploratory expenditures, including geophysical costs and annual lease rentals, are expensed as incurred.
Acquisition costs of proved oil and gas properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves.
Capitalized exploratory drilling and development costs associated with productive depletable extractive properties are amortized using unit-of-production rates based on the amount of proved developed reserves of oil and gas that are estimated to be recoverable from existing facilities using current operating methods. Under the unit-of-production method, oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank.
Production costs are expensed as incurred. Production involves lifting the oil and gas to the surface and gathering, treating, field processing and field storage of the oil and gas. The production function normally terminates at the outlet valve on the lease or field production storage tank. Production costs are those incurred to operate and maintain Royale Energy’s wells and related equipment and facilities. They become part of the cost of oil and gas produced. These costs, sometimes referred to as lifting costs, include such items as labor costs to operate the wells and related equipment; repair and maintenance costs on the wells and equipment; materials, supplies and energy costs required to operate the wells and related equipment; and administrative expenses related to the production activity. Proved oil and gas properties held and used by Royale Energy are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Royale Energy estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts and whether carrying amounts should be impaired. The Company performs the evaluation of carrying amounts at least annually or when economic events or commodity prices indicate that a substantial and measurable change in future cash flows has occurred. Cash flows used in impairment evaluations are developed using updated evaluation assumptions for crude oil and natural gas commodity prices. Annual volumes are based on field production profiles, which are also updated annually.
Impairment analyses are generally based on proved reserves. An asset group would be further assessed if the undiscounted cash flows were less than its’ carrying value. 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.
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. The valuation allowances are reviewed at least annually.
Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resulting gain or loss is recorded to Royale Energy’s Statement of Operations. Upon the sale of an entire interest in an unproved property where the property has been assessed for impairment individually, a gain or loss is recognized in Royale Energy’s Statement of Operations. If a partial interest in an unproved property is sold, any funds received are accounted for as a recovery of the cost in the interest retained with any excess funds recognized as a gain. Should Royale Energy’s turnkey drilling agreements include unproved property, total drilling costs incurred to satisfy its obligations are recovered by the total funds received under the agreements. Any excess funds are recorded as a Gain on Turnkey Drilling Programs, and any costs not recovered are capitalized and accounted for under the “successful efforts” method.
Royale Energy sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest. Gains on Turnkey Drilling Programs represent funds received from turnkey drilling participants in excess of all costs Royale incurs during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account; and are recognized only upon making this determination after Royale’s obligations have been fulfilled.
The contracts require the participants pay Royale Energy the full contract price upon execution of the agreement. Royale Energy completes the drilling activities typically between 10 and 30 days after drilling begins. The participant retains an undivided or proportional beneficial interest in the property and is also responsible for its proportionate share of operating costs. Royale Energy retains legal title to the lease. The participants purchase a working interest directly in the well bore.
In these working interest arrangements, the participants are responsible for sharing in the risk of development, but also sharing in a proportional interest in rights to revenues and proportional liability for the cost of operations after drilling is completed and the interest is conveyed to the participant.
A certain portion of the turnkey drilling participant’s funds received are non-refundable. The Company holds all funds invested as Deferred Drilling Obligations until drilling is complete. 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 $
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. Included in Restricted Cash are amounts for use in completion of turnkey drilling programs in progress.
Losses on properties sold are recognized when incurred or when the properties are held for sale and the fair value of the properties is less than the carrying value.
NOTE 3 – SERIES B PREFERRED STOCK
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
NOTE 4 – LOSS PER SHARE
|
Three Months Ended June 30, |
||||||||||||||||
|
2022 |
2021 |
|||||||||||||||
|
Basic |
Diluted |
Basic |
Diluted |
|||||||||||||
|
Net Loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Less: Preferred Stock Dividend |
||||||||||||||||
|
Net Loss Attributable to |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Weighted average common shares outstanding |
||||||||||||||||
|
Effect of dilutive securities |
||||||||||||||||
|
Weighted average common shares, including Dilutive effect |
||||||||||||||||
|
Per share: |
||||||||||||||||
|
Net Loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Six Months Ended June 30, |
||||||||||||||||
|
2022 |
2021 |
|||||||||||||||
|
Basic |
Diluted |
Basic |
Diluted |
|||||||||||||
|
Net Loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Less: Preferred Stock Dividend |
||||||||||||||||
|
Net Loss Attributable to |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Weighted average common shares outstanding |
||||||||||||||||
|
Effect of dilutive securities |
||||||||||||||||
|
Weighted average common shares, including Dilutive effect |
||||||||||||||||
|
Per share: |
||||||||||||||||
|
Net Loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
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
NOTE 5 – INCOME TAXES
Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. At the end of 2015, management reviewed the reliability of the Company’s net deferred tax assets, and due to the Company’s continued cumulative losses in recent years, the Company concluded it is not “more-likely-than-not” its deferred tax assets will be realized. 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 June 30, 2022 and 2021, respectively |
$ | ( |
) | $ | ( |
) | ||
|
Increase (decrease) in taxes resulting from: |
||||||||
|
State tax / percentage depletion / other |
||||||||
|
Other non-deductible expenses |
( |
) | ||||||
|
Change in valuation allowance |
||||||||
|
Provision (benefit) |
$ | $ | ||||||
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
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
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.
OVERVIEW
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 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 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 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 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 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 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 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. 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. 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 $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 $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 $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
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
As of June 30, 2022, our management, including its Chief Executive and Chief Financial Officers evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, the company concluded that there was a material weakness in our disclosure controls and procedures. These controls and procedures are based on the definition of disclosure controls and procedures in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As a result of the review by the CFO and CEO, the material weakness was identified as listed below.
|
● |
In connection with the audit of our 2021 and 2020 consolidated financial statements, management has identified a material weakness that exists because we did not maintain effective controls over our financial close and reporting process, and has concluded that the financial close and reporting process needs additional formal procedures to ensure that appropriate reviews occur on all financial reporting analysis. Management is in the process of designing and implementing updated control procedures that it believes will mitigate this material weakness. |
Because of the material weaknesses described above, our management was unable to conclude that our internal control over financial reporting was effective as of the end of period to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Notwithstanding the material weaknesses described above, our management, including our Chief Executive Officer and Chief Financial Officer, believes that the consolidated financial statements contained in this Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal periods presented in conformity with U.S. generally accepted accounting principles. In addition, the material weakness described did not result in the restatements of any of our audited or unaudited consolidated financial statements or disclosures for any previously reported periods.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except for the actions described above, that were taken to address the material weaknesses, there were no changes in our internal controls during the period ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be involved in various legal proceedings or may be subject to claims that arise in the ordinary course of business. The outcome of any such claims or proceedings cannot be predicted with certainty. As of the date of this filing, management is not aware of any such claims against the Company.
Item 1A. Risk Factors
Not applicable to smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, we have not issued any unregistered shares.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
|
31.1 |
|
|
31.2 |
|
|
32.1 |
|
|
32.2 |
|
|
101.INS |
Inline XBRL Instance Document |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema |
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
ROYALE ENERGY, INC. |
||
|
Date: August 19, 2022 |
/s/ Johnny Jordan |
|
|
Johnny Jordan, Chief Executive Officer |
||
|
Date: August 19, 2022 |
/s/ Ronald Lipnick |
|
|
Ronald Lipnick, Interim Chief Financial Officer |
||