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Item 9A. Controls and Procedures

2020-03-30 compared with 2019-04-16 · 491 added, 632 removed, 860 unchanged (57% of the section changed)

Item 9A Controls and Procedures

Disclosure Controls

Disclosure controls are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our disclosure controls and procedures are designed to insure that the information required to be filed is accumulated and communicated to our management in a manner designed to enable them to make timely decisions regarding required disclosure.

Our executive officers, Johnny Jordan, Chief Executive Officer, and Stephen M.

Hosmer, Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the 2018 fiscal year.

Based on their evaluation, they concluded that our disclosure controls are effective as of December 31, 2018.

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management assessed our internal control over financial reporting as of December 31, 2018, which was the end of our fiscal year.

Management based its assessment on criteria established in the SEC Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

The guidance sets forth an approach by which management can conduct a top-down, risk-based evaluation of internal control over financial reporting.

Management’s assessment included an evaluation of risks to reliable financial reporting, whether controls exist to address those risks and evaluated evidence about the operation of the controls included in the evaluation based on its assessment of risk.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) or 15d-15(e) under the Exchange Act.

Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective to give reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis as of the end of the period covered by this annual report.Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting.

In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Based on our evaluation under the framework in Internal Control-Integrated Framework, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective as of December 31, 2019 due to the material weakness that is described below.

Material Weakness and Remediation

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

There were no changes in our internal controls during the fiscal year ended December 31, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.

Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

In connection with the audit of our 2019 consolidated financial statements, management has identified a material weakness that exists because we did not maintain effective controls over our financial close and reporting process, and has concluded that the financial close and reporting process needs additional formal procedures to ensure there are appropriate reviews occur on all financial reporting analysis.

Updated procedures have been implemented through the close process for the year ended December 31, 2019, and we will continue to monitor these throughout 2020 to be able to fully assess whether the procedures and controls are effective.

In connection with the audit of our 2018 consolidated financial statements, we had a material weakness in our internal control over financial reporting because we had concluded that certain legal documents, such as debt and equity financing transactions, during the fiscal year were not supported by fully executed agreements.

Subsequently, management has had all non-recurring equity and note transactions reviewed by outside counsel for proper completion and execution.

Any received funds prior to receipt of fully executed documents, has been recorded as a liability pending finalization of legal documents.

Management has been monitoring this situation for compliance and concluded that the weakness has been remediated.

Additionally, in connection with the audit of our 2018 consolidated financial statements, management had also identified a material weakness that existed, in that we did not have appropriate policies and procedures in place to properly evaluate the accuracy of certain of our financial accounts related to the determination of the tax basis of acquired assets associated with the merger of the Company with Matrix Oil Management Corporation.

Subsequently, the Company engaged outside consulting firms and tax counsel that assisted us in the determination of the tax basis of these properties, application of IRS regulation 382, determination of whether or not to file as a tax group or maintain separate filing status and the calculation of the proper tax accounting for the contribution of assets to the RMX joint venture.

Additionally, management implemented a more robust review and increasing the supervision and monitoring of the financial reporting processes related to our material weakness in the calculation and reporting of tax carryforward balances, deferred taxes and tax basis of reported assets and concluded the weakness has been remediated.

Attestation Report of the Independent Registered Public Accounting Firm.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.

Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the last fiscal quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls or internal controls over financial reporting will prevent all error or fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met.

Any control system contains limitations imposed by resources and relevant cost considerations.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been addressed.

These inherent limitations include the realities that judgments can be faulty and that breakdowns can occur because of simple error or mistake.

In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control.

Our control system design is also based on assumptions about the likelihood of future events, and we cannot be sure that we have considered all possible future circumstances and events.

Material Weakness

Certain legal documents, such as debt and equity financing transactions, during the fiscal year were not supported by fully executed agreements.

Because of this material weakness, our management was unable to conclude that our internal control over financial reporting was effective as of the end of period to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.

Management is seeking written acknowledgement of the note transactions from the note holders in order to remediate the material weakness described above and will require written acknowledgement from counterparties of all similar future transactions.

We did not maintain effective controls over our financial close and reporting process.

The financial close and reporting process needs additional formal procedures.

Because of the material weakness described above, our management was unable to conclude that our internal control over financial reporting was effective as of the end of period to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.

Management has determined that the notes are fully satisfied and will fully document future financial instruments if and when entered into.

Management has also identified a material weakness that existed, in that we did not have appropriate policies and procedures in place to properly evaluate the accuracy of certain of our financial accounts related to the determination of the tax basis of acquired assets associated with the merger of the Company with Matrix as further described in the financial Note 1 –

Merger with Matrix Oil Management Corporation.

There have been no changes in our internal control over financial reporting that occurred during the nine month period year ended September 30December 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management has engaged a nationally recognized tax preparer, and believes that this engagement will remediate the stated weakness.

Based on their most recent evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, our Company’s disclosure controls and procedures were not effective as a result of the material weaknesses in our internal control over financial reporting described.

Notwithstanding the material weaknesses described, our management, including our Chief Executive Officer and Chief Financial Officer, believes that the audited consolidated financial statements contained in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented in conformity with U.S.

generally accepted accounting principles.

In addition, the material weaknesses described below did not result in the restatements of any of our audited or unaudited consolidated financial statements or disclosures for any previously reported periods.

Remedial Action

We have begun our remediation plan with respect to improving and implementing our control over financial reporting and more specifically associated with determining the tax basis of the properties acquired in the merger with Matrix Oil Management Corporation.

We have engaged outside consulting firms and tax counsel to assist us in the determination of the tax basis of these properties, application of IRS regulation 382, determination of whether or not to file as a tax group or maintain separate filing status and the ultimate calculation of the proper tax accounting for the contribution of assets to the RMX joint venture.

Additionally, we are in the process of implementing a more robust review and increasing the supervision and monitoring of the financial reporting processes related to our material weakness in the calculation and reporting of tax carryforward balances, deferred taxes and tax basis of reported assets.

Except for the actions described above that were taken to address the material weaknesses, there were no changes in our internal controls during the twelve months ended December 31, 2018, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other than the remedial activities describe above, no changes in our internal control over financial reporting occurred during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 10 Directors and Executive Officers of the Registrant

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The following information is furnished with respect to each director and executive officer who served as such during the fiscal year ended December 31, 2019:

First Became Director or

Executive Officer

First Became Director or Executive Officer

Positions Held

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Jonathan Gregory

Vice-Chair of the Board of Directors

Vice-Chair of the

Board of Directors

Johnny Jordan

Chief Executive and Operating officer and Director

Chief Executive and

Operating officer

Gladney (1) (2)(3)(4)

Barry Lasker (1) (2)

Karen Kerns (1) (2)(3)(4)

Robert Vogel (1) (2)(3)(4)

Chairman Emeritus

(1) Member of the audit committee.

(2) Member of the compensation committee.

Member of the nominations committee (company has not assigned Board members to the nominations committee).

(1) Members of the Audit Committee

(2) Members of the compensation committee

(3) Members of the nominations committee

(4) Members indentified as independent

The board has determined that directors Mel G.

Riggs, Thomas M.

Gladney, Barry Lasker and Robert Vogel qualify as independent directors.

Gladney, Karen Kerns and Robert Vogel qualify as independent directors.

The following summarizes the business experience of each director and executive officer for the past six years.

Riggs –

Chairman of the Board

Riggs – Chairman of the Board

Riggs presently is affiliated with the Clayton Williams family office.

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Riggs is a certified public accountant and received a BBA with a degree in accounting from Texas Tech University in 1977.

Jonathan Gregory –

Vice Chair of the Board of Directors

Jonathan Gregory – Vice Chair of the Board of Directors

Gregory became director of Royale in March 2014 and served as Royale's chief executive officer from September 10, 2015, until June 1, 2018.

Prior to becoming Royale's CEO, Mr.

Gregory, from March 2014 to July 2015, served as Chief Financial Officer and Chief Business Development Strategist for Americo Energy Resources, a private exploration and production company located in Houston, Texas, Prior to serving as CFO of Americo Energy, Mr, Gregory was CFO of J&S Oil & Gas, LLC, from April 2012 to February 2014.

Gregory was CFO of J&S Oil & Gas, LLC, from April 2012 to February 2014.

From December 2004 to April 2012, Mr.

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Gregory is also a Credit Committee Advisor to Anvil Capital Partners, a private debt capital provider to upstream energy companies.

Gregory graduated from Lamar

University in 1986 with a Bachelor's degree in Finance.

Johnny Jordan –

Chief Executive Officer, President, Chief Operating Officer and Director

Gregory graduated from Lamar University in 1986 with a Bachelor's degree in Finance.

Johnny Jordan – Chief Executive Officer, President, Chief Operating Officer and Director

Jordan is a petroleum engineer with expertise in acquisitions, field economics and reserves analysis, bank negotiations, reservoir and field operations, and multi-team interaction.

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in Chemical Engineering from the University of Oklahoma in 1983 and is currently a member of the Society of Petroleum Engineers and the American Petroleum Institute.

Rod Eson –

Eson is the chief executive officer of Foothill Energy, LLC, a position he has held since he founded Foothill Energy in 2004.

Foothill owns and operates oil and gas properties in the central and northern valleys of California.

Eson has owned and operated oil and gas production companies as well as oilfield service companies since 1979.

From 2006 to 2014, he was chairman of the board of Enhanced Oil Resources, Inc.

Prior to forming Foothill Energy in June 2004, Mr.

Eson was president and chief executive officer of Venoco, Inc., a California based independent oil and gas company he cofounded in 1992.

At the time of Mr.

Eson’s sale of his interest in Venoco, it held assets in excess of $400 million in California, Texas, Mississippi, Colorado and Argentina.

Eson is the former chairman of the board of the California Independent Petroleum Association and has been a member of the Society of Petroleum Engineers and American Petroleum Institute for more than three decades.

He is also a member of the Texas Independent Producers and Royalty Owners Association and a member of the board of directors of the Independent Petroleum Association of America.

He received a B.S.

in Mechanical Engineering from California State Polytechnic University in Pomona, California.

Gladney - Director

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Gladney has a BS in Petroleum Engineering from Mississippi State University.

Barry Lasker - Director

Barry Lasker has served as founder and managing partner of Baja Oil and Gas LLC, which is focused on exploration projects using geology and geophysics in South Texas since 2017.

From January 2005 to January 2015, Mr.

Lasker served as president and CEO of Enhanced Oil Resources, Inc.

(TSX Venture Exchange).

Lasker has 34 years of oil and gas experience with majors and small public and private companies.

Robert Vogel –

Karen Kerns - Director

Karen Leik Kerns is an attorney with over 30 years of experience in business, contract and loan negotiation, and real estate law.

Kerns previously served as General Counsel for a private real estate investment trust with over $400 million in limited partner investments throughout the United States.

In her early legal career Ms.

Kerns practiced business and insurance defense litigation.

She holds a Juris Doctor from the University of Denver Sturm College of Law and a Bachelor’s degree from the University of Wyoming.

Robert Vogel – Director

Robert Vogel is a Principal at Lucas Capital Management, a registered investment advisor providing a full suite of financial services to individuals and institutional clients.

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Vogel holds a BS in Chemical Engineering from the University of Colorado and an MBA from New York University.

Hosmer –

Chairman Emeritus

Hosmer has served as chairman of Royale since he founded the company in 1986.

From inception until June 1995, he also served as president and chief executive officer.

Hosmer will serve as chairman of Holdings until the first annual shareholders meeting, at which time he will retire as chairman and assume the title of chairman emeritus.

Audit Committee

The board has appointed an audit committee to assist the board of directors in carrying out its responsibility as to the independence and competence of the Company’s independent public accountants.

All members of the audit committee are independent members of the board of directors.

The audit committee operates pursuant to an audit committee charger, which has been adopted by the board of directors to define the committee’s responsibilities.

A copy of the audit committee charter is posted on our website, www.royl.com The board has determined that Robert Vogel qualifies as an “audit committee financial expert”

as defined in Item 407(d)(5) of the Securities and Exchange Commission.

At the end of 2018, the members of the audit committee were Robert Vogel (Chair), Barry Lasker, Jonathan Gregory and Thomas M.

The audit committee operates pursuant to an audit committee charter, which has been adopted by the board of directors to define the committee’s responsibilities.

A copy of the audit committee charter is posted on our website, www.royl.com The board has determined that Robert Vogel qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of the Securities and Exchange Commission.

At the end of 2019, the members of the audit committee were Robert Vogel (Chair), Karen Kerns, and Thomas M.

Code of Business Conduct and Ethics

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Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission regulations require that Royale’s directors, certain officers, and greater than 10 percent shareholders file reports of ownership and changes in ownership with the SEC and the NASD and furnish Royale with copies of all such reports they file.

Based solely upon a review of the copies of the forms furnished to Royale, or representations from certain reporting persons that no reports were required, Royale believes that no persons failed to file required reports on a timely basis for 2017.

Item 11 Executive Compensation

The following table summarizes the compensation of the chief executive officer, chief financial officer and the one other most highly non-executive employees (the “named executives and employees”) of Royale and its subsidiaries during the past three years.

Name and Principal Position

Option Awards

Compensation (2)

Johnny Jordan, CEO (6)

Johnny Jordan (5)

Jonathan Gregory (4)

Donald Hosmer

(Business Development)

Chief Financial Officer

(1) Certain options granted in October 2014 expired on December 31, 2017 unexercised.

At December 29, 2017, Royale’s stock price, $0.36, was less than the weighted average exercise price, and as such the outstanding and exercisable stock options had no intrinsic value.

Stephen Hosmer

(1) On October 10, 2018, the company entered into an agreement to issue Mr.

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These options were granted for a period of ten years with a maturity date of October 9, 2028.

(2) All other compensation consists of matching contributions to the Company’s simple IRA plan, except for Donald H.

Hosmer and Stephen M.

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This category also includes Board fees for Mr.

Gregory and Mr.

(3) During 2016, Jonathan Gregory, Donald and Stephen Hosmer received a portion of their compensation in shares of common stock, valued at the closing market price on the date of grant, instead of cash.

In 2016, of the $242,469 paid to Jonathan Gregory, $141,814 was paid in cash and 386,178 shares of common stock were issued, valued at $100,655.

Of the $282,533 paid to Donald Hosmer, $190,595 was paid in cash and 609,702 shares of common stock were issued, valued at $91,938.

Of the $207,693 paid to Stephen Hosmer, $165,742 was paid in cash and 101,630 shares of common stock were issued, valued at $41,951.

During 2017 the $230,192 paid to Stephen Hosmer, $173,945 was paid in cash and 200,564 shares of common stock were issued, valued at $56,247.

(3) Salary represents either direct payroll or common stock paid in lieu of taking a cash salary.

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Jordan joined the Company upon the merger with the Matrix entities on March 7, 2018

Eson served as CEO of the Company during 2018.

Eson received $144,609 in compensation as CEO of which $69,179 was paid in cash and $75,429 was paid in common stock.

Eson serves on the Board of Directors and received $6,250 as Board compensation.

Stock Options and Equity Compensation;

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No unvested stock awards were outstanding at the end of 2019.

Number of securities underlying unexercised options

Number of securities underlying

unexercised options

Number of securities

underlying unexercised

Number of securities underlying unexercised

unexercisable

Option exercise price

Option exercise

On October 10, 2018, the Board of Directors of Royale granted Mr.

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Members of the Compensation Committee:

Gladney, Barry Lasker (Chair), and Robert Vogel

Gladney, Karen Kerns (Chair), and Robert Vogel

All members of the compensation committee are independent members of the Board of Directors.

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Donald Hosmer and Stephen Hosmer each receive an annual car allowance.

The compensation committee’s primary responsibility is making recommendations to the board of directors relating to compensation of our officers.

The committee also makes recommendations to the board of directors regarding employee benefits, our defined benefit plans, defined contribution plans, and stock based plans.

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To determine executive compensation, the committee, in December each year, meets with our officers to review our compensation programs, discuss the performance of the company, the duties and responsibilities of each of the officers pay levels and business results compared to others similarly situated within the industry.

The committee then makes recommendations to the board of directors for any adjustment to the officers’

compensation levels.

The committee then makes recommendations to the board of directors for any adjustment to the officers’ compensation levels.

The committee does not employ compensation consultants to make recommendations on executive compensation.

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The compensation committee meets annually to determine the quantity, if any, of the cash bonuses of executive officers.

The amount granted is based, subjectively, upon the company’s stock price performance, earnings, revenue, reserves and production.

The committee does not use quantifiable metrics for these criteria;

but rather uses each in balance to assess the strength of the company’s performance.

The committee believes that formulaic approaches to cash incentives can foster an unhealthy balance between short-term and long-term goals.

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Fees paid in Cash or

Option awards

All Other Compensation

Jonathan Gregory (1)

Former Board Members

Ronald Verdier

Gary Grinsfelder

Gregory and Mr.

Eson served as CEO of the Company during 2018.

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

On April 10, 2019, 50,411,353 shares of Royale’s common stock were outstanding.

The following table contains information regarding the ownership of Royale’s common stock as March 14, 2019, by each director and executive officer of Royale, and all directors and officers of Royale as a group.

On March 6, 2020, 52,231,899 shares of Royale’s common stock were outstanding.

The following table contains information regarding the ownership of Royale’s common stock as March 6, 2020, by each director and executive officer of Royale, and all directors and officers of Royale as a group.

Except pursuant to applicable community property laws and except as otherwise indicated, each shareholder identified in the table possesses sole voting and investment power with respect to its or his shares.

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(2) Includes 12,000 shares owned by Stephen M.

Hosmer’s minor children.

Hosmer's minor children.

(3) Includes 9,858,160 shares issuable upon conversion of Series B Convertible Preferred Stock.

(4) Includes 35,000 shares owned by Mr.

Gregory’s son.

The following table contains information regarding the ownership of Royale’s common stock as March 14, 2019, by each person who is known by Royale to own beneficially more than 5% of the outstanding shares of each class of equity securities.

Gregory's son.

The following table contains information regarding the ownership of Royale’s common stock as March 6, 2020, by each person who is known by Royale to own beneficially more than 5% of the outstanding shares of each class of equity securities.

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Item 13 Certain Relationships and Related Transactions

In 1989, the board of directors adopted a policy (the “1989 policy”) that permits each director and officer of Royale to purchase from Royale, at its cost, up to one percent (1%) fractional interest in any well to be drilled by Royale.

When an officer or director elects to make such a purchase, the amount charged per each percentage working interest is equal to Royale’s actual pro rata cost of drilling and completion, rather than the higher amount that Royale charges to working interest holders for the purchase of a percentage working interest in a well.

Of the current officers and directors, Donald Hosmer, Stephen Hosmer and Harry E.

Hosmer at various times have elected under the 1989 policy to purchase interests in certain wells Royale has drilled.

Under the 1989 policy, officers and directors may elect to participate in wells at any time up until drilling of the prospect begins.

Participants are required to pay all direct costs and expenses through completion of a well, whether or not the well drilling and completion expenses exceed Royale’s cost estimates, instead of paying a set, turnkey price (as do outside investors who purchase undivided working interests from Royale).

Thus, they participate on terms similar to other oil and gas industry participants or joint venturers.

Participants are invoiced in advance for their share of estimated direct costs of drilling and completion and later actual costs are reconciled, as Royale incurs expenses and participants make further payments as necessary.

Officer and director participants under this program do not pay some expenses paid by outside, retail investors in working interests, such as sales commissions, if any, or marketing expenses.

The outside, turnkey drilling agreement investors, on the other hand, are not obligated to pay additional costs if a drilling project experiences cost overruns or unanticipated expenses in the drilling and completion stage.

Accordingly, Royale’s management believes that its officers and directors who participate in wells under the board of directors’

policy do so on terms the same as could be obtained by unaffiliated oil and gas industry participants in arms-length transactions, albeit those terms are different than the turnkey agreement under which outside investors purchase fractional undivided working interests from Royale.

Donald and Stephen Hosmer each have participated individually in 179 wells each under the 1989 policy.

The Hosmer Trust, a trust for the benefit of family members of Harry E.

Hosmer, has participated in 178 wells.

Investments in wells under the 1989 policy for the three years ended December 31, 2018, 2017, and 2016 are as follows:

# of fractional interests

Donald Hosmer (1)

Stephen Hosmer (1)

Donald Hosmer and Mr.

Stephen Hosmer did not participate in any wells under this policy during 2017 or 2018.

Our Chief Executive, Johnny Jordan, had been an employee of Matrix prior to the Merger.

Pursuant to this employment, he had accrued certain unpaid salaries, which were assumed by the Company.

At December 31, 2019 Mr.

Jordan was owed $22,107 in accrued unpaid guaranteed payments.

Our Chief Financial Officer, Stephen Hosmer has participated individually in 179 wells under the 1989 policy.

During 2019 and 2018, Stephen did not participate in fractional interests.

At December 31, 2019, the Company had a receivable balance of $ 15,524 due from Stephen Hosmer for normal drilling and lease operating expenses.

Donald Hosmer has participated individually in 179 wells under the 1989 policy.

During 2019 and 2018, Donald did not participate in fractional interests.

At December 31, 2019, Royale had a receivable balance of $3,441 due from Donald Hosmer for normal drilling and lease operating expenses.

At December 31, 2019, we had a total payable of $32,367 due to RMX Resources, LLC and its subsidiary, Matrix Oil Corporation, related to certain lease operating expenses for wells operated by RMX Resources, LLC.

For the same period, the Company also had prepaid expenses and other current assets of $2,680,155 primarily for the drilling of two wells, expected to commence in 2020.

Royale had outstanding accrued unpaid guaranteed payments for unpaid salaries due to certain Matrix employees, for periods prior to the Merger.

At December 31, 2019, the balance due was $1,306,605.

Michael McCaskey and Jeffery Kerns, each former directors of Royale, have consulting agreements to provide services as directed and at the discretion of the Company.

Kerns is married to Karen Kerns, a director.

Item 14 Principal Accountant Fees and Services

SingerLewak LLP served as the independent auditors to audit the Company’s financial statements for the fiscal year ended December 31, 2018 and 2017.

This is the fifth annual audit performed by SingerLewak LLP.

The aggregate fees billed by SingerLewak LLP for the years ended December 31, 2018 and 2017 are as follows, respectively:

Moss Adams LLP served as the independent auditors to audit the Company’s financial statements for the fiscal year ended December 31, 2019.

For the preceding 5 years, Singer Lewak LLP provided the same service.

The aggregate fees billed for the years ended December 31, 2019 and 2018 are as follows:

Moss Adams LLP

SingerLewak LLP

Audit fees (1)

Audit Related Fees

All other fees (3)

(1) Audit fees are fees for professional services rendered for the audit of Royale Energy’s annual financial statements, reviews of financial statements included in the company’s Forms 10-Q, and reviews of documents filed with the U.S.

(1) Audit fees are fees for professional services rendered for the audit of Royale Energy's annual financial statements, reviews of financial statements included in the company's Forms 10-Q, and reviews of documents filed with the U.S.

Securities and Exchange Commission.

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(3) Other fees consist of work on registration statements under the Securities Act of 1933.

The audit committee of Royale Energy has adopted policies for the pre-approval of all audit and non-audit services provided by the company’s independent auditor.

The policy requires pre-approval by the audit committee of specifically defined audit and non-audit services.

Unless the specific service has been previously pre-approved with respect to that year, the audit committee must approve the permitted service before the independent auditor is engaged to perform it.

No representatives of SingerLewak LLP are expected to be present at the annual meeting.

No representatives of Moss Adams LLP or SingerLewak LLP are expected to be present at the annual meeting.

Although the audit committee has the sole responsibility to appoint the auditors as required under the Securities Exchange Act of 1934, the committee welcomes any comments from shareholders on auditor selection or performance.

Comments may be sent to the audit committee chair, Robert Vogel, care of Royale Energy’s executive office, 1870 Cordell Court, Suite 210, El Cajon, California 92020.

Item 15 Exhibits and Financial Statement Schedules

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000-55912), filed March 8, 2018

Subscription and Contribution Agreement by and among RMX, CIC, Royale, REF and Matrix (April 4, 2018), filed as Exhibit 2.1 to the Company’s Form 8-K filed April 10, 2018

Restated Articles of Incorporation of Royale Energy, Inc., incorporated by reference to Exhibit 3.1 of Royale Energy’s Form 10-Q filed August 14, 2009.

Amended and Restated Bylaws of Royale Energy, Inc., incorporated by reference to Exhibit 3.3 of Royale Energy’s Form 10-K filed March 27, 2009.

Amendment to the Certificate of Incorporation of Royale Energy, Inc., a California corporation (March 7, 2018), filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K dated March 7, 2018, filed March 12, 2018

Royale Energy Holdings, Inc., Certificate of Designation of Series B 3.5% Redeemable Convertible Preferred Stock, filed with the Delaware Secretary of State on February 27, 2018, filed as Exhibit 2.5 to the Company’s Form 8-A, filed March 8, 2018

Consent To Merger, Joinder, Waiver And Fourth Amendment To Term Loan Agreement between Matrix Oil Corporation, Matrix Pipeline LP, Matrix Oil Management Corporation, Matrix Las Cienegas Limited Partnership, Matrix Investments, L.P., Matrix Permian Investments, LP, Matrix Royalty, LP, Royale Energy Holdings, Inc., Royale Energy, Inc., Arena Limited SPV, LLC, Arena Limited SPV, LLC, , and Cargill Incorporated (February 28, 2018), filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K dated March 7, 2018, filed March 12, 2018

Pledge Agreement by Royale Energy, Inc., in favor of Arena Limited SPV, LLC (February 28, 2018), filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K dated March 7, 2018, filed March 12, 2018

Agreement and Plan of Exchange between Royale Energy, Inc., Royale Energy Holdings, Inc., and the partners of Matrix Investments, LP (February 28, 2018), filed as Exhibit 10.1 to the Company’s Form 8-K filed March 12, 2018

Agreement and Plan of Exchange between Royale Energy, Inc., Royale Energy Holdings, Inc., and the partners of Matrix Las Cienegas Limited Partnership (February 28, 2018), filed as Exhibit 10.2 to the Company’s Form 8-K filed March 12, 2018

Agreement and Plan of Exchange between Royale Energy, Inc., Royale Energy Holdings, Inc., and the partners of Matrix Permian Investments, LP (February 28, 2018), filed as Exhibit 10.3 to the Company’s Form 8-K filed March 12, 2018

Agreement and Plan of Exchange between Royale Energy, Inc., Royale Energy Holdings, Inc., Matrix Oil Corporation and the shareholders of Matrix Oil Corporation (February 28, 2018), filed as Exhibit 10.4 to the Company’s Form 8-K filed March 12, 2018

Preferred Exchange Agreement between Royale Energy, Inc., Royale Energy Holdings, Inc., and the holders of the preferred limited partnership interests of Matrix Investments, LP (February 28, 2018), filed as Exhibit 10.5 to the Company’s Form 8-K filed March 12, 2018

Pledge Agreement by Royale Energy, Inc., in favor of Arena Limited SPV, LLC (February 28, 2018) filed as Exhibit 10.7 to the Company’s Form 8-K filed March 12, 2018

Subscription and Contribution Agreement by and among RMX, CIC, Royale, REF and Matrix (April 4, 2018), filed as Exhibit 2.1 to the Company’s Form 8-K filed April 10, 2018

Restated Articles of Incorporation of Royale Energy, Inc., incorporated by reference to Exhibit 3.1 of Royale Energy’s Form 10-Q filed August 14, 2009.

Amended and Restated Bylaws of Royale Energy, Inc., incorporated by reference to Exhibit 3.3 of Royale Energy’s Form 10-K filed March 27, 2009.

Pledge Agreement by Royale Energy, Inc., in favor of Arena Limited SPV, LLC (February 28, 2018) ), filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K dated March 7, 2018, filed March 12, 2018

Settlement Agreement and Release between Joseph Henry Paquette TR FBO OVE, Inc Profit Sharing Plan FBO Joseph Paquette and Royale Energy, Inc.

(February 28, 2018), filed as Exhibit 10.8 to the Company’s Form 8-K filed March 12, 2018

Company Agreement of RMX (April 4, 2018), filed as Exhibit 10.1 to the Company’s Form 8-K filed April 10, 2018

Assignment and Assumption Agreement by and between Sunny Frog Oil, LLC, RMX, Royale, and SFO Production Payment LLC (April 4, 0218), filed as Exhibit 10.2 to the Company’s Form 8-K filed April 10, 2018

Conveyance of Term Overriding Royalty Interest between Sunny Frog Oil, LLC, and Royale (April 4, 2018), filed as Exhibit 10.3 to the Company’s Form 8-K filed April 10, 2018

Form of Management Services Agreement between Royale and RMX to be entered upon Second Closing of Contribution Agreement, filed as Exhibit 10.5 to the Company’s Form 8-K filed April 10, 2018

Purchase and Sale Agreement between Sunny Frog Oil, LCC, and REF (November 27, 2017), filed as Exhibit 10.6 to the Company’s Form 8-K filed April 10, 2018

Letter Agreement by and among RMX, CIC, Royale, REF and Matrix (April 12, 2018), filed as Exhibit 2.1 to the Company’s Form 8-K filed April 17, 2018

Royale Energy, Inc., 2018 Equity Incentive Plan, filed as Exhibit 99.1 to the Company’s Form S-8 filed October 29, 2018

(February 28, 2018), filed as Exhibit 10.8 to the Company’s Form 8-K filed March 12, 2018

Company Agreement of RMX (April 4, 2018), filed as Exhibit 10.1 to the Company’s Form 8-K filed April 10, 2018

Assignment and Assumption Agreement by and between Sunny Frog Oil, LLC, RMX, Royale, and SFO Production Payment LLC (April 4, 2018), filed as Exhibit 10.2 to the Company’s Form 8-K filed April 10, 2018

Conveyance of Term Overriding Royalty Interest between Sunny Frog Oil, LLC, and Royale (April 4, 2018), filed as Exhibit 10.3 to the Company’s Form 8-K filed April 10, 2018

Form of Management Services Agreement between Royale and RMX to be entered upon Second Closing of Contribution Agreement, filed as Exhibit 10.5 to the Company’s Form 8-K filed April 10, 2018

Purchase and Sale Agreement between Sunny Frog Oil, LCC, and REF (November 27, 2017), filed as Exhibit 10.6 to the Company’s Form 8-K filed April 10, 2018

Letter Agreement by and among RMX, CIC, Royale, REF and Matrix (April 12, 2018), filed as Exhibit 2.1 to the Company’s Form 8-K filed April 17, 2018

Royale Energy, Inc., 2018 Equity Incentive Plan, filed as Exhibit 99.1 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Thomas M.

Gladney, filed as Exhibit 10.3 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Jonathan Gregory, filed as Exhibit 10.4 to the Company’s Form S-8 filed October 29, 2018

Gladney, filed as Exhibit 10.3 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Jonathan Gregory, filed as Exhibit 10.4 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Harry E.

Hosmer, filed as Exhibit 10.5 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Barry Lasker, filed as Exhibit 10.6 to the Company’s Form S-8 filed October 29, 2018

Hosmer, filed as Exhibit 10.5 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Barry Lasker, filed as Exhibit 10.6 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Mel.

Riggs, filed as Exhibit 10.7 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Robert Vogel, filed as Exhibit 10.8 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Michael McCaskey, filed as Exhibit 10.9 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Jeffrey Kerns, filed as Exhibit 10.10 to the Company’s Form S-8 filed October 29, 2018

Riggs, filed as Exhibit 10.7 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Robert Vogel, filed as Exhibit 10.8 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Michael McCaskey, filed as Exhibit 10.9 to the Company’s Form S-8 filed October 29, 2018

Employment Agreement between the Company and Jeffrey Kerns, filed as Exhibit 10.10 to the Company’s Form S-8 filed October 29, 2018

Incentive Stock Option Agreement between the Company and Stephen M.

Hosmer, filed as Exhibit 10.11 to the Company’s Form S-8 filed October 29, 2018

Participation Agreement between the Company and California Resources Petroleum Corporation October 17, 2018), filed as Exhibit 10.29 to the Company’s Form 8-K filed on November 19, 2018

Hosmer, filed as Exhibit 10.11 to the Company’s Form S-8 filed October 29, 2018

Participation Agreement between the Company and California Resources Petroleum Corporation October 17, 2018), filed herewith.

Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Secretary of the Commission

Subsidiaries, filed herewith.

Consent of SingerLewak L.L.P., filed herewith

Consent of Moss Adams LLP filed herewith

Consent of Netherland, Sewell & Associates, Inc., filed herewith.

Rule 13a-14(a), 115d-14(a) Certification, filed herewith.

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Royale Energy, Inc.

April 15, 2019

March 30, 2020

/s/ Johnny Jordan

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Chief Executive Officer

April 15, 2019

March 30, 2020

/s/ Stephen M.

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

April 15, 2019

March 30, 2020

Chairman of the Board of Directors

April 15, 2019

March 30, 2020

/s/ Jonathan Gregory

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Vice-Chair of the Board of Directors

April 15, 2019

March 30, 2020

/s/ Thomas M.

April 15, 2019

/s/ Barry Lasker

April 15, 2019

March 30, 2020

/s/ Karen Kerns

March 30, 2020

/s/ Robert Vogel

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AND SUPPLEMENTARY DATA

REPORT OF SINGERLEWAK LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY (DEFICIT)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

Royale Energy, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Royale Energy, Inc.

(the “Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 1.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic No.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Moss Adams LLP

San Diego, California

March 30, 2020

We have served as the Company’s auditor since 2019.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors of Royale Energy, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Royale Energy, Inc.

(the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”).

In our opinion, based on our audit and the report of the other auditor, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheet of Royale Energy, Inc.

(the “Company”) as of December 31, 2018, the related consolidated statements of operations, stockholders' deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”).

In our opinion, based on our audit and the report of the other auditor, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We did not audit the financial statements of RMX Resources, LLC, an equity method investment, which statements reflect total assets and revenue constituting 30 percent and 10 percent, respectively, in 2018, of the related consolidated totals.

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Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements, based on our audits.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements, based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB), and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used, and significant estimates made, by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used, and significant estimates made, by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

SingerLewak LLP

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Prepaid Expenses and Other Current Assets

Prepaid Drilling to RMX Resources, LLC

Total Current Assets

Investment in Joint Venture

Right of Use Asset - Operating Leases

Oil and Gas Properties (Successful Efforts Basis), Real Property and Equipment and Fixtures, net

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

ROYALE ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’

EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts Payable and Accrued Expenses

Cash Advances on Pending Transactions

Royalties Payable

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Accrued Liabilities

Operating Leases - Current

Deferred Drilling Obligations

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Asset Retirement Obligation

Operating Leases - Non-current

Accrued Unpaid Guaranteed Payments

Accrued Liabilities

Accrued Liabilities - Non-current

Total Liabilities

Stockholders’

Equity (Deficit):

Stockholders’ Equity:

Convertible Preferred Stock, Series B, $10 par value, 3,000,000

Shares Authorized, 2,012,400 shares issued and outstanding

59,461 Authorized but unissued at December 31, 2018

Common Stock, No Par Value, 30,000,000 Shared Authorized

21,850,185 shares issued and outstanding at December 31, 2017

Shares Authorized, 2,145,332 and 2,012,400 shares issued / outstanding

at December 31, 2019 and 2018, respectively

Common Stock, .001 Par Value, 280,000,000 Shares Authorized

49,421,387 shares issued and outstanding at December 31, 2018

51,854,136 and 49,421,387 shares issued / outstanding

at December 31, 2019 and 2018, respectively

Additional Paid in Capital

Accumulated Deficit

Total Stockholder’

Equity (Deficit)

Total Liabilities and Stockholders’

Equity (Deficit)

The accompanying notes are an integral part of these financial statements.

Total Stockholder’s Equity

Total Liabilities and Stockholders’ Equity

The accompanying notes are an integral part of these consolidated financial statements.

ROYALE ENERGY, INC.

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Lease Operating

Lease Impairment

Geological and Geophysical Expense

Well Equipment Write Down

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Interest Expense

Gain on Investment in Joint Venture

Gain on Settlement of Accounts Payable

Gain (Loss) on Investment in Joint Venture

Gain on Settlement of Payables

Loss on Hedging Activities

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Diluted Loss Per Share

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

ROYALE ENERGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY (DEFICIT)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

Preferred Stock Series B

Number Shares Issued and Outstanding

Preferred Stock

Number Shares

Comprehensive

Balance, December 31, 2017

Stock issued in lieu of Compensation

Stock issued in Settlement of AP-Adjustment

Balance, December 31, 2017

Matrix Merger

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Stock issued in lieu of Compensation

Warrants Issued to CIC with Sale of Assets to RMX

Executive’s Stock Option Grant

Warrants Issued to CIC with

Sale of Assets to RMX

Executive’s Stock Option Grant

Preferred Series B 3.5% Dividend

Balance, December 31, 2018

The accompanying notes are an integral part of these financial statements.

Stock issued in lieu of Compensation

Preferred Series B 3.5% Dividend

Balance, December 31, 2019

The accompanying notes are an integral part of these consolidated financial statements.

ROYALE ENERGY, INC.

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Depreciation, Depletion, and Amortization

Lease Impairment

Loss on Sale of Assets

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Gain on Settlement of Accounts Payable

Gain on Investment in Joint Venture

Loss (Gain) on Investment in Joint Venture

Bad Debt Expense

Geological & Geophysical Costs

Gain on Other

Stock-Based Compensation

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Principal Payments on Long-Term Debt

Proceeds from Issuance of Common Stock

Seismic Financing Agreement Payments

Net Cash Provided by Financing Activities

Net Increase (Decrease) in Cash

Cash at Beginning of Year

Cash at End of Year

Cash, Cash Equivalents, and Restricted Cash at Beginning of Year

Cash, Cash Equivalents, and Restricted Cash at End of Year

Cash Paid for Interest

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Issuance of Common Stock for Accrued Compensation Expense

Warrants Issued with Sale of Assets

Series B Paid-In-Kind Dividends

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Contributions to J.V.

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

ROYALE ENERGY, INC.

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

NOTE 1 –

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Royale Energy, Inc.

(in these notes sometimes called “Royale Energy,”

“Royale,”

or the “Company”) is presented to assist in understanding Royale Energy’s financial statements.

(See Note 2 below, Merger with Matrix Oil Management, Corporation and Formation of RMX.) These consolidated financial statements include the accounts of our controlled subsidiaries.

(in these notes sometimes called “Royale Energy,” “Royale,” or the “Company”) is presented to assist in understanding Royale Energy’s financial statements.

See Note 2 – Merger With Matrix Oil Management Corporation And Formation Of RMX below.

These consolidated financial statements include the accounts of our controlled subsidiaries.

Investments in unincorporated joint ventures and undivided interests in certain operating assets are consolidated on a pro rata basis.

The financial statements and notes are representations of Royale Energy’s management, which is responsible for their integrity and objectivity.

These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

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Royale Energy is an independent oil and gas producer which also has operations in the area of turnkey drilling.

Royale Energy owns wells and leases in major geological basins located primarily in California, Texas, Oklahoma and Utah.

Royale Energy owns wells and leases in major geological basins located primarily in California, Texas, Oklahoma, Colorado, and Utah.

Royale Energy offers fractional working interests and seeks to minimize the risks of oil and gas drilling by selling multiple well drilling projects which do not include the use of debt financing.

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As a result, reserve estimates may be different from the quantities of crude oil and condensate, NGLs and natural gas that are ultimately recovered.

See Note 18 –

Supplementary Information About Oil and Gas Producing Activities for further detail.

See Note 17 - Supplemental Information About Oil And Gas Producing Activities (Unaudited) for further detail.

Other items subject to estimates and assumptions include the carrying amounts of property, plant and equipment, asset retirement obligations, valuation of derivative instruments and valuation allowances for deferred tax assets, among others.

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The primary sources of liquidity have historically been issuances of common stock and operations.

There are factors that give rise to substantial doubt about the company’s ability to meet liquidity demands, and we anticipate that our primary sources of liquidity will be from the issuance of debt and/or equity, the sale of oil and natural gas property participation interests through our normal course of business and the sale of non-strategic assets.

The Company’s consolidated financial statements reflect a working capital deficiency of $5,471,153 and a net loss from operations of $(3,204,056).

There are factors that give rise to substantial doubt about the Company’s ability to meet liquidity demands, and we anticipate that our primary sources of liquidity will be from the issuance of debt and/or equity, the sale of oil and natural gas property participation interests through our normal course of business and the sale of non-strategic assets.

The Company’s 2019 consolidated financial statements reflect a working capital deficiency of $3,425,012 and a net loss from operations of $845,071.

These factors raise substantial doubt about our ability to continue as a going concern.

The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management’s plans to alleviate the going concern by cost control measures that include the reduction of overhead costs by 25% and the sale of non-strategic assets.

Management’s plans to alleviate the going concern by cost control measures that include the reduction of overhead costs and the sale of non-strategic assets.

There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow.

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Restricted Cash

Royale sponsors turnkey drilling arrangements in unproved properties.

Royale sponsors turnkey drilling arrangements in proved and unproved properties.

The contracts require that participants pay Royale the full contract price upon execution of the drilling agreement.

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Once the well is drilled, the funds are used to satisfy the drilling cost.

Royale classifies these funds prior to drilling as restricted cash as called for under ASU 2016-15 and later codified as ASC 230-10-50-8.

Royale classifies these funds prior to commencement of drilling as restricted cash based on guidance codified as under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 230-10-50-8.

In the event that progress payments are made from these funds, they are recorded as Prepaid Expenses and Other Current Assets.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows.

Year Ended December 31,

Cash and cash equivalents

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When a loss is deemed to have occurred and is other than temporary, the carrying value of the equity method investment is written down to fair value, and the amount of the write-down is included in income.

The earnings from RMX reflected in these financial statements as Investment in JV, reflect our share of net earnings or losses directly attributable to this equity method investment.

We evaluated our investment in RMX as of December 31, 2019, and determined that any losses were not other than temporary.

Revenue Recognition

On January 1, 2018, we adopted the new ASC Topic 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method.

On January 1, 2018, we adopted the new ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method.

We evaluated the effect of transition by applying the provisions of the new revenue standard to contracts with remaining obligations as of January 1, 2018.

No cumulative adjustment to retained earnings was necessary as a result of adopting this standard.

Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies.

We concluded that the adoption of the new revenue standard did not result in any changes to our consolidated balance sheet or statement of cash flow.

A significant portion of our revenues are derived from the sale of crude oil and condensate, natural gas liquids (“NGLs”) and natural gas under spot and term agreements with our customers.

Year Ended December 31,

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Other working interest owners reimburse us for costs incurred based on our agreements.

We determined that these activities are not performed as part of customer relationships, in accordance with the new revenue standard, and such reimbursements will continue to not be recorded as revenues within the scope of the new revenue standard after the first quarter of 2018.

Prior to this, such cost reimbursements were included in revenue.

We determined that these activities are not performed as part of customer relationships, and such reimbursements are recorded as cost reimbursements.

We commonly market the share of production belonging to other working interest owners as the operator of jointly owned oil and gas properties.

We concluded that those marketing activities are carried out as part of the collaborative arrangement, and we do not purchase or otherwise obtain control of other working interest owners’

share of production.

Those marketing activities are carried out as part of the collaborative arrangement, and we do not purchase or otherwise obtain control of other working interest owners’ share of production.

Therefore, we act as a principal only in regards to the sale of our share of production and recognize revenue for the volumes associated with our net production.

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When monies are received from third parties for future drilling obligations, the Company records the liability as Turnkey Drilling Obligations.

Once the contracted depth for the drilling of the well is reached and a determination as to the commercial viability of the well (typically call “Casing Point Election”

or “Logging Point”), the difference in the actual cost to drill and the guaranteed cost is recorded as income or expense depending on whether there was a gain or loss.

Once the contracted depth for the drilling of the well is reached and a determination as to the commercial viability of the well (typically call “Casing Point Election” or “Logging Point”), the difference in the actual cost to drill and the guaranteed cost is recorded as income or expense depending on whether there was a gain or loss.

Crude oil and condensate

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Supervisory Fees and Other

These amounts include proceeds from the Master Service Agreement (“MSA”) with RMX for the providing of land, engineering, accounting and support services for the RMX joint venture.

Revenues earned under the MSA are recorded at the end of each month that services were performed in conformity with the Agreement with an offsetting receivable from the RMX joint venture.

The service fee income is deemed earned at the end of each month that services are performed as prescribed by the contract.

Payment is due on the thirteenth day following the end of the month following the performance of the services.

Although payment is not necessarily received in accordance with the contract terms, it is eventually received.

These amounts include proceeds from the Master Service Agreement (“MSA”) with RMX for the providing of land, engineering, accounting and support services for the RMX joint venture.

Revenues earned under the MSA were recorded at the end of each month that services were performed, in conformity with the Agreement.

The service fee income was deemed earned at the end of each month that services were performed as prescribed by the contract.

During 2018, we recognized $1,620,000 or 49.3% of our total revenues from these services.

Royale has a single supervisory fee customer, that being RMX, which represents 100% of the Supervisory Fee income.

Royale had a single supervisory fee customer, that being RMX, which represented 100% of the Supervisory Fee income.

On December 31, 2018, Royale received notice of cancelation of the MSA by RMX effective March 31, 2019.

Also included are Pipeline and Compressor fees which are received and allocated based on production volumes.

For the year ended 2019, the Company recognized $540,000 in supervisory fees from RMX.

Also included in the caption are Pipeline and Compressor fees which are received and allocated based on production volumes.

Oil and Gas Property and Equipment

Royale Energy uses the “successful efforts”

method to account for its exploration and production activities.

Successful efforts

Royale Energy uses the “successful efforts” method to account for its exploration and production activities.

Under this method, Royale Energy accumulates its proportionate share of costs on a well-by-well basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred, and capitalizes expenditures for productive wells.

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Under the unit-of-production method, oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank.

Production Cost

Production costs are expensed as incurred.

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The production function normally terminates at the outlet valve on the lease or field production storage tank.

Production costs are those incurred to operate and maintain Royale Energy’s wells and related equipment and facilities.

They become part of the cost of oil and gas produced.

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and administrative expenses related to the production activity.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration.

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Major renewals and improvements are capitalized, and the assets replaced are retired.

The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use.

The project drilling phase commences with the development of the detailed engineering design and ends when the assets are ready for their intended use.

Interest costs, to the extent they are incurred to finance expenditures during the construction phase, are included in property, plant and equipment and are depreciated over the service life of the related assets.

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During 2019 and 2018, impairment losses of $977,682 and $1,183,515, respectively, were recorded on various capitalized base and land costs as well as certain fields acquired through the merger with the matrix entities.

Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resultant gain or loss is recorded to Royale Energy’s Statement of Operations.

Upon the sale of an entire interest in an unproved property where the property has been assessed for impairment individually, a gain or loss is recognized in Royale Energy’s Statement of Operations.

If a partial interest in an unproved property is sold, any funds received are accounted for as a recovery of the cost in the interest retained with any excess funds recognized as a gain.

Should Royale Energy’s turnkey drilling agreements include unproved property, total drilling costs incurred to satisfy its obligations are recovered by the total funds received under the agreements.

Any excess funds are recorded as a Gain on Turnkey Drilling Programs, and any costs not recovered are capitalized and accounted for under the “successful efforts”

Royale Energy sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest.

Any excess funds are recorded as a Gain on Turnkey Drilling Programs, and any costs not recovered are capitalized and accounted for under the “successful efforts” method.

Turnkey Drilling

Royale Energy sponsors turnkey drilling agreement arrangements in proved and unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest.

Gains on Turnkey Drilling Programs represent funds received from turnkey drilling participants in excess of all costs Royale incurs during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account;

and are recognized only upon making this determination after Royale’s obligations have been fulfilled.

The contracts require the participants pay Royale Energy the full contract price upon execution of the agreement.

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In these working interest arrangements, the participants are responsible for sharing in the risk of development, but also sharing in a proportional interest in rights to revenues and proportional liability for the cost of operations after drilling is completed and the interest is conveyed to the participant.

A certain portion of the turnkey drilling participant’s funds received are non-refundable.

The Company holds all funds invested as Deferred Drilling Obligations until drilling is complete.

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Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected.

The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable.

All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance.

At December 31, 2019 and 2018, the Company established an allowance for uncollectable accounts of $1,791,162 and $2,296,384, respectively, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

During 2019, the Company closed a number of accounts as uncollectable, offsetting the allowance in the amount of $519,333.

Revenue Receivables

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Weighted average common shares, including Dilutive effect

For the year ended December 31, 2018, Royale Energy had dilutive securities of 24,049,443.

For the years ended December 31, 2019 and 2018, Royale Energy had dilutive securities of 23,947,519 and 24,049,443, respectively.

These securities were not included in the dilutive loss per share due to their antidilutive nature.

Stock Based Compensation

Royale has a stock-based employee compensation plan, which is more fully described in Note 12.

The Company has adopted ASC 718 as updated by ASU 2016-09 and ASU 2017-09 for share-based payments.

The Company has not implemented the amendments described in ASU 2018-07 as they become effective for public companies in 2019.

Royale has a stock-based employee compensation plan, which is more fully described in Note 11 - Stock Compensation Plan.

The Company has adopted ASC 718 for share-based payments.

This topic requires that the cost resulting from all share-based payment transactions be recognized in the financial statements.

It further establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee stock ownership plans.

Shares issued in connection with a business combination as part of the consideration transferred in exchange for the acquiree are treated within the scope of Topic 805.

Royale utilizes the asset and liability approach to measure deferred tax assets and liabilities based on temporary differences existing at each balance sheet date using currently enacted tax rates in accordance with the Income Taxes Topic of the Accounting Standards Codification ASC740.

Shares issued in connection with a business combination as part of the consideration transferred in exchange for the acquiree are treated within the scope of ASC 805.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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Fair Value Measurements

According to Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.

According to Fair Value Measurements and Disclosures Topic of the ASC, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

Carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

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Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment.

These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions

At December 31, 2019 and 2018, Royale Energy does not have any financial assets measured and recognized at fair value on a recurring basis.

The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “

Asset Retirement and Environmental Obligations”

(“FASB ASC 410”).

The Company estimates asset retirement obligations pursuant to the provisions of ASC 410, “ Asset Retirement and Environmental Obligations” .

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties.

Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.

See Note 3 for further discussion of the Company’s asset retirement obligations.

See Note 3 – Oil and Gas Properties, Equipment and Fixtures for further discussion of the Company’s asset retirement obligations.

Accounts Payable and Accrued Expenses

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Current drilling efforts accrued expenses

Legal Settlement Payable

Accrued Liabilities

Employee related accruals

Interest payable on cash advances

Deferred rent

Federal and State income taxes payable

Accrued Liabilities –

Prior to the Merger, Matrix had outstanding long term liabilities for interest on notes payable due to certain Matrix principals.

The balance due at December 31, 2018, was $1,306,605.

Accrued Unpaid Guaranteed Payments

Prior to the Merger, Matrix had outstanding accrued unpaid guaranteed payments for unpaid salaries due to certain Matrix employees.

At December 31, 2018, the $1,616,205 balance remains the same as the time of merger.

Cash Advances on Pending Transactions

In July 2016, we received a cash investment of $1,580,000 from two investors to purchase convertible promissory notes of $1,280,000 and $300,000, with a conversion price of $0.40 per share, with warrants to purchase one share of common stock for every three shares of common stock issuable upon conversion of the notes.

The funds from these transactions were used to continue drilling activities, fund expenses incurred in connection with the completion of Royale Energy’s merger with Matrix Oil Corporation and for general corporate purposes.

The notes originally matured on August 2, 2017, one year from the date of issuance, and carried a 10% interest rate, with a default rate of 25%.

Shortly before completion of the Merger, the $300,000 note was converted into 750,000 shares of Royale common stock, and Royale agreed to a cash settlement with the holder of the $1,280,000 note for $1,900,000.

Reclassifications

The Company has reclassified certain prior year amounts between operating cash flow categories to present it on a basis comparable with the current year’s presentation with no impact on net cash provided by operating activities.

During 2017, Royale treated reimbursement of overhead expenses through joint operations (“COPAS Overhead”) as part of revenue.

In 2018, the Company changed its accounting policy and treats COPAS Overhead as a reduction to the Company’s General and Administrative expenses.

Certain prior year amounts have been reclassified for consistency with the current year presentation.

These reclassifications had no effect on the reported results of operations.

Accrued– Non-current

At December 31, 2019, the Company had non-current accrued liabilities of $1,306,605 and accrued unpaid guaranteed payment of $1,616,205, due to certain Matrix principals, from periods prior to the Merger.

See NOTE 2 – Merger with Matrix Oil Management Corporation and Formation of RMX.

Note Settlements

On August 2, 2017, one year from the date of issuance, two notes totaling $1,580,000 matured, with a default rate of 25%.

In the first quarter 2018, the $300,000 note was converted into 750,000 shares of Royale common stock, and Royale agreed to a cash settlement with the holder of the $1,280,000 note for $1,900,000.

Business Combinations

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Fair value considerations include the evaluation of the underlying documentation supporting receivables, property, other assets and liabilities.

If the documentation and support for a receivable or other asset represented by the seller is not deemed acceptable by the Company’s auditors, the receivable or other asset is not considered in the purchase price until such time as the receivable or other asset can be proven to a level acceptable to the Company’s auditors.

Any receipts by the Company of cash or other assets, subsequent to the transaction date for which the merger documentation was considered insufficient at the time of the merger, the Company recognizes as a current liability.

At such time as the documentation is deemed acceptable, the liability is relieved with a credit to earnings in the period of determination.

When the Company pays more than fair market value for an asset, it records the overage as an intangible asset (“goodwill”).

In the event that the Company pays less than fair market value for an asset(s) this results in “negative goodwill”

or a so called “bargain purchase”.

In the event of a bargain purchase, the Company will reevaluate the fair market value of the asset(s) being acquired until such time as there is no negative goodwill.

Goodwill and Impairments

We evaluate goodwill for impairment annually as of December 31st, or when an indicator of impairment exists.

We compare the fair value of our reporting units with the carrying value, including goodwill.

We recognize an impairment charge for the amount by which the carrying value exceeds a reporting unit’s fair value, not to exceed the total amount of recorded goodwill, as applicable.

Significant estimates used in our fair value calculation using discounted future cash flows include:

(1) estimates of future revenue and expense growth by field, (2) future estimated effective tax rates, which vary by geological region and state;

(3) future estimated capital expenditures and future required investments in working capital;

(4) estimated discount rates, (5) reserve life and decline rates as estimated by an industry recognized reservoir engineer, (6) future commodity pricing expectations as developed by Company management, (7) risking factors established by management by asset class and (8) future development opportunities as evaluated by the Company’s engineering staff.

Significant estimates include;

oil and gas future well recoveries, future commodity price forecasts, future potential growth estimates, discount values and risk factors.

In addition, we evaluate an acquisition for impairment if events or circumstances change between annual tests, indicating a possible impairment.

Examples of such events or circumstances include:

(1) a significant adverse change in legal factors or in the business climate;

(2) an adverse change in commodity prices, (3) assessment by a regulator;

(3) a determination by management that some or all of the acquisition will be sold;

(4) continued or sustained losses by the acquisition;

(5) a significant decline in production as compared to our book value;

or (6) we conclude that we may not recover a significant asset class within the acquisition.

Accounting Standards

Recently Adopted

ASU 2017-09, Revenue from Contracts with Customers (ASC 606)

On January 1, 2018, we adopted the new ASC Topic 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method.

We evaluated the effect of transition by applying the provisions of the new revenue standard to contracts with remaining obligation as of January 1, 2018.

No cumulative adjustment to retained earnings was necessary as a result of adopting this standard.

We concluded that the adoption of the new revenue standard did not result in any changes to our consolidated balance sheet or statement of cash flow

Business Combinations–Clarifying the Definition of a Business

In January 2017, the FASB issued a new accounting standards update that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities constitutes a business.

The guidance requires us to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets;

if so, the set of transferred assets and activities would not represent a business.

The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue guidance.

This standard was effective for us in the first quarter of 2018, and was applied prospectively.

Adoption of this standard did not have a significant impact on our consolidated results of operations, financial position or cash flows.

Statement of Cash Flow-Restricted Cash (ASC-230-10-50-8)

In November 2016, the FASB issued a new accounting standards update that requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows.

As a result, we no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows.

When cash, cash equivalents, and restricted cash are presented in more than one line item on the balance sheet, the standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet.

This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements.

Royale has adopted this new ASU 2016-18 with the reporting of year-end financials.

This standard requires Royale to show cash received specifically for drilling operations separately on the balance sheet as Restricted Cash.

See note above.

We also adopted the following ASUs during 2018, none of which had a material impact to our financial statements or financial statement disclosures:

Effective Date

2017-09 Stock Compensation-Scope of Modification Accounting

January 1, 2018

2017-07 Retirement Benefits-Improving the Presentation of

Net Periodic Pension Cost and Net Periodic Post Retirement Cost

January 1, 2018

2017-05 Gains and Losses from the Depreciation of Nonfinancial Assets

-Clarifying the Scope of Assets Derecognition Guidance

January 1, 2018

2014-16 Income Taxes-Intra-Entity Transfers of

Assets other than Inventory

January 1, 2018

2016-15 Statement of Cash Flows-Classification of Certain Cash

Receipts and Cash Payments

January 1, 2018

2016-01 Financial Instruments-Recognition and Measurement of

Financial Assets and Liabilities

January 1, 2018

Not Yet Adopted

ASU 2018-02, Reporting Comprehensive Income –

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an ASU allowing an entity the choice to retained earnings the tax effects related to the TCJA that are stranded in accumulated other comprehensive income.

We do not expect adoption of this standard to have a material impact on our financial statements.

The amendment is effective beginning in 2019.

ASU 2017-12, Derivatives and hedging –

Targeted Improvement to Accounting for Hedging Activities

ASU 2017-12, Derivatives and hedging – Targeted Improvement to Accounting for Hedging Activities

In August 2017, the FASB issued an ASU to amend the hedge accounting rules to simplify the application of hedge accounting guidance and better portray the economic results of risk management activities in the financial statements.

The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirements to separately measure and report hedge ineffectiveness and eases certain hedge effectiveness assessment requirements.

The guidance is effective beginning in 2019.

We are currently evaluating the impact of this guidance, including transition elections and required disclosures, on our financial statements and the timing of adoption.

However, since we have not historically used derivatives to hedge our commodity price risk, we do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

ASU 2016-13, Credit Losses –

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued an ASU related to the accounting for credit losses on certain financial instruments.

The guidance requires that for most financial assets, losses be based on an expected loss approach which includes estimates of losses over the life of exposures that considers historical, current and forecasted information.

Expanded disclosures related to the methods used to estimate the losses as well as a specific disaggregation of balances for financial assets are also required.

The change is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

We do not expect application of this ASU to have a material impact on our consolidated financial statements.

The guidance was effective beginning in 2019.

Adoption of this standard did not have a material impact on our consolidated financial statements.

ASU 2016-02 and 2018-11, Leases

In February 2016, the FASB issued an ASU requiring lessees to record virtually all leases on their balance sheet.

The ASU also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flow arising from leases.

For Lessors, this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leasers.

The guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods within those years.

We will transition to the new guidance by recording leases on our balance sheet as of January 1, 2019.

We continue to evaluate the impact of this standard on our financial statements, disclosures, internal controls and accounting policies.

This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls.

We believe the adoption of the standard will have a material impact on our consolidated financial statements as virtually all leases will be recognized as a right of use asset and lease obligation.

NOTE 2 –

Merger with Matrix Oil Management Corporation and Formation of RMX

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No.

2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements.

Topic 842 was subsequently amended by ASU No.

2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No.

2018-10, Codification Improvements to Topic 842, Leases; and ASU No.

2018-11, Targeted Improvements.

The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.

As a public company, the new standard is effective for us on January 1, 2019.

A modified retrospective transition approach is the implementation methodology we have selected; applying the new standard to all leases existing at the date of initial application, in this case January 1, 2019.

Consequently, financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients for the transition.

We have elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.

We do not expect to elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.

We have elected all of the new standard’s available transition practical expedients.

The standard did not materially impact our consolidated results of operations, earnings per share, and had no impact on cash flows.

The most significant effects relate to:

(1) the recognition of new ROU assets in long-term assets on the balance sheet; (2) lease liabilities, both short-term and long-term, on our balance sheet; and, (3) providing significant new disclosures about our leasing activities.

We do not expect a significant change in our leasing activities as a result of the adoption of this new pronouncement.

See Note 9- Operating Leases

NOTE 2 – MERGER WITH MATRIX OIL MANAGEMENT CORPORATION AND FORMATION OF RMX

On March 7, 2018, Royale Energy, Inc.

(“Royale Energy,”

formerly known as Royale Energy Holdings, Inc., a Delaware corporation), Royale Energy Funds, Inc.

(“REF,”

formerly known as Royale Energy, Inc., a California corporation), and Matrix Oil Management Corporation (“Matrix”) and its affiliates were notified by the California Secretary of State of the filing and acceptance of agreements of merger by the California Secretary of State, to complete the previously announced merger between the companies (the “Merger”).

In the Merger, REF was merged into a newly formed subsidiary of Royale Energy, and Matrix was merged into a second newly formed subsidiary of Royale Energy pursuant to the Amended and Restated Agreement and Plan of Merger among REF, Royale Energy, Royale Merger Sub, Inc., (“Royale Merger Sub”), Matrix Merger Sub, Inc., (“Matrix Merger Sub”) and Matrix (the “Merger Agreement”).

(“Royale Energy,” formerly known as Royale Energy Holdings, Inc., a Delaware corporation), Royale Energy Funds, Inc.

(“REF,” formerly known as Royale Energy, Inc., a California corporation), and Matrix Oil Management Corporation (“Matrix”) and its affiliates were notified by the California Secretary of State of the filing and acceptance of agreements of merger by the California Secretary of State, to complete the previously announced merger between the companies (the “Merger”).

Additionally, in connection with the merger, all limited partnership interest of two limited partnership affiliates of Matrix (Matrix Permian Investments, LP, and Matrix Las Cienegas Limited Partnership), were exchanged for Royale Energy common stock using conversion ratios according to the relative values of each partnership.

All Class A limited partnership interests of another Matrix affiliate, Matrix Investments, LP (“Matrix Investments”) were exchanged for Royale Energy Common stock using conversion ratios according to the relative value of the Class A limited partnership interests, and $20,124,000 of Matrix Investments preferred limited partnership interests were converted into 2,012,400 shares of Series B Convertible Preferred Stock of Royale Energy.

Another Matrix affiliate, Matrix Oil Corporation (“Matrix Operator”), was acquired by Royale Energy by exchanging Royale Energy common stock for the outstanding common stock of Matrix Oil Corporation using a conversion ratio according to the relative value of the Matrix Oil Corporation common stock.

Matrix, Matrix Oil Corporation and the three limited partnership affiliates of Matrix called the “Matrix Entities.”

The Merger had been previously approved by the respective holders of all outstanding capital stock of REF, Matrix, Royale Energy, Matrix Merger Sub and Royale Merger Sub on November 16, 2017, as previously reported in our Current Report on Form 8-K dated November 16, 2017.

The Merger and related transactions are described in detail in our Current Report on Form 8-K dated March 7, 2018, and in Royale Energy’s Current Report on Form 8-K dated March 7, 2018 (SEC File No.

The Merger and related transactions are described in more detail in our Form 8-K dated March 7, 2018 (SEC File No.

As a result of the Merger, REF became a wholly owned subsidiary of Royale Energy, and each outstanding share of common stock of REF at the time of the Merger was converted into one share of common stock of Royale Energy.

The common stock of Royale Energy is traded on the Over-The-Counter QB (OTCQB) Market System (symbol ROYL).

Under FASB Topic ASC 805, Business Combinations, which among other things requires the assets acquired and liabilities assumed to be measured and recorded at their fair values as of the acquisition date, the Company was determined to be the acquirer and as such, the acquisition was accounted for as a business combination.

The preliminary allocation of the purchase price was determined in arms’

length negotiations between the parties.

Under ASC 805, Business Combinations , which among other things requires the assets acquired and liabilities assumed to be measured and recorded at their fair values as of the acquisition date, the Company was determined to be the acquirer and as such, the acquisition was accounted for as a business combination.

The preliminary allocation of the purchase price was determined in arms’ length negotiations between the parties.

Substantially all of the value of the transaction was related to the value of the oil and gas assets acquired with minimal value ascribed to the other assets.

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The comparable transaction analysis was performed to establish a range of fair values for similarly situated oil and gas properties that were recently bought or sold in arms-length, observable market transactions.

The range of value observed from the Company’s analysis of recent market transactions was then utilized as a basis for evaluating the fair value determined via the discounted cash flow method.

The Company’s fair value conclusion indicated that the discounted cash flow method valuation is in line with the same range as the comparable transactions reviewed, when considering the comparable transactions.

The range of value observed from the Company’s analysis of recent market transactions was then utilized as a basis for evaluating the fair value determined via the discounted cash flow method.

Other current liabilities assumed in the acquisition, were carried over at historical carrying values because the assets and liabilities are short term in nature and their carrying values are estimated to represent the best estimate of fair value.

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Total Fair Value of Assets Acquired

In accordance with FASB Topic ASC 805, the following unaudited supplemental pro forma condensed results of operations present combined information as though the business combination had been completed as of January 1, 2018.

In accordance with ASC 805, the following unaudited supplemental pro forma condensed results of operations present combined information as though the business combination had been completed as of January 1, 2018.

The unaudited supplemental pro forma financial information was derived from the historical revenues and direct operating expenses of Royale Energy, Inc.

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Year ended December 31, 2018

Year ended December 31, 2017

Royale Energy, Inc.

Matrix Oil Management Corp

Royale Energy, Inc.

Matrix Oil Management Corp

Net Loss available to common shareholders

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Amounts previously estimated have changed during the measurement period.

The changes in estimates included an increase of $2,581,641 of oil and gas properties and a decrease of $2,581,641 in accounts receivable and other current assets.

The changes in estimates included an increase of $2,581,641 million of oil and gas properties and a decrease of $2,581,641 million in accounts receivable and other current assets.

We recorded measurement-period adjustments in the fourth quarter of 2018.

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Formation of RMX and Asset Contribution

On April 13, 2018, Royale Energy, Inc., and two of Royale’s subsidiaries, Royale Energy Funds, Inc.

and Matrix Oil Management Corporation (the “Royale Entities”) completed the Subscription and Contribution Agreement (“Contribution Agreement”), in which the Royale Entities and CIC RMX LP (“CIC”) entered into the Contribution Agreement and certain other agreements providing that the Royale Entities would contribute certain assets to RMX Resources, LLC (“RMX”), a newly formed Texas limited liability company formed to facilitate the investment from CIC.

On April 13, 2018, Royale Energy, Inc., and two of Royale’s subsidiaries, Royale Energy Funds, Inc.

In exchange for its contributed assets, Royale received a 20% equity interest in RMX, an equity performance incentive interest and up to $20.0 million to pay off Royale Entities senior lender, Arena Limited SPV, LLC., in full, and to pay Royale Entities trade payables and other outstanding obligations.

CIC contributed an aggregate of $25.0 million in cash to RMX in exchange for (i) an 80% equity interest in RMX with preferred distributions until certain thresholds are met, (ii) a warrant (“Warrant”) to acquire up to 4,000,000 shares of Royale’s common stock at an exercise price of $.01 per share and registration rights pursuant to a Registration Rights Agreement

The Contribution Agreement was completed in a two-step closing and funding, with the First Closing consummated on April 4, 2018 and the Second Closing consummated on April 13, 2018 with the Royale Entities.

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Royale has designated Michael McCaskey and Johnny Jordan as its members of the RMX board.

The return targets for CIC through its funding of RMX provide for a “waterfall”

style return profile with the first distributions going to CIC until it has received all Unpaid Preferred Return and Unpaid Preferred Enhanced Return, as defined by the Company’s Agreement.

As part of the formation of the joint venture, Royale contributed Matrix Oil Corporation (“MOC”) to RMX.

The return targets for CIC through its funding of RMX provide for a “waterfall” style return profile with the first distributions going to CIC until it has received all Unpaid Preferred Return and Unpaid Preferred Enhanced Return, as defined by the Company’s Agreement.

As part of the formation of the joint venture, Royale contributed Matrix Oil Corporation (“MOC”) to RMX.

MOC has the permits and licenses to operating oil and gas properties in California.

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The transfer of MOC to RMX as the operating company provided an amount due Royale of approximately $640,000, which was recorded as a due from affiliate during the period in 2018.

Under the provisions of the Amended and Restated Limited Liability Company Agreement of RMX Resources, LLC (“RMX Agreement”) dated March 27, 2018, the gains and losses of the partnership are distributed as if all of RMX’s assets were sold for cash at a price equal to their book basis and all RMX liabilities were satisfied at their book basis and all of the remaining assets of RMX were distributed in accordance with Section 5.4 of the RMX Agreement.

Notwithstanding the above, for each fiscal year or other relevant period, deductions attributable to exploration costs, IDCs, and operating and maintenance costs shall be allocated 100% to the CIC members pro rata in accordance with their Class B percentage interests for each fiscal year.

The RMX joint venture has a senior revolving loan facility with Washington Federal Bank.

The borrowing base of the facility is $25.0 million with $22.9 million drawn at December 31, 2018.

As part of the joint venture, RMX entered into a Master Service Agreement (“MSA”) calling for Royale Energy to provide land, engineering and support services for the joint venture.

For these services, Royale will receive $180,000 per month for the first year, renewable after one year at a reduced rate of $150,000 per month and subject to termination on 90 days’

The borrowing base of the facility is $25.0 million with $19,403,800 drawn at December 31, 2019.

As part of the joint venture, RMX entered into a Master Service Agreement (“MSA”) calling for Royale Energy to provide land, engineering and support services for the joint venture.

For these services, Royale received $180,000 per month for the first year.

These amounts are included in Supervisory Fees, Service Agreement and Other as more fully described in Note 1.

Termination of RMX MSA

On December 31, 2018, Royale was formally notified of RMX’s intent to terminate the MSA as of March 31, 2019.

The Termination Notice calls for Royale to continue to provide accounting and other services through March 31, 2019.

Thereafter, per Article VII, Section 7.2 of the MSA, Royale shall provide all reasonable assistance requested by the RMX Board to transition the management of RMX for a period of 30 days.

RMX Special Tax Provisions

Listed below is the summarized information required under Rule 3-09 of regulation S-X, Article 10 for Royale’s investment in RMX:

On December 31, 2018, Royale was formally notified of RMX’s intent to terminate the MSA as of March 31, 2019.

The Termination Notice called for Royale to continue to provide accounting and other services through March 31, 2019.

On March 11, 2019, Royale entered into a Settlement Agreement with RMX Resources to resolve differences resulting from the calculation of certain post-closing amounts as called for under Section 7.3 of the Subscription and Contribution Agreement.

In settlement of these differences, Royale has agreed to assign its remaining interests in the Bellevue Field, located in Kern County and the W.

Whittier Field located in Los Angeles County, California to RMX.

These fields accounted for 5.145 and 140.647 Mboe in reserves and were valued at $67,671 and $2.4 million, respectively using SEC pricing and discounted at 10 percent at December 31, 2018.

Royale will continue to be responsible for the liability for the payment of all royalties and suspended funds incurred prior to March 1, 2018.

Also as part of this Settlement Agreement, RMX will offer Royale the right, but not the obligation to participate in a portion of the working interest, in a number of wells to be drilled in the Sansinena, Sempra, Whittier and/or East LA properties in Los Angeles County, California..

The minimum number of wells to be offered to Royale in each year is 2 net wells as determined by an agreed upon methodology.

The Agreement also calls for certain credits toward future drilling costs of the offered wells.

The Company recorded a loss of $1,237,126 on the settlement, recorded in Loss on Sale of Assets in the Statement of Operations.

In conjunction with the merger between the Matrix entities and Royale, there were $1,254,204 of assets included on the books of Matrix for which documentary support could not be identified.

At December 31, 2018 the Company concluded that these amounts were a contingent liability and recorded them in Current - Accrued Liabilities.

On October 11, 2019, the Company received documentary support enabling management to conclude that the liability was no longer probable and should be derecognized.

The Company recorded a gain of $1,254,204 on extinguishment, recorded in Loss on Sale of Assets in the Statement of Operations.

Listed below is summarized information the Company’s investment in RMX:

Twelve Months Ended

December 31, 2019

March 27, 2018

(Inception) through

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RMX Resources, LLC

Royale Energy, Inc.

RMX Resources, LLC

Balance Sheet:

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Loss from operations

NOTE 3 –

OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

Oil and gas properties, equipment and fixtures consist of the following at December 31:

NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

Oil and gas properties, equipment and fixtures consist of:

Year ended December 31,

Producing properties, including intangible drilling costs

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The following sets forth costs incurred for oil and gas property acquisition and development activities, whether capitalized or expensed at December 31:

Acquisition –

Year ended December 31,

Acquisition - Proved

Acquisition - Unproved

The guidance set forth in the Continued Capitalization of Exploratory Well Costs paragraph of the Extractive Activities Topic of the FASB Accounting Standards Codification requires that we evaluate all existing capitalized exploratory well costs and disclose the extent to which any such capitalized costs have become impaired and are expensed or reