NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. TRUST ORGANIZATION
AND PROVISIONS
Permianville Royalty
Trust (the “Trust”), previously known as Enduro Royalty Trust, is a Delaware statutory trust formed in May 2011 pursuant
to a trust agreement (the “Trust Agreement”) among Enduro Resource Partners LLC (“Enduro”), as trustor,
The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee, and Wilmington Trust Company (the “Delaware
Trustee”), as Delaware Trustee.
The Trust was created
to acquire and hold for the benefit of the Trust unitholders a net profits interest representing the right to receive 80% of the
net profits from the sale of oil and natural gas production from certain properties in the states of Texas, Louisiana and New Mexico
held by Enduro as of the date of the conveyance of the net profits interest to the Trust (the “Net Profits Interest”).
The properties in which the Trust holds the Net Profits Interest are referred to as the “Underlying Properties.”
In connection with
the closing of the initial public offering in November 2011, Enduro contributed the Net Profits Interest to the Trust in exchange
for 33,000,000 units of beneficial interest in the Trust (the “Trust Units”). On August 31, 2018, COERT Holdings 1
LLC (“COERT” or the “Sponsor”) acquired from Enduro the Underlying Properties and all of the outstanding
Trust Units owned by Enduro (the “Sale Transaction”). In connection with the Sale Transaction, COERT assumed all of
Enduro’s obligations under the Trust Agreement and other instruments to which Enduro and the Trustee were parties. As of
June 30, 2020, the Sponsor owned 8,600,000 Trust Units, or 26% of the issued and outstanding Trust Units.
The Net Profits Interest
is passive in nature and neither the Trust nor the Trustee has any management control over or responsibility for costs relating
to the operation of the Underlying Properties. The Amended and Restated Trust Agreement provides, among other provisions, that:
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the Trust’s business activities are limited to owning the Net Profits Interest and any activity reasonably related to such ownership, including activities required or permitted by the terms of the Conveyance of Net Profits Interest, dated effective as of July 1, 2011 (as supplemented and amended to date, the “Conveyance”). As a result, the Trust is not permitted to acquire other oil and natural gas properties or net profits interests or otherwise to engage in activities beyond those necessary for the conservation and protection of the Net Profits Interest;
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the Trust may dispose of all or any material part of the assets of the Trust (including the sale of the Net Profits Interest) if approved by at least 75% of the outstanding Trust Units;
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the Sponsor may sell a divided or undivided portion of its interests in the Underlying Properties, free from and unburdened by the Net Profits Interest, if approved by at least 50% of the outstanding Trust Units at a meeting of Trust unitholders;
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the Trustee will make monthly cash distributions to unitholders (Note 5);
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the Trustee may create a cash reserve to pay for future liabilities of the Trust;
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the Trustee may authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed its cash on hand and available reserves. No further distributions will be made to Trust unitholders until such amounts borrowed are repaid; and
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the Trust is not subject to any pre-set termination provisions based on a maximum volume of oil or natural gas to be produced or the passage of time. The Trust will dissolve upon the earliest to occur of the following:
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the Trust, upon approval of the holders of at least 75% of the outstanding Trust Units, sells the Net Profits Interest;
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the annual cash proceeds received by the Trust attributable to the Net Profits Interest are less than $2 million for each of any two consecutive years;
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the holders of at least 75% of the outstanding Trust Units vote in favor of dissolution; or
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the Trust is judicially dissolved.
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PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - Continued
(unaudited)
2. BASIS OF PRESENTATION
The Statement of
Assets, Liabilities and Trust Corpus as of December 31, 2019, which has been derived from audited financial statements, and
the unaudited interim financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly,
certain information and disclosures normally included in annual financial statements have been condensed or omitted pursuant to
those rules and regulations. Therefore, these financial statements should be read in conjunction with the financial statements
and notes thereto included in the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019
Annual Report on Form 10-K”).
In the opinion of
the Trustee, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal, recurring accrual
adjustments, that are necessary for a fair presentation of the interim periods presented and include all the disclosures necessary
to make the information presented not misleading. These interim results are not necessarily indicative of results for a full year.
The preparation of
financial statements requires the Trustee to make estimates and assumptions that affect reported amounts of assets and liabilities
and the reported amounts of revenues and expenses during the reporting period. Although the Trustee believes that these estimates
are reasonable, actual results could differ from those estimates.
The Trust uses the
modified cash basis of accounting to report Trust receipts of income from the Net Profits Interest and payments of expenses incurred.
The Net Profits Interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease
operating expenses and production and property taxes) and development expenses of the Underlying Properties, multiplied by 80%.
Cash distributions of the Trust are made based on the amount of cash received by the Trust pursuant to terms of the Conveyance
creating the Net Profits Interest.
Under the terms of
the Conveyance, the monthly Net Profits Interest calculation includes oil and natural gas revenues received during the relevant
month. Monthly operating expenses and capital expenditures represent estimated incurred expenses and, as a result, represent accrued
expenses as well as expenses paid during the period.
The financial statements
of the Trust are prepared on the following basis:
(a) Income from Net
Profits Interest is recorded when distributions are received by the Trust;
(b) Distributions
to Trust unitholders are recorded when paid by the Trust;
(c) Trust general
and administrative expenses (which includes the Trustee’s fees as well as accounting, engineering, legal, and other professional
fees) are recorded when paid;
(d) Cash reserves
for Trust expenses may be established by the Trustee for certain future expenditures that would not be recorded as contingent liabilities
under accounting principles generally accepted in the United States of America (“GAAP”);
(e) Amortization of
the Net Profits Interest in oil and natural gas properties is calculated on a unit-of-production basis and is charged directly
to the Trust corpus; and
(f) The Net Profits
Interest in oil and natural gas properties is periodically assessed whenever events or circumstances indicate that the aggregate
value may have been impaired below its total capitalized cost based on the Underlying Properties. If an impairment loss is indicated
by the carrying amount of the assets exceeding the sum of the undiscounted expected future net cash flows of the Net Profits Interest,
then an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value
determined using discounted cash flows.
The financial statements
of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued; certain cash reserves
may be established for contingencies which would not be accrued in financial statements prepared in accordance with GAAP; general
and administrative expenses are recorded when paid instead of when incurred; and amortization of the net profits interest calculated
on a unit-of-production basis is charged directly to trust corpus instead of as an expense. While these statements differ from
financial statements prepared in accordance with GAAP, the modified cash basis of reporting is considered to be the most meaningful
because monthly distributions to the Trust unitholders are based on net cash receipts.
This comprehensive
basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff
Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - Continued
(unaudited)
3. NET PROFITS INTEREST
IN OIL AND NATURAL GAS PROPERTIES
The Net Profits Interest
in oil and natural gas properties was recorded at its fair value on the date of conveyance. Amortization of the Net Profits Interest
in oil and natural gas properties is calculated on a unit-of-production basis based on the Underlying Properties’ production
and reserves. As the Trust uses the modified cash basis of accounting, amortization is recognized only in those months in which
income from net profits interest exceeds capital expenditures. The reserves upon which the amortization rate is based are quantity
estimates that are subject to numerous uncertainties inherent in the estimation of proved reserves. The volumes considered to be
commercially recoverable fluctuate with changes in commodity prices and operating costs. These estimates are expected to change
as additional information becomes available in the future. Downward revisions in proved reserves may result in an increased rate
of amortization. Amortization is charged directly to the Trust corpus balance and does not affect the distributable income of the
Trust. Accumulated amortization as of June 30, 2020 and December 31, 2019 was $282,727,370 and $279,925,202, respectively.
The Net Profits Interest
is periodically assessed for impairment whenever events or circumstances indicate that the current fair value based on expected
future cash flows of the Underlying Properties may be less than the carrying value of the Net Profits Interest. While the Trust
did not record an impairment during the six months ended June 30, 2020 or 2019, future downward revisions in actual production
volumes relative to current forecasts, higher than expected operating costs, or lower than anticipated commodity prices could result
in recognition of impairment in future periods.
4. INCOME TAXES
Federal Income Taxes
For federal income
tax purposes, the Trust is a grantor trust and therefore is not subject to tax at the trust level. Trust unitholders are treated
as owning a direct interest in the assets of the Trust, and each Trust unitholder is taxed directly on his or her pro rata share
of the income and gain attributable to the assets of the Trust and entitled to claim his or her pro rata share of the deductions
and expenses attributable to the assets of the Trust. The income of the Trust is deemed to have been received or accrued by each
unitholder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.
The deductions of
the Trust consist of severance taxes and administrative expenses. In addition, each unitholder is entitled to depletion deductions
because the Net Profits Interest constitutes “economic interests” in oil and natural gas properties for federal income
tax purposes. Each unitholder is entitled to amortize the cost of the Trust Units through cost depletion over the life of the Net
Profits Interest or, if greater, through percentage depletion. Unlike cost depletion, percentage depletion is not limited to a
unitholder’s depletable tax basis in the Trust Units. Rather, a unitholder could be entitled to percentage depletion as long
as the applicable Underlying Properties generate gross income.
Some Trust Units are
held by a middleman, as such term is broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint
owners, and brokers holding an interest for a custodian in street name). Therefore, the Trustee considers the Trust to be a non-mortgage
widely held fixed investment trust (“WHFIT”) for U.S. federal income tax purposes. The Bank of New York Mellon Trust
Company, N.A., 601 Travis, 16th Floor, Houston, Texas 77002, telephone number (512) 236-6545, is the representative
of the Trust that will provide tax information in accordance with applicable U.S. Treasury Regulations governing the information
reporting requirements of the Trust as a WHFIT. Tax information is also posted by the Trustee at www.permianvilleroyaltytrust.com.
Notwithstanding the foregoing, the middlemen holding units on behalf of unitholders, and not the Trustee of the Trust, are solely
responsible for complying with the information reporting requirements under the U.S. Treasury Regulations with respect to such
units, including the issuance of IRS Forms 1099 and certain written tax statements. Unitholders whose units are held by middlemen
should consult with such middlemen regarding the information that will be reported to them by the middlemen with respect to the
Trust Units.
The tax consequences
to a unitholder of ownership of Trust Units will depend in part on the unitholder’s tax circumstances. Unitholders should
consult their tax advisors about the federal tax consequences relating to owning the Trust Units.
PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - Continued
(unaudited)
State Taxes
The Trust’s
revenues are from sources in the states of Louisiana, New Mexico and Texas. Because it distributes all of its net income to unitholders,
the Trust is not taxed at the trust level in Louisiana or New Mexico. Although the Trust does not owe tax, the Trustee is
required to file a return with Louisiana reflecting the income and deductions of the Trust attributable to properties located in
that state. Presently, Louisiana and New Mexico tax nonresident income from real property located within that state. Louisiana
and New Mexico impose a corporate income tax which may apply to unitholders organized as corporations.
Texas does not impose
a state income tax, so the Trust’s income is not subject to income tax at the trust level in Texas. Texas imposes a franchise
tax at a rate of 0.75% on gross revenues less certain deductions for returns originally due on or after January 1, 2016, as specifically
set forth in the Texas franchise tax statutes. Entities subject to tax generally include trusts unless otherwise exempt. Trusts
that receive at least 90% of their federal gross income from designated passive sources, including royalties from mineral properties
and other income from other non-operating mineral interests, and do not receive more than 10% of their income from operating an
active trade or business, generally are exempt from the Texas franchise tax as “passive entities.” Although the Trust
is intended to be exempt from Texas franchise tax at the trust level as a passive entity, each unitholder that is considered a
taxable entity under the Texas franchise tax would generally be required to include its portion of Trust net income in its own
Texas franchise tax computation.
Each unitholder should
consult his or her own tax advisor regarding state tax requirements, if any, applicable to such person’s ownership of Trust
Units.
5. DISTRIBUTIONS
TO UNITHOLDERS
Each month, the Trustee
determines the amount of funds available for distribution to the Trust unitholders. Available funds are the excess cash, if any,
received by the Trust from the Net Profits Interest and other sources (such as interest earned on any amounts reserved by the Trustee)
that month, over the Trust’s liabilities for that month, subject to adjustments for changes made by the Trustee during the
month in any cash reserves established for future liabilities of the Trust. Distributions are made to the holders of Trust Units
as of the applicable record date (generally the last business day of each calendar month) and are payable on or before the 10th
business day after the record date.
The following table
provides information regarding the Trust’s distributions per unit paid during the periods indicated:
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Distribution
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Declaration Date
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Record Date
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Payment Date
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per Unit
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Six Months Ended June 30, 2020:
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December 16, 2019
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December 31, 2019
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January 15, 2020
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$
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0.018000
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January 17, 2020
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January 31, 2020
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February 14, 2020
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$
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0.020630
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February 18, 2020
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February 28, 2020
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March 13, 2020
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$
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0.024500
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March 16, 2020
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March 31, 2020
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April 14, 2020
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$
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0.041000
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April 17, 2020
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April 30, 2020
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May 12, 2020
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$
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0.029000
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May 15, 2020
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May 29, 2020
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June 15, 2020
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$
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0.015300
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Year to Date – 2020
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$
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0.148430
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Six Months Ended June 30, 2019:
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January 18, 2019
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January 31, 2019
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February 14, 2019
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$
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0.005135
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February 15, 2019
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February 28, 2019
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March 14, 2019
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$
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0.026550
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March 18, 2019
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March 29, 2019
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April 15, 2019
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$
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0.076357
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April 18, 2019
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April 30, 2019
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May 14, 2019
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$
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0.016800
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May 20, 2019
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May 31, 2019
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June 14, 2019
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$
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0.006988
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Year to Date - 2019
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$
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0.131830
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In December 2018, the direct operating
and development expenses exceeded the revenues causing the net profits to be negative. This was primarily due to the delay in
transitioning operator reporting for the Underlying Properties to the Sponsor, thus reducing the cash receipts to the Trust for
this period. As a result, there was no distribution to the Trust unitholders reported in December 2018 to be distributed in January
2019. In January 2019, net profits from the Underlying Properties were positive, and the aggregate shortfall in net profits of
$667,227 from December 2018 was deducted from such net profits when calculating distributions paid in February 2019.
PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - Continued
(unaudited)
6. ADVANCES TO THE TRUST
From time to time,
if the Trust’s cash on hand (including available cash reserves, if any) is not sufficient to pay the Trust’s ordinary
course administrative expenses that are due prior to the monthly payment to the Trust of proceeds from the Net Profits Interest,
COERT may advance funds to the Trust to pay such expenses. Such advances are recorded as a liability on the Statements of Assets,
Liabilities and Trust Corpus until repaid. As of June 30, 2020 and December 31, 2019, advances to the Trust were $19,100 and
$34,818, respectively.
7. TRUSTEE FEES
Under the terms of
the Trust Agreement, the Trust pays an administrative fee of $200,000 per year to the Trustee and an annual fee of $2,000 to the
Delaware Trustee. During the three- and six-month periods ended June 30, 2020 and 2019, the Trust paid $50,000 and $100,000, respectively,
to the Trustee pursuant to the terms of the Trust Agreement. The Trust paid $0 and $2,000 to the Delaware Trustee during the three-month
and six-month periods ended June 30, 2020, respectively. The Trust paid a total of $0 and $2,000 to the Delaware Trustee during
the three-month and six-month periods ended June 30, 2019, respectively.
8. 2017 DIVESTITURE
PROPERTIES HOLDBACK AMOUNT
In September 2017,
Enduro completed the sale of certain properties in the Permian Basin. In connection with the sale, Enduro withheld $750,000 (the
“Holdback Amount”) from the net proceeds allocable to the Trust to cover possible indemnification obligations under
the related purchase and sale agreements arising within 25 months of the closing of the transactions, or by the end of October
2019 (the “Indemnification Term”). In connection with the Sale Transaction, Enduro released the Holdback Amount to
the Trustee on September 4, 2018, with the Trustee announcing that it would continue to retain the Holdback Amount for the remainder
of the Indemnification Term. The Trustee announced in September 2019 that it would release the Holdback Amount, totaling approximately
$752,000, including interest, as part of the Trust distribution to unitholders payable in October 2019.
9. SUBSEQUENT
EVENTS
Distributions
Paid or Declared
On July 15, 2020,
a distribution of $0.003800 per unit, which was declared on June 15, 2020, was paid to Trust unitholders of record as of June 30,
2020.
On July 17, 2020,
the Trust announced a reduction in sales volumes when comparing the July distribution period to prior periods This reduction was
due, in part, to shut ins by operators of certain Underlying Properties coupled with lower commodity prices as a result of the
COVID-19 pandemic. The result of this reduction is that direct operating expenses and development expenditures exceeded cash receipts
for the calculation period and, as a result, a distribution will not be paid in August 2020. The shortfall of $892,782 will
be deducted from any net profits allocable to the Trust from the August distribution period.