Royal Energy Resources, Inc. - FORM 10-Q

Attached files

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EX-31 - Royal Energy Resources, Inc.	v218434_ex31.htm
EX-32 - Royal Energy Resources, Inc.	v218434_ex32.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: February 28, 2011

File No. 000-52547

Royal Energy Resources, Inc.

(Name of small business issuer in our charter)

Delaware	11-3480036
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

543 Bedford Avenue, #176, Brooklyn, NY 11211

(Address of principal executive offices) (Zip Code)

Registrant's telephone number: 800-620-3029

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ Nox

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 81,863,731 shares of common stock outstanding as of April 12, 2011.

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("Commission"). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, contained in the Company’s Form 10-K dated August 31, 2010.

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION

Item 1:	Condensed Unaudited Financial Statements	3

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4T:	Controls and Procedures	25

PART II - OTHER INFORMATION		26

Item 1:	Legal Proceedings	26

Item 1A:	Risk Factors	26

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3:	Defaults upon Senior Securities	26

Item 4:	Submission of Matters to a Vote of Security Holders	26

Item 5:	Other Information	26

Item 6:	Exhibits	26

PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Condensed Balance Sheets

February 28, 2011 (unaudited) and August 31, 2010

	February 28,			August 31,
	2011			2010
Assets
Current assets
Cash and cash equivalents	$	12,563		$	311
Accounts receivable		17,619			10,617
Prepaid expenses		-			20,571
Total current assets		30,182			31,499
Oil and gas properties, on full cost method:
Unproved properties not being amortized		6,395			6,350
Other assets
Prepaid drilling costs		-			28,583
Investment in uranium properties		4,329			4,329
Total other assets		4,329			32,912
Total assets	$	40,906		$	70,761
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable	$	60,948		$	73,226
Accrued expenses		-			243
Debenture payable		9,750			-
Convertible note payable		80,000			86,000
Total current liabilities		150,698			159,469

Commitments and contingencies

Stockholders' equity (deficit)
Preferred stock: $0.00001 par value; authorized 10,000,000 shares; 100,000 at February 28, 2011 and at August 31, 2010, issued and outstanding, respectively		1			1
Common stock: $0.00001 par value; authorized 100,000,000 shares; 86,113,731 and 39,713,731 shares issued and outstanding at February 28, 2011 and August 31, 2010, respectively		861			397
Additional paid-in capital		3,490,929			3,267,893
Deferred option and stock compensation		(17,666	)		(28,809	)
Common stock subscription receivable		(578,036	)		(422,340	)
Deficit accumulated during the development stage		(3,005,881	)		(2,905,850	)
Total stockholders' equity (deficit)		(109,792	)		(88,708	)
Total liabilities and stockholders' equity (deficit)	$	40,906		$	70,761

See accompanying notes to condensed financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Condensed Statements of Operations

Three Months Ended February 28, 2011 and 2010

(Unaudited)

	Three Months Ended
	February 28,
	2011			2010

Oil and gas production	$	-		$	1,107
Total revenues		-			1,107
Costs and expenses:
Lease operating expense		-			1,900
Production taxes		-			80
Depreciation, depletion and amortization		-			121
Non-cash compensation		35,786			95,215
Other selling, general and administrative expense		15,875			14,135
Total costs and expenses		51,661			111,451
Loss from operations		(51,661	)		(110,344	)
Other expenses (income):
Interest income - related party		(2,539	)		(1,505	)
Interest expense		3,100			3,750
		561			2,245
Loss before income taxes		(52,222	)		(112,589	)
Provision for income taxes		-			-
Net loss	$	(52,222	)	$	(112,589	)

Net loss per share, basic and diluted	$	(0.00	)	$	(0.00	)

Weighted average shares outstanding, basic and diluted		74,269,287			23,460,398

See accompanying notes to condensed financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Condensed Statements of Operations

Six Months Ended February 28, 2011 and 2010 and

from inception (July 22, 2005) through February 28, 2011

(Unaudited)

							Inception
							(July 22, 2005)
	Six Months Ended						Through
	February 28,						February 28,
	2011			2010			2011

Oil and gas production	$	-		$	3,152		$	12,704
Total revenues		-			3,152			12,704
Costs and expenses:
Lease operating expense		504			3,262			14,494
Production taxes		-			227			913
Depreciation, depletion and amortization		-			377			2,148
Asset impairment		-			-			75,164
Non-cash compensation		53,643			273,634			2,157,549
Other selling, general and administrative expense		44,839			70,284			650,073
Total costs and expenses		98,986			347,784			2,900,341
Loss from operations		(98,986	)		(344,632	)		(2,887,637	)
Other expenses (income):
Loss on disposition by rescission agreement of condominium		-			-			15,000
Loss on comodities trading		-			719			36,557
Interest income		-			-			(4,414	)
Interest income - related party		(5,808	)		(2,748	)		(19,865	)
Interest expense		6,853			6,750			61,971
		1,045			4,721			89,249
Loss before income taxes		(100,031	)		(349,353	)		(2,976,886	)
Provision for income taxes		-			-			-
Net loss	$	(100,031	)	$	(349,353	)	$	(2,976,886	)

