1.
|
Please expand your disclosure to indicate when you expect to recognize the deferred revenues associated with your turnkey drilling contracts, particularly for those on which drilling has not commenced or will not be completed within the thirty day timeframe mentioned in your accounting policy note. If drilling has been delayed, or for contracts on which you had anticipated an extended period to elapse between the funding and drilling dates, please explain the reasons with details sufficient to understand when you expect to resolve those matters and for drilling to begin and conclude.
|
2.
|
Your response to comment one from our letter dated April 10, 2013 explains that you intend to allocate the proceeds from the turnkey drilling agreements between unproved properties and drilling services by determining the percentages of each type of cost for each agreement, and that amounts allocated to properties will be treated as a recovery of cost as described in FASB ASC 932-360-55-9. Since you will know the actual costs to acquire the interest in the unproved properties, explain your reasons for using estimates rather than actual costs in determining the percentages utilized in your computations. If your method will not result in fully offsetting acquisition costs allocable to the interest sold, explain how your practice would not overstate the book value of your properties.
|
3.
|
Please expand your disclosure to explain your policy for recognizing amounts allocated to the sale of unproved property interests along with your turnkey drilling arrangements, to clarify the manner of
|
4.
|
We note your responses to prior comments two and three, indicating that you have decided not to use the percentage-of-completion method. However, the guidance in FASB ASC 605-35-05-5 explains, with reference to the percentage-of-completion and completed-contract methods, that each "...should be used in specified circumstances and should not be used as acceptable alternatives for the same circumstances.” Given this guidance, and considering your statement in your letter dated April 2, 2013 that “…the most appropriate measure for recognizing revenue for our turnkey drilling arrangements is the percentage-of-completion method described in ASC 605-35-25-51 and 52,” please tell us the facts and circumstances that changed from your April 2 letter to your April 23 letter that led you to conclude that the percentage-of-completion method is not required. Please submit the analysis that you performed in making this decision, expanded as necessary to explain how the approach you have proposed is consistent with the guidance in FASB ASC 605-35-25-56 through 69, and FASB ASC 605-35-25-90 through 95.
|
5.
|
Given that you have expressed the possibility of applying the completed-contract method rather than the percentage-of-completion method to your turnkey drilling arrangements, also understanding that you had previously recognized pre-contract costs as incurred and restated your financial statements to address the problem of recognizing amounts received under your turnkey drilling contracts in advance of drilling (which had offset pre-contract costs recognized in your Statements of Operations), we would like to understand how each of these components is addressed in your new accounting policy.
Please sumit the revisions you propose to clarify these various concerns. Please also expand your disclosure on page F-9, stating "Revenues covering the pre-drilling and drilling costs are recognized in
|
6.
|
We note that you have not provided any explanation or description of the nature of the error correction reported, contrary to the guidance in prior comment four. Please revise your accounting and error correction disclosures as necessary to resolve the remaining concerns outlined in this letter, and submit the revisions that you believe would satisfy the requirements outlined in FASB ASC 250-10-50-7 through 11.