Net loss per share, basic and diluted	$	(0.00	)	$	(0.02	)

Weighted average shares outstanding, basic and diluted		64,205,444			22,954,753

See accompanying notes to condensed financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Statements of Stockholders' Equity

Inception of Development Stage, July 22, 2005, through November 30, 2010

											Additional
	Preferred stock				Common stock						Paid-in
	Shares		Amount		Shares			Amount			Capital

Inception, July 22, 2005		-		-		5,930,300			59			22,426
Sale of common stock for cash		-		-		320,000			3			31,997
Common stock issued for real estate investment		-		-		1,900,000			19			189,981
Contribution to capital		-		-		-			-			6,560
Net loss		-		-		-			-			-
Balance August 31, 2005		-		-		8,150,300			81			250,964
Sale of common stock for cash		-		-		1,086,667			12			120,488
Net loss		-		-		-			-			-
Balance, August 31, 2006		-		-		9,236,967			93			371,452
Sale of common stock		-		-		4,670,060			46			161,614
Net loss		-		-		-			-			-
Balance, August 31, 2007		-		-		13,907,027			139			533,066
Sale of preferred stock		100,000		1		-			-			999
Sale of common stock		-		-		2,295,704			23			413,149
Common stock issued for consulting contracts		-		-		2,965,000			30			977,745
Cash portion of consulting contracts		-		-		-			-			-
Rescission of real estate purchase		-		-		(1,900,000	)		(19	)		(199,981	)
Amortization of prepaid consulting contracts:
Non-cash portion		-		-		-			-			-
Cash portion		-		-		-			-			-
Stock subscription receivable:
Payments received		-		-		-			-			-
Interest accrued		-		-		-			-			-
Net loss		-		-		-			-			-
Balance, August 31, 2008		100,000		1		17,267,731			173			1,724,978
Sale of common stock for cash		-		-		20,000			-			3,600
Common stock issued for consulting contracts		-		-		3,551,000			36			887,403
Cash portion of consulting contracts		-		-		-			-			-
Amortization of prepaid consulting contracts:
Non-cash portion		-		-		-			-			-
Cash portion		-		-		-			-			-
Stock subscription receivable:
Sold		-		-		1,550,000			15			263,485
Payments received		-		-		-			-			-
Interest accrued		-		-		-			-			-
Net loss		-		-		-			-			-
Balance, August 31, 2009		100,000	$	1		22,388,731		$	224		$	2,879,466

(Continued)

See accompanying notes to financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Statements of Stockholders' Equity, continued

Inception of Development Stage, July 22, 2005, through November 30, 2010

										Deficit
										Accumulated
										During
	Subscription			Deferred			Accumulated			Development
	Receivable			Expenses			Deficit			Stage			Total
										(Restated
										Note 11)

Inception, July 22, 2005		-			-			(28,995	)		-			(6,510	)
Sale of common stock for cash		-			-			-			-			32,000
Common stock issued for real estate investment		-			-			-			-			190,000
Contribution to capital		-			-			-			-			6,560
Net loss		-			-			-			(7,739	)		(7,739	)
Balance August 31, 2005		-			-			(28,995	)		(7,739	)		214,311
Sale of common stock for cash		-			-			-			-			120,500
Net loss		-			-			-			(80,825	)		(80,825	)
Balance, August 31, 2006		-			-			(28,995	)		(88,564	)		253,986
Sale of common stock		(81,590	)		-			-			-			80,070
Net loss		-			-			-			(95,813	)		(95,813	)
Balance, August 31, 2007		(81,590	)		-			(28,995	)		(184,377	)		238,243
Sale of preferred stock		-			-			-			-			1,000
Sale of common stock		-			-			-			-			413,172
Common stock issued for consulting contracts		-			(977,775	)		-			-			-
Cash portion of consulting contracts		-			(85,000	)		-			-			(85,000	)
Rescission of real estate purchase		-			-			-			-			(200,000	)
Amortization of prepaid consulting contracts:
Non-cash portion		-			338,547			-			-			338,547
Cash portion		-			43,529			-			-			43,529
Stock subscription receivable:
Payments received		13,400			-			-			-			13,400
Interest accrued		(3,902	)		-			-			-			(3,902	)
Net loss		-			-			-			(467,712	)		(467,712	)
Balance, August 31, 2008		(72,092	)		(680,699	)		(28,995	)		(652,089	)		291,277
Sale of common stock for cash		-			-			-			-			3,600
Common stock issued for consulting contracts		-			(887,440	)		-			-			-
Cash portion of consulting contracts		-			(40,901	)		-			-			(40,901	)
Amortization of prepaid consulting contracts:
Non-cash portion		-			1,252,861			-			-			1,252,861
Cash portion		-			82,371			-			-			82,371
Stock subscription receivable:
Sold		(77,500	)		-			-			-			186,000
Payments received		1,168												1,168
Interest accrued		(3,545	)											(3,545	)
Net loss		-			-			-			(1,723,711	)		(1,723,711	)
Balance, August 31, 2009	$	(151,969	)	$	(273,808	)	$	(28,995	)	$	(2,375,800	)	$	49,120

See accompanying notes to financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Statements of Stockholders' Equity

Inception of Development Stage, July 22, 2005, through November 30, 2010

											Additional
	Preferred stock				Common stock						Paid-in
	Shares		Amount		Shares			Amount			Capital

Balance August 31, 2009		100,000	$	1		22,388,731		$	224		$	2,879,466
Common stock issued for:
Consulting contracts		-		-		2,525,000			25			81,475
Drilling program participation		-		-		100,000			1			5,999
Loan extension		-		-		700,000			7			13,993
Amortization of prepaid Consulting contracts		-		-		-			-			-
Beneficial conversion feature of convertible debt		-		-		-			-			2,100
Stock subscription receivable:
Sold		-		-		14,000,000			140			284,860
Payments received		-		-		-			-			-
Interest accrued		-		-		-			-			-
Net loss		-		-		-			-			-
Balance August 31, 2010		100,000	$	1		39,713,731		$	397		$	3,267,893
Amortization of prepaid Consulting contracts		-		-		-			-			-
Common stock issued for:
Consulting contracts		-		-		2,000,000			20			19,980
Loan fee		-		-		1,500,000			15			22,485
Beneficial conversion feature of convertible debt		-		-		-			-			9,000
Stock subscription receivable:
Sold		-		-		43,000,000			430			171,570
Payments received		-		-		-			-			-
Interest accrued		-		-		-			-			-
Common stock cancelled for rescinded drilling program		-		-		(100,000	)		(1	)		1
Net loss		-		-		-			-			-
Balance February 28, 2011		100,000	$	1		86,113,731		$	861		$	3,490,929

(Continued)

See accompanying notes to financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Statements of Stockholders' Equity, continued

Inception of Development Stage, July 22, 2005, through November 30, 2010

										Deficit
										Accumulated
										During
	Subscription			Deferred			Accumulated			Development
	Receivable			Expenses			Deficit			Stage			Total

Balance, August 31, 2009	$	(151,969	)	$	(273,807	)	$	(28,995	)	$	(2,375,800	)	$	49,120
Common stock issued for:
Consulting contracts		-			(81,500	)		-			-			-
Drilling program participation		-			-			-			-			6,000
Loan extension		-			-			-			-			14,000
Amortization of prepaid consulting contracts:		-			326,498			-			-			326,498
Beneficial conversion feature of convertible debt		-			-			-			-			2,100
Stock subscription receivable:
Sold		(285,000	)		-			-			-			-
Payments received		21,239												21,239
Interest accrued		(6,610	)											(6,610	)
Net loss		-			-			-			(501,055	)		(501,055	)
Balance August 31, 2010		(422,340	)		(28,809	)		(28,995	)		(2,876,855	)		(88,708	)
Amortization of prepaid Consulting contracts		-			31,143			-			-			31,143
Common stock issued for:
Consulting contracts		-			(20,000	)		-			-			-
Loan fee		-			-			-			-			22,500
Beneficial conversion feature of convertible debt		-			-			-			-			9,000
Stock subscription receivable:
Sold		(172,000	)		-			-			-			-
Payments received		22,112			-			-			-			22,112
Interest accrued		(5,808	)		-			-			-			(5,808	)
Common stock cancelled for rescinded drilling program		-			-			-			-			-
Net loss		-			-			-			(100,031	)		(100,031	)
Balance February 28, 2011	$	(578,036	)	$	(17,666	)	$	(28,995	)	$	(2,976,886	)	$	(109,792	)

See accompanying notes to financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Condensed Statements of Cash Flows

Six Months Ended February 28, 2011 and 2010 and

from inception (July 22, 2005) through February 28, 2011

(Unaudited)

							From inception
							July 22, 2005
	Six months ended						through
	February 28,						February 28,
	2011			2010			2011

Cash flows from operating activities
Net loss	$	(100,031	)	$	(349,353	)	$	(2,976,886	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and depletion		-			377			2,148
Value of common shares issued for services		53,643			273,634			2,157,549
Loss on rescission of condominium purchase		-			-			15,000
Interest accrued on stock subscription		(5,808	)		(2,748	)		(19,865	)
Asset impairment		-			-			75,164
Loan extension paid with common stock		-			-			14,000
Beneficial conversion feature of convertible note payable		750			-			2,850
Change in other assets and liablities:
Accounts receivable		6,500			(1,093	)		(367	)
Prepaid expenses and other assets		21,075			43,710			49,392
Accounts payable and accrued expenses		2,056			16,971			(15,948	)
Net cash used in operations		(21,815	)		(18,502	)		(696,963	)

Cash flows from investing activities
Investment in real estate		-			-			(11,000	)
Oil and gas property expenditures		(60	)		(7,065	)		(150,402	)
Proceeds from sale of undeveloped leasehold		-			-			70,275
Investment in uranium properties		-			-			(5,673	)
Net cash provided by (used in) investing activities		(60	)		(7,065	)		(96,800	)

Cash flows from financing activities
Proceeds of stockholder loans		-			-			50
Proceeds from subscription receivable		22,127			6,944			57,934
Loan proceeds		18,000			-			164,000
Loan repayment		(6,000	)		-			(66,000	)
Proceeds from sale of common stock		-			-			649,342
Proceeds from sale of preferred stock		-			-			1,000
Net cash provided by (used in) financing activities		34,127			6,944			806,326

Net increase (decrease) in cash and cash equivalents		12,252			(18,623	)		12,563
Cash and cash equivalents, beginning of period		311			18,680			-
Cash and cash equivalents, end of period	$	12,563		$	57		$	12,563

(Continued)

See accompanying notes to condensed financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

Condensed Statements of Cash Flows, Continued

Six Months Ended February 28, 2011 and 2010, and

from inception (July 22, 2005) through February 28, 2011

(Unaudited)

					From inception
					July 22, 2005
	Six months ended				through
	February 28,				February 28,
	2011		2010		2011

Supplemental cash flow information
Cash paid for interest	$	6,100	$	6,750	$	29,475
Cash paid for income taxes		-		-		-

Non-cash investing and financing activities:
Issuance of common stock for real estate	$	-	$	-	$	190,000
Contribution of stockholder loan to capital		-		-		6,560
Disposition of real estate per stock rescission agreement		-		-		200,000
Common stock issued for participation in drilling program		-		6,000		6,000
Common stock issued for stock subscription receivables		172,000		-		615,922
Accounts receivable exchanged for accounts payable		14,578		-		14,578
Drilling prepayment transferred to accounts receivable		28,079		-		28,079
Common stock cancelled for rescinded drilling program		1,000		-		1,000

See accompanying notes to condensed financial statements.

ROYAL ENERGY RESOURCES, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

February 28, 2011

(Unaudited)

1	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

These financial statements include the accounts of Royal Energy Resources, Inc. (“RER”) (formerly known as World Marketing, Inc. ("WMI"). RER is a development stage enterprise within the meaning of Financial Accounting Standards Board Topic 915.

RER was organized in 1999 and attempted to start a web-based marketing business for health-care products. The health-care products business had no revenue and was discontinued in 2001 and the Company remained inactive until July 22, 2005 when it commenced its real estate business. Accordingly, the current development stage has a commencement date of July 22, 2005 and all prior losses of $28,995 have been transferred to accumulated deficit.

The condensed financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These condensed financial statements have not been audited.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report for the year ended August 31, 2010.

In preparing the accompanying unaudited condensed consolidated financial statements, the Company has reviewed, as determined necessary by the Company's management, events that have occurred after February 28, 2011, up until the issuance of the financial statements.

Organization and nature of business

RER is a Delaware corporation which was incorporated on March 22, 1999, under the name Webmarketing, Inc. ("Webmarketing"). On July 7, 2004, the Company revived its charter and changed its name from Webmarketing to World Marketing, Inc. In December 2007 the Company changed its name to Royal Energy Resources, Inc.

Commencing at the end of August 2006, the Company began acquiring oil and gas and uranium leases and has since resold some of its leases and retained an overriding royalty interest. During the last half of fiscal 2008, the Company invested in three oil & gas drilling prospects in Washington County, Oklahoma, and had advanced additional funds to participate in three re-works. Two wells began initial sales in November 2008. All workover attempts were unsuccessful and the properties were abandoned during fiscal 2010. All proven properties were sold effective October 1, 2010.

The Company is currently pursuing gold, silver, copper and rare earth metals mining concessions in Romania, Bulgaria and Canada and mining leases in the United States. If successful, the Company plans to concentrate its efforts to develop these properties.

On July 22, 2005, the Company began selling its common stock to obtain the funds necessary to begin implementation of its new business plan. The primary objective of the new business plan was to acquire, make necessary renovations and resell both residential and commercial real estate. The Company expected to acquire real estate using cash, mortgage financing or its common stock, or any combination thereof, and anticipated that the majority of the properties acquired would be in the New York City area. The Company rescinded the purchase of the real estate property it had previously acquired during the quarter ended May 31, 2008 and currently is limiting any potential real estate acquisitions to Eastern European countries, due to the current real estate environment in the United States.

Webmarketing attempted to establish a web-based marketing business for health care products from its inception in 1999 until 2001. However, the Company did not establish any revenues and discontinued these operations in 2001.

Going Concern

The Company has not established sources of revenues sufficient to fund the development of business, projected operating expenses and commitments for the next year. The Company, which has been in the development stage since its inception, March 22, 1999, has accumulated a net loss of $3,005,881 ($28,995 in a prior development stage) through February 28, 2011, and incurred losses of $100,031 for the six months then ended.

In March 2006, the Company sold 650,000 shares of its common stock for $65,000 to provide a portion of the cash required to purchase its first real estate investment. Subsequently, the Company continued to sell its common stock to raise capital to continue operations. During 2008, the Company revised its business plan, rescinded its real estate purchase and began investing in energy leases and oil and gas drilling prospects. However, while energy prices have improved the energy business has a high degree of risk and there can be no assurance that the Company will be able to obtain sufficient funding to develop the Company's current business plan.

Cash and cash equivalents

The Company considers all cash on hand, cash in banks and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.

Revenue recognition

Revenue from the sale of oil and gas leases is recognized in accordance with the provisions of full cost accounting.

Oil and gas production income will be recognized when the product is delivered to the purchaser. We will receive payment from one to three months after delivery. At the end of each month, we will estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received; however, differences should be insignificant.

Revenue from real estate sales is recognized when the related property is subject to a binding contract and all significant obligations have been satisfied.

Stock option plans

The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. The accounting literature covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its options. However, the Black-Scholes option valuation model provides the best available estimate for this purpose.

Property and equipment

The Company follows the full cost method of accounting for oil and natural gas operations. Under this method all productive and nonproductive costs incurred in connection with the acquisition, exploration and development of oil and natural gas reserves are capitalized. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves. The costs of unevaluated oil and natural gas properties are excluded from the amortizable base until the time that either proven reserves are found or it has determined that such properties are impaired. The Company had $6,395 and $6,350 at February 28, 2011 and August 31, 2010, respectively in unproved property costs that have not been evaluated and are not being amortized. As properties are evaluated, the related costs would be transferred to proven oil and natural gas properties using full cost accounting. Amortization in the amount of $377 and $121 was recorded during the six and three months ended February 28, 2010 and none was recorded in the 2011 period.

Under the full cost method the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the “Ceiling Limitation”). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the ceiling limitation is charged to expense in the period in which it occurs and is not subsequently reinstated. Reserve estimates used in determining estimated future net revenues have been prepared by a consultant to the Company.

The Company assesses the recoverability of the carrying value of its non-oil and gas long-lived assets when events occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset. No impairments of non-oil and gas long-lived assets have been recorded as of February 28, 2011.

Depreciation and amortization

All capitalized costs of oil and natural gas properties and equipment, including the estimated future costs to develop proved reserves, are amortized using the unit-of-production method based on total proved reserves. Depreciation of other equipment is computed on the straight line method over the estimated useful lives of the assets, which range from three to twenty-five years.

Natural gas sales and gas imbalances

The Company follows the entitlement method of accounting for natural gas sales, recognizing as revenues only its net interest share of all production sold. Any amount attributable to the sale of production in excess of or less than the Company’s net interest is recorded as a gas balancing asset or liability. At February 28, 2011 and August 31, 2010, there were no natural gas imbalances.

Investments in real estate

Costs associated with the acquisition, development and construction of real estate properties are capitalized when incurred. The carrying value of the properties will be reviewed, at least annually, for impairment. In the event the property is leased, depreciation will be recorded based upon a thirty-year life. The Company rescinded the purchase of the real estate property it had during the quarter ended May 31, 2008.

Oil and natural gas reserve estimates

The Company prepared its oil and natural gas reserves with the assistance of a consultant. Proved reserves, estimated future net revenues and the present value of our reserves are estimated based upon a combination of historical data and estimates of future activity. Consistent with SEC requirements, we have based our present value of proved reserves on spot prices on the date of the estimate. The reserve estimates are used in calculating depletion, depreciation and amortization and in the assessment of the Company’s Ceiling Limitation. Significant assumptions are required in the valuation of proved oil and natural gas reserves which, as described herein, may affect the amount at which oil and natural gas properties are recorded. Actual results could differ materially from these estimates.

Deferred income taxes

Deferred income taxes are provided for temporary differences between financial and tax reporting in accordance with the liability method. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless management believes it is more likely than not that such asset will be realized.

Earnings (loss) per common share

RER is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive shares outstanding. At February 28, 2011 and 2010, there were no common stock equivalents. Accordingly, basic and diluted earnings per share are the same for all periods presented.

Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Credit risk

The Company had cash deposits in certain banks that at times exceeded the maximum insured by the Federal Deposit Insurance Corporation. The Company monitors the financial condition of the banks and has experienced no losses on these accounts.

Contingencies

Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such contingencies related to legal proceeding that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probably that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or if probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.

Asset retirement obligations

The fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Company determines its asset retirement obligation by calculating the present value of the estimated cash flows related to the liability. Periodic accretion of the discount of the estimated liability would be recorded in the statement of operations. At February 28, 2011 and August 31, 2010, the Company had no working interests from which they would have had a plugging or abandoning liability.

Recent accounting pronouncements

Below is a listing of the most recent accounting standards and their effect on the Company.

In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-03 (ASU 2010-03), Extractive Activities—Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures. This amendment to Topic 932 has improved the reserve estimation and disclosure requirements by (1) updating the reserve estimation requirements for changes in practice and technology that have occurred over the last several decades and (2) expanding the disclosure requirements for equity method investments. This is effective for annual reporting periods ending on or after December 31, 2009. However, an entity that becomes subject to the disclosures because of the change to the definition oil- and gas- producing activities may elect to provide those disclosures in annual periods beginning after December 31, 2009. Early adoption is not permitted. The Company adopted the provisions of ASU 2010-03 on August 31, 2010 which did not have a material effect on the financial position, results of operations or cash flows of the Company.

Fair value determination

Financial instruments consist of cash, marketable securities, promissory notes receivable, accounts payable, accrued expenses and short-term borrowings. The carrying amount of these financial instruments approximates fair value due to their short-term nature or the current rates at which the Company could borrow funds with similar remaining maturities.

2 INVESTMENT IN ENERGY PROPERTIES

MINING

UNDEVELOPED LEASEHOLD NOT BEING AMORTIZED

The Company has been the successful bidder in United States Government auctions to purchase certain oil and gas lease rights. The oil and gas leases currently comprise approximately 3,000 acres in Weston, Goshen, Converse, Freemont, Laramie and Platt Counties, Wyoming as of February 28, 2011 and August 31, 2010, respectively. In addition, the Company holds the lease for uranium rights on approximately 1,000 acres in Wyoming as of February 28, 2011 and August 31, 2010, respectively.

The Company is negotiating with energy companies to develop the potential resources that may be contained in these properties. The Company has entered into agreements and then sold, by assignment, the rights, title and interest in certain of these leases and retained an over-riding royalty interest. Revenue from these transactions is accounted for using the full cost method of accounting.

OIL AND GAS PRODUCING PROPERTIES

During fiscal 2008, the Company prepaid $119,153 as estimated drilling and completion costs for a 25% working interest in three wells in Washington County, Oklahoma. Two of the wells were completed in September and October 2008 and the third well was abandoned in 2010. During 2009, the Company advanced an additional $42,000, net, to apply toward workover of three additional wells. All workover attempts were unsuccessful and the properties were abandoned in 2010. All proven reserves were sold effective October 1, 2010 and the net proceeds was included in accounts receivable at August 31, 2010. The cost in excess of proceeds of $19,308 was included in asset impairment at August 31, 2010.

Prepaid drilling costs includes $28,583 at August 31, 2010. Upon sale of the proved properties, discussed above, the $28,079 balance in prepaid drilling costs was transferred to accounts receivable.

3	CONVERTIBLE NOTES PAYABLE

The Company has a loan with an individual in the original amount of $140,000, with interest payable monthly at 15% and which was extended to January 1, 2010 and revised to be convertible into common stock at a conversion price to be reasonably agreed upon by the parties. The loan is currently past due and has a balance of $80,000 at February 28, 2011 and August 31, 2010. The Company issued 21,000,000 shares of the Company's common stock to a group of individuals who agreed to repay the balance of the $80,000 loan. The sale of the shares is being accounted for as a stock subscription until the note is repaid.

On April 13, 2010, the Company issued a convertible debenture in the amount of $6,000. The debenture bears interest at the rate of $10% per annum, was due on September 13, 2010, is convertible into the Company's common stock at a conversion rate of 65% of the lowest closing bid price of the common stock during the immediately preceding 30 trading days and there is no pre-payment penalty. Accordingly, at issuance, $2,100 of the proceeds was assigned to the conversion feature. The discount was amortized over the five-month term of the note.

Face amount of the debenture	$	6,000
Unamortized balance of the intrinsic value of the conversion feature		-
Carrying value of the debenture	$	6,000

The debenture was repaid in September 2010.

4	DEBENTURE PAYABLE

On February 18, 2011, the Company issued a convertible debenture in the amount of $18,000. The debenture bears interest at the rate of 12% per annum, is due on February 18, 2012, and is convertible into the Company's common stock, after August 18, 2011, at a conversion rate of 50% of the lowest closing price for the ten trading days prior to conversion or $0.0075 per share. There is a prepayment penalty of 10% during the first six months term of the loan and a prepayment penalty of 5% during the second six-month period.

At issuance, $9,000 of the proceeds was assigned to the conversion feature, which is being amortized over the six-month period until the debenture can be converted.

Face amount of the debenture	$	18,000
Unamortized balance of the intrinsic value of the conversion feature		(8,250	)
Carrying value of the debenture	$	9,750

5 STOCKHOLDERS’ EQUITY

Common stock

In November 2007, the Company amended its charter to authorize issuance of up to 100,000,000 shares of common stock with a par value of $0.00001. The amendment became effective on December 12, 2007, upon filing with the Delaware secretary of state. At February 28, 2011 and August 31, 2010, 86,113,731 and 39,713,731 shares were issued and outstanding, respectively.

Series A preferred stock

In November 2007, the Company amended its charter to authorize issuance of up to 10,000,000 shares of its $0.00001 preferred stock. The amendment became effective on December 12, 2007, upon filing with the Delaware secretary of state. In December 2007 the Company issued 100,000 shares of its Series A preferred stock to its President and Chief Executive Officer for $1,000. The certificate of designation of the Series A preferred stock provides: the holders of Series A preferred stock shall be entitled to receive dividends when, as and if declared by the board of directors of the Company; participates with common stock upon liquidation; convertible into one share of common stock; and has voting rights such that the Series A preferred stock shall have an aggregate voting right for 54% of the total shares entitled to vote.

Stock option plan

The Royal Energy Resources, Inc. 2008 Stock Option Plan (“Plan”) was filed on June 27, 2008 and reserves 4,000,000 shares for Awards under the Plan, of which up to 3,000,000 may be designated as Incentive Stock Options. The Company’s Compensation Committee is designated to administer the Plan at the direction of the Board of Directors. No options are outstanding under the Plan at February 28, 2011.

Consulting and financial services agreements

The Company has entered into various consulting and financial services agreements as well as a new loan agreement. The cost associated with the agreements is being amortized over the period of the agreements. The unamortized balance of the agreements was $17,666 and $28,809 at February 28, 2011 and August 31, 2010, respectively.

Transactions during the period ended February 28, 2011

On September 28, 2010, the Company issued 21,000,000 shares to a group of individuals who agreed to pay $80,000 to retire the Company's note payable. This obligation will be accounted for as a subscription receivable by the Company until the note is paid.

On November 30, 2010, the Company's CEO acquired 12,000,000 shares of the Company's common stock for a stock subscription receivable of $59,880 and cash of $120.

Effective November 30, 2010, the 100,000 shares which the Company had issued for first right of refusal to participate in a drilling program were returned when the originally proposed drilling program was cancelled. The shares were returned to the transfer agent and retired.

On February 16, 2011, the Company issued 2,000,000 shares of its common stock valued at $20,000 for consulting services through April 26, 2011. The value is being amortized over the 2 1/2 month term of the agreement.

On February 17, 2011, the Company's CEO acquired 10,000,000 shares of the Company's common stock for a stock subscription receivable of $31,900 and cash of $100.

On February 18, 2011, the Company issued 1,500,000 shares of its common stock as additional compensation to the holder of the Company's convertible note payable. The value of $22,500 was expensed.

6	STOCK SUBSCRIPTION RECEIVABLE

The officers and directors of the Company and others have acquired common stock from the Company pursuant to note agreements, summarized as follows.

			Original		Interest			Balance		Balance
Name	Shares		Balance		Rate			2/28/2011		8/31/2010

Jacob Roth		45,950,000	$	505,532		2-5	%	$	461,637	$	391,749
Frimet Taub		600,000		29,937		2	%		29,937		29,937
									491,574		421,686
Accrued interest									6,462		654
Related party total									498,036		422,340
Debt retirement		21,000,000		80,000		0	%		80,000		-
								$	578,036	$	422,340

7	RELATED PARTY TRANSACTIONS

The President and Chief Executive Officer of the Company made loans and advances to the Company since its inception. During fiscal 2005, the total amount of $6,560 was contributed to the capital of the Company.

In December 2007 the Company issued 100,000 shares of its Series A preferred stock to its President and Chief Executive Officer for $1,000. The certificate of designation of the Series A preferred stock provides: the holders of Series A preferred stock shall be entitled to receive dividends when, as and if declared by the board of directors of the Company; participates with common stock upon liquidation; convertible into one share of common stock; and has voting rights such that the Series A preferred stock shall have an aggregate voting right for 54% of the total shares entitled to vote.

The President and Chief Executive Officer of the Company was paid approximately $8,885 and $6,380 for office and travel expense reimbursements during the three month periods ended February 28, 2011 and 2010, respectively.

See Note 6 above regarding stock subscription receivables.

8	SUBSEQUENT EVENTS

On March 4, 2011, the Company acquired the rights to lease the mineral rights to approximately 2,130 acres of rare earth and precious metals leases in Crook County, Wyoming.

On April 1, 2011, the Company, through its CEO completed the initial stages of forming a Romanian subsidiary to be used to acquire and develop possible gold, silver and copper mining concessions in Romania. The subsidiary, S.C. Golden Carpathan Resources S.R.L., will be located in Bucharest, Romania when the formation process is completed.

In April 2011, the Company's CEO cancelled 4,250,000 shares of the Company's common stock which had been issued to him pursuant to stock subscription loans. Loan balances of approximately $144,800 were cancelled as a part of the transaction.

Item 2:

Management's Discussion and Analysis of Financial Condition and Results of Operations

This statement contains forward-looking statements within the meaning of the Securities Act. Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement.

At the present time we have only nominal overhead costs. Our officers do not receive any payroll and our administrative assistance is now being provided on a reimbursement basis. This situation will remain constant until such time as we have sufficient capital to afford to pay salaries.

The Company was the successful bidder in United States Government auctions to purchase certain oil and gas lease rights. The oil and gas leases currently represent approximately 3,000 acres of property located in Weston, Goshen, Converse, Freemont, Laramie and Platt County Wyoming. The Company also holds leases for the uranium rights on approximately 1,000 acres in Wyoming. The Company is negotiating with energy companies to develop the potential resources that may be contained in these properties. The Company has completed several transactions wherein the Company sold the lease rights and retained a royalty interest and have sold the royalty interest in one transaction. No exploration activities have yet taken place. The Company has received proceeds of $70,275 from these transactions.

Going Concern

COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2011 AND 2010

We had revenue from oil and gas production of $1,107 during the three months ended February 28, 2010. The Company sold its producing oil properties effective October 1, 2010 and had no revenue during the 2011 quarter.

Non-cash compensation amounted to $35,786 in fiscal 2011 as compared to $95,215 in fiscal 2010. Non-cash compensation is from the amortization of the calculated value of common shares issued for consulting agreements. (Note 5).

During the three-month period in fiscal 2011, selling, general and administrative expenses amounted to $15,875 as compared to $14,135 in the year earlier period.

During the three-month period in fiscal 2011, we recognized interest expense of $3,100 and recorded interest income in the amount of $2,539 from related parties. During the three-month period in fiscal 2010, we recognized interest expense of $3,750 and recorded interest income in the amount of $1,505 from related parties.

COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 2011 AND 2010

We had revenue from oil and gas production of $3,152 during the six months ended February 28, 2010. The Company sold its producing oil properties effective October 1, 2010 and had no revenue during the 2011 period.

Non-cash compensation amounted to $53,643 in fiscal 2011 as compared to $273,634 in fiscal 2010. Non-cash compensation is from the amortization of the calculated value of common shares issued for consulting agreements. (Note 5).

During the six-month period in fiscal 2011, selling, general and administrative expenses amounted to $44,839 as compared to $70,284 in the year earlier period.

During the six-month period in fiscal 2011, we recognized interest expense of $6,853 and recorded interest income in the amount of $5,808 from related parties. During the six-month period in fiscal 2010, we recognized interest expense of $6,750 and recorded interest income in the amount of $2,748 from related parties.

OFF-BALANCE SHEET ARRANGEMENTS

None.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T:

CONTROLS AND PROCEDURES

1 (a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer has reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of February 28, 2011. Based on that review and evaluation, which included inquiries made to certain consultants of the Company, the CEO concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective, in ensuring that information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including insuring that such information is accumulated and communicated to the Company’s management, including the CEO, as appropriate to allow timely decisions regarding required disclosure. The lack of segregation of duties is mitigated by using a third-party consultant to assist the Company in preparing its financial statements and its filings with the SEC.

(b) Changes in Internal Controls

There have been no changes in internal controls over financial reporting or in other factors that could significantly affect these controls that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting during the quarter ended February 28, 2011, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

ITEM 1:

LEGAL PROCEEDINGS

None

ITEM 1A:

RISK FACTORS

Not applicable.

ITEM 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended November 30, 2010, the Company issued 1,500,000 shares of its common stock, valued at $22,500 to the older of the Company's convertible debenture. The Company also issued 2,000,000 shares of its common stock valued at $20,000 for consulting services. In addition, the Company sold 10,000,000 shares to its Chief Executive Officer for $100 in cash and a note in the amount of $31,900.

The shares issued were sold pursuant to an exemption from registration under Section 4(2) promulgated under the Securities Act of 1933, as amended.

ITEM 3:

DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4:

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

ITEM 5:

OTHER INFORMATION.

None

ITEM 6:

EXHIBITS

Exhibit 31		Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32		Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

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.

		ROYAL ENERGY RESOURCES, INC.

Date: April 13, 2011

	By:	/s/ Jacob Roth
		President, Chief Executive Officer and
		Chief Financial Officer

Royal Energy Resources, Inc. - FORM 10-Q - April 13, 2011

Attached files

Royal Energy Resources, Inc. Reports