|
As Previously
|
||||||||
Reported
|
As Restated
|
|||||||
Balance sheet as of December 31, 2010:
|
||||||||
Accumulated deficit
|
(16,807,424
|
)
|
(18,037,663
|
)
|
||||
Balance sheet as of December 31, 2011:
|
||||||||
Deferred Tax Asset
|
6,055,803
|
6,771,474
|
||||||
Total Assets
|
20,745,589
|
21,461,260
|
||||||
Deferred Revenue from Turnkey Drilling
|
4,879,853
|
6,909,666
|
||||||
Total Current Liabilities
|
9,423,834
|
11,453,647
|
||||||
Total Liabilities
|
12,749,446
|
14,779,259
|
||||||
Accumulated Deficit
|
20,911,762
|
22,225,904
|
||||||
Total paid in capital and accumulated deficit
|
7,543,515
|
6,861,377
|
||||||
Total Stockholder’s Equity
|
7,996,143
|
6,682,001
|
||||||
Total Liabilities and Stockholder’s Equity
|
20,745,589
|
21,461,260
|
||||||
Statement of Operations for the year ended December 31, 2011:
|
||||||||
Turnkey Drilling
|
5,933,065
|
5,794,427
|
||||||
Total Revenues
|
11,671,048
|
11,532,410
|
||||||
Income From Operations
|
(5,643,891
|
)
|
(5,782,529
|
)
|
||||
Income Before Income Tax Expense
|
(5,782,109
|
)
|
(5,920,747
|
)
|
||||
Income Tax Provision (Benefit)
|
(1,677,771
|
)
|
(1,732,506
|
)
|
||||
Net Income (Loss)
|
(4,104,338
|
)
|
(4,188,241
|
)
|
||||
Comprehensive Income (Loss)
|
(4,101,303
|
)
|
(4,185,206
|
)
|
·
|
The Company is responsible for the adequacy and accuracy of the disclosure in the filing;
|
·
|
Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
|
·
|
The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
|
Revenues recognized
|
Table 1 – Predrilling. All pre-drilling revenue is recognized in the year received. For example, 2009 pre-drilling revenue is composed of Project 2008B ($439,579), Project 2009A ($1,639,731), and Project 2009B ($247,999), for a total of $2,327,309 (See Table 2)
|
Contract dates
|
Table 1 (Contract Date Range)
|
Drilling dates
|
Table 1 (Date Drilled)
|
Amounts designated as drilling and
|
Table 1 (Pre-Drilling and Drilling)
|
|
pre-drilling
|
Revenue recognized each period
|
Table 2 (Annual Totals – Income Statement)
|
Underlying properties & reserve status
|
Table 3
|
Sale Amount
|
Working Interest Recognized
|
||||||||||||
Project/Wells
|
Contracts Date Range
|
Date Drilled
|
Prior to 2009
|
2009
|
2010
|
2011
|
Total Sales Thru 2011
|
Prior to 2009
|
2009
|
2010
|
2011
|
Total Interest Recognized
|
Retained by Royal
|
Project - 2008B
|
Jul '08 - Sept '09
|
||||||||||||
Well #1
|
12/18/2009
|
$589,639
|
$286,695
|
$876,334
|
29.56%
|
14.25%
|
43.81%
|
55.88%
|
|||||
Well #2
|
10/28/2009
|
$539,090
|
$262,117
|
$801,207
|
29.56%
|
14.25%
|
43.81%
|
53.82%
|
|||||
Well #3
|
9/1/2010
|
$573,880
|
$279,032
|
$852,912
|
29.56%
|
14.25%
|
43.81%
|
55.88%
|
|||||
Well #4
|
5/31/2010
|
$637,890
|
$310,156
|
$948,046
|
29.56%
|
14.25%
|
43.81%
|
55.88%
|
|||||
TOTAL
|
$2,340,500
|
$1,138,000
|
$3,478,500
|
||||||||||
Pre-drilling @ 38.63%
|
$439,579
|
||||||||||||
Deferred Drilling @ 61.37%
|
$698,421
|
||||||||||||
Project - 2009A
|
Apr '09 - Dec '09
|
||||||||||||
Well #1
|
4/16/2010
|
$1,062,280
|
$1,062,280
|
57.14%
|
57.14%
|
40.21%
|
|||||||
Well #2
|
7/28/2010
|
$1,179,017
|
$1,179,017
|
57.14%
|
57.14%
|
41.19%
|
|||||||
Well #3
|
9/4/2011
|
$467,520
|
$467,520
|
17.14%
|
17.14%
|
81.68%
|
|||||||
Well #4
|
7/23/2010
|
$1,096,182
|
$1,096,182
|
57.14%
|
57.14%
|
12.23%
|
|||||||
TOTAL
|
$3,805,000
|
$3,805,000
|
|||||||||||
Pre-drilling @ 43.094%
|
$1,639,731
|
||||||||||||
Deferred Drilling @ 56.906%
|
$2,165,269
|
||||||||||||
Project - 2009B
|
Dec '09 - Aug '10
|
||||||||||||
Well #1
|
11/11/2010
|
$255,595
|
$647,285
|
$902,880
|
13.67%
|
34.61%
|
48.28%
|
49.09%
|
|||||
Well #2
|
9/9/2010
|
$239,713
|
$607,065
|
$846,778
|
13.67%
|
34.61%
|
48.28%
|
50.03%
|
|||||
Well #3
|
3/4/2011
|
$236,296
|
$598,412
|
$834,708
|
13.67%
|
34.61%
|
48.28%
|
50.06%
|
|||||
Well #4
|
6/19/2011
|
$230,896
|
$584,738
|
$815,634
|
13.67%
|
34.61%
|
48.28%
|
49.65%
|
|||||
TOTAL
|
$962,500
|
$2,437,500
|
$3,400,000
|
||||||||||
Pre-drilling @ 25.766
|
$247,999
|
$628,050
|
|||||||||||
Deferred Drilling @ 74.234%
|
$714,501
|
$1,809,450
|
|||||||||||
Project - 2010A
|
Jul '10 - Feb '11
|
||||||||||||
Well #1
|
11/20/2011
|
$986,567
|
$6,277
|
$992,844
|
54.02%
|
0.37%
|
54.39%
|
43.96%
|
|||||
Well #2
|
To be drilled
|
$518,368
|
$3,298
|
$521,666
|
43.40%
|
0.30%
|
43.70%
|
56.00%
|
|||||
Well #3
|
9/27/2011
|
$1,157,071
|
$7,362
|
$1,164,433
|
54.02%
|
0.37%
|
54.39%
|
44.22%
|
|||||
Well #4
|
12/2/2012
|
$925,656
|
$5,890
|
$931,546
|
54.02%
|
0.37%
|
54.39%
|
45.24%
|
|||||
TOTAL
|
$3,587,662
|
$22,827
|
$3,610,489
|
||||||||||
Pre-drilling @ 27.874%
|
$1,000,013
|
$6,363
|
|||||||||||
Deferred Drilling @ 72.126%
|
$2,587,649
|
$16,464
|
|||||||||||
Sale Amount
|
Working Interest Recognized
|
||||||||||||
Project/Wells
|
Contracts Date Range
|
Date Drilled
|
Prior to 2009
|
2009
|
2010
|
2011
|
Total Sales Thru 2011
|
Prior to 2009
|
2009
|
2010
|
2011
|
Total Interest Recognized
|
Retained by Royal
|
Project - 2010B
|
Oct '10 - Nov '10
|
||||||||||||
Well #1
|
11/30/2010
|
$445,874
|
$445,874
|
19.79%
|
19.79%
|
75.99%
|
|||||||
Well #2
|
1/29/2011
|
$445,874
|
$445,874
|
19.79%
|
19.79%
|
76.71%
|
|||||||
TOTAL
|
$891,747
|
$891,747
|
|||||||||||
Pre-drilling @ 39.138%
|
$349,015
|
||||||||||||
Deferred Drilling @ 60.862%
|
$542,732
|
||||||||||||
Project - 2010C
|
Dec '10 - Jul '11
|
||||||||||||
Well #1
|
10/31/2011
|
$87,867
|
$985,545
|
$1,073,412
|
4.05%
|
45.42%
|
49.47%
|
49.23%
|
|||||
Well #2
|
12/31/2012
|
$89,824
|
$1,007,493
|
$1,097,316
|
4.05%
|
45.42%
|
49.47%
|
50.22%
|
|||||
Well #3
|
To be drilled
|
$76,021
|
$852,674
|
$928,695
|
4.86%
|
54.54%
|
59.40%
|
40.23%
|
|||||
Well #4
|
To be drilled
|
$71,288
|
$799,594
|
$870,882
|
4.05%
|
45.42%
|
49.47%
|
50.22%
|
|||||
TOTAL
|
$325,000
|
$3,645,306
|
$3,970,306
|
||||||||||
Pre-drilling @ 27.659%
|
$89,892
|
$1,008,255
|
|||||||||||
Deferred Drilling @ 72.341%
|
$235,108
|
$2,637,051
|
|||||||||||
Project - 2011A
|
Jul '11 - Aug '12
|
||||||||||||
Well #1
|
To be drilled
|
$680,585
|
$680,585
|
30.25%
|
30.25%
|
48.90%
|
|||||||
Well #2
|
To be drilled
|
$680,585
|
$680,585
|
30.25%
|
30.25%
|
48.90%
|
|||||||
Well #3
|
To be drilled
|
$556,380
|
$556,380
|
30.25%
|
30.25%
|
48.90%
|
|||||||
Well #4
|
To be drilled
|
$542,144
|
$542,144
|
30.25%
|
30.25%
|
48.90%
|
|||||||
Well #5
|
To be drilled
|
$564,806
|
$564,806
|
30.25%
|
30.25%
|
48.90%
|
|||||||
TOTAL
|
$3,024,500
|
$3,024,500
|
|||||||||||
Pre drilling @ 26.805
|
$810,712
|
||||||||||||
Deferred Drilling @ 73.195
|
$2,213,788
|
Sale Amount
|
Working Interest Recognized
|
|||||||||||||
Project/Wells
|
Contracts Date Range
|
Date Drilled
|
Prior to 2009
|
2009
|
2010
|
2011
|
Total Sales Thru 2011
|
Prior to 2009
|
2009
|
2010
|
2011
|
Total Interest Recognized
|
Retained by Royal
|
|
Deferred Drilling Recognition – Completion of Obligations under Turnkey Agreement
|
||||||||||||||
2006A – Well #2
|
1/31/2009
|
$422,157
|
||||||||||||
2007A – Well #1
|
1/31/2009
|
$502,304
|
||||||||||||
2008B – Well #2
|
10/28/2009
|
$491,718
|
||||||||||||
2008A – Well #3
|
11/4/2009
|
$780,472
|
||||||||||||
2008B – Well #1
|
12/18/2009
|
$537,829
|
||||||||||||
2009A – Well #1
|
4/16/2010
|
$604,500
|
||||||||||||
2006B – Well #1
|
5/31/2010
|
$1,103,980
|
||||||||||||
2008B – Well #4
|
5/31/2010
|
$581,828
|
||||||||||||
2009A – Well #4
|
7/23/2010
|
$623,792
|
||||||||||||
2009A – Well #2
|
7/28/2010
|
$670,930
|
||||||||||||
2008B – Well #3
|
9/1/2010
|
$523,440
|
||||||||||||
2009B – Well #2
|
9/9/2010
|
$627,039
|
||||||||||||
2004A – Well #5
|
9/30/2010
|
$122,569
|
||||||||||||
2009B – Well #1
|
11/11/2010
|
$671,833
|
||||||||||||
2010B – Well #1
|
11/30/2010
|
$271,366
|
||||||||||||
2010B – Well #2
|
1/29/2011
|
$271,366
|
||||||||||||
2009B – Well #3
|
3/4/2011
|
$617,350
|
||||||||||||
2009B – Well #4
|
6/19/2011
|
$607,729
|
||||||||||||
2009A – Well #3
|
9/4/2011
|
$266,047
|
||||||||||||
2010A – Well #3
|
9/27/2011
|
$847,972
|
||||||||||||
2010C – Well #1
|
10/31/2011
|
$782,410
|
||||||||||||
2010A – Well #1
|
1/31/2009
|
$714,947
|
||||||||||||
Deferred Drilling Recognized
|
$2,734,479
|
$5,801,276
|
$4,107,822
|
Annual Totals – Income Statement
|
2009
|
2010
|
2011
|
2009-2011
Total
|
||
Pre-drilling
|
$2,327,309
|
$2,066,969
|
$1,825,329
|
$6,219,608
|
||
Deferred Drilling Recognized as Revenue
|
$2,734,479
|
$5,801,276
|
$4,107,822
|
$12,643,577
|
||
Total Turnkey Drilling Revenue
|
||||||
Per Above Schedule
|
$5,061,789
|
$7,868,246
|
$5,933,151
|
$18,863,185
|
||
Per Financial Stmts
|
$5,061,804
|
$7,868,273
|
$5,933,065
|
$18,863,142
|
||
Difference
|
-$15
|
-$27
|
$86
|
$43
|
||
Annual Totals
|
||||||
Total Receipts
|
$5,905,500
|
$7,241,909
|
$6,692,633
|
$19,840,042
|
||
Total Spoilage Costs
|
$98,042
|
$201,883
|
$12,959
|
$312,884
|
||
Total Marketing Costs
|
$1,171,511
|
$1,175,049
|
$1,284,575
|
$3,631,185
|
||
Total Lease Costs – Unproved Property Only
|
$17,327
|
$133,534
|
$85,444
|
$236,305
|
||
Total Other Land Costs – Unproved Property Only
|
$37,788.40
|
$150,067.80
|
$78,523.57
|
$266,380
|
||
Total Intangible Drilling Costs
|
$3,685,931
|
$4,491,656
|
$6,552,776
|
$14,730,362
|
||
Total Tangible Drilling Costs
|
$531,016
|
$671,762
|
$794,967
|
$1,997,746
|
||
Total Costs
|
$5,541,615
|
$6,823,952
|
$8,809,245
|
$21,174,812
|
||
Total Recipts less Total Costs
|
$363,885
|
$417,957
|
-$2,116,612
|
-$1,334,771
|
||
Percentage of Lease Costs of Total Costs
|
0.31%
|
1.96%
|
0.97%
|
1.12%
|
Original Property Description
|
Drilled Property Description
|
||||||||||||
Project/Wells
|
Contracts Date Range
|
Date Drilled
|
Location
|
Reserve Status
|
Substitution of Original Location
|
Location
|
Reserve Status
|
Successful Well
|
|||||
Project - 2008B
|
Jul '08 - Sept '09
|
||||||||||||
Well #1
|
12/18/2009
|
Colusa County, CA
|
Unproved
|
YES
|
Colusa County, CA
|
Unproved
|
Dry Hole
|
||||||
Well #2
|
10/28/2009
|
Colusa County, CA
|
Unproved
|
NO
|
Proved
|
||||||||
Well #3
|
9/1/2010
|
Kern County, CA
|
Unproved
|
NO
|
Dry Hole
|
||||||||
Well #4
|
5/31/2010
|
To be determined
|
Unknown
|
N/A
|
Sacramento County, CA
|
Unproved
|
Dry Hole
|
||||||
Project - 2009A
|
Apr '09 - Dec '09
|
||||||||||||
Well #1
|
4/16/2010
|
Colusa County, CA
|
Unproved
|
NO
|
Proved
|
||||||||
Well #2
|
7/28/2010
|
Colusa County, CA
|
Unproved
|
NO
|
Proved
|
||||||||
Well #3
|
9/4/2011
|
San Joaquin County, CA
|
Unproved
|
NO
|
Proved
|
||||||||
Well #4
|
7/23/2010
|
To be determined
|
Unknown
|
N/A
|
Tehema County, CA
|
Proved
|
|||||||
Project - 2009B
|
Dec '09 - Aug '10
|
||||||||||||
Well #1
|
11/11/2010
|
Colusa County, CA
|
Unproved
|
NO
|
Proved
|
||||||||
Well #2
|
9/9/2010
|
Tehama County, CA
|
Unproved
|
NO
|
Dry Hole
|
||||||||
Well #3
|
3/4/2011
|
Colusa County, CA
|
Unproved
|
YES
|
Colusa, County, CA
|
Unproved
|
Dry Hole
|
||||||
Well #4
|
6/19/2011
|
To be determined
|
Unknown
|
N/A
|
Colusa, County, CA
|
Unproved
|
Dry Hole
|
||||||
Project - 2010A
|
Jul '10 - Feb '11
|
||||||||||||
Well #1
|
11/20/2011
|
Colusa County, CA
|
Unproved
|
YES
|
Colusa, County, CA
|
Unproved
|
Dry Hole
|
||||||
Well #2
|
To be drilled
|
Tehama County, CA
|
Unproved
|
N/A
|
|||||||||
Well #3
|
9/27/2011
|
Colusa County, CA
|
Unproved
|
NO
|
Proved
|
||||||||
Well #4
|
12/2/2012
|
To be determined
|
Unknown
|
N/A
|
Colusa, County, CA
|
Unproved
|
Dry Hole
|
||||||
Project - 2010B
|
Oct '10 - Nov '10
|
||||||||||||
Well #1
|
11/30/2010
|
Colusa County, CA
|
Proved
|
NO
|
Proved
|
||||||||
Well #2
|
1/29/2011
|
Colusa County, CA
|
Proved
|
NO
|
Proved
|
||||||||
Project - 2010C
|
Dec '10 - Jul '11
|
||||||||||||
Well #1
|
10/31/2011
|
Colusa County, CA
|
Unproved
|
No
|
|||||||||
Well #2
|
12/31/2012
|
Colusa County, CA
|
Unproved
|
YES
|
Colusa, County, CA
|
Unproved
|
Proved
|
||||||
Well #3
|
To be drilled
|
Solana County, CA
|
Unproved
|
N/A
|
|||||||||
Well #4
|
To be drilled
|
To be determined
|
Unknown
|
N/A
|
|||||||||
Project - 2011A
|
Jul '11 - Aug '12
|
||||||||||||
Well #1
|
To be drilled
|
Colusa County, CA
|
Unproved
|
N/A
|
|||||||||
Well #2
|
To be drilled
|
Colusa County, CA
|
Unproved
|
N/A
|
|||||||||
Well #3
|
To be drilled
|
Colusa County, CA
|
Unproved
|
N/A
|
|||||||||
Well #4
|
To be drilled
|
Colusa County, CA
|
Unproved
|
N/A
|
|||||||||
Well #5
|
To be drilled
|
Solana County, CA
|
Unproved
|
N/A
|
June 25, 2013 - Revenue Recognition Comparison
|
||||||||||||||||||
Royale Energy, Inc.
|
||||||||||||||||||
At December 31, 2012
|
||||||||||||||||||
Percentage-of-Completion & Completed-Contract Method vs SEC ASB No. 104
|
||||||||||||||||||
Period
|
Well
|
Date Drilled
|
Gross Lease & Land
|
Gross Drilling & Completion
|
Total Gross Annual Cost
|
Total Gross Project Cost
|
Percent of Costs Incurred
|
Total Project Proceeds
|
Project Proceeds to be Recognized
|
|||||||||
2011
|
||||||||||||||||||
2010B - Well #2
|
1/29/2011
|
$0
|
$1,597,698
|
$1,597,698
|
$1,597,698
|
100%
|
$445,874
|
$445,874
|
||||||||||
2009B - Well #3
|
3/4/2011
|
$4,689
|
$1,386,209
|
$1,390,898
|
$1,390,898
|
100%
|
$834,708
|
$834,708
|
||||||||||
2009B - Well #4
|
6/19/2011
|
$34,461
|
$549,599
|
$584,059
|
$584,059
|
100%
|
$815,634
|
$815,634
|
||||||||||
2009A - Well #3
|
9/4/2011
|
$65,074
|
$838,210
|
$903,284
|
$903,284
|
100%
|
$467,520
|
$467,520
|
||||||||||
2010A - Well #3
|
9/27/2011
|
$37,439
|
$1,047,332
|
$1,084,771
|
$1,084,771
|
100%
|
$1,164,433
|
$1,164,433
|
||||||||||
2010C - Well #1
|
10/31/2011
|
$13,767
|
$1,218,865
|
$1,232,632
|
$1,232,632
|
100%
|
$1,073,412
|
$1,073,412
|
||||||||||
2010A - Well #1
|
11/20/2011
|
$8,538
|
$709,830
|
$718,368
|
$718,368
|
100%
|
$992,844
|
$992,844
|
||||||||||
$163,968
|
$7,347,743
|
$7,511,711
|
$7,511,711
|
$5,794,425
|
$5,794,425
|
|||||||||||||
Turnkey Revenue as Recorded on 10K
|
$5,794,427
|
|||||||||||||||||
Difference
|
$2
|
|||||||||||||||||
2012
|
||||||||||||||||||
2010A - Well #4
|
12/2/2012
|
39,439.34
|
658,747.20
|
$698,187
|
$698,187
|
100%
|
$931,546
|
$931,546
|
||||||||||
2010C - Well #2
|
12/31/2012
|
21,472.66
|
964,691.48
|
$986,164
|
$986,164
|
100%
|
$1,097,316
|
$1,097,316
|
||||||||||
$60,912
|
$1,623,439
|
$1,684,351
|
$1,684,351
|
$2,028,862
|
$2,028,862
|
|||||||||||||
Turnkey Revenue as Recorded on 10K
|
$2,028,863
|
|||||||||||||||||
Difference
|
$1
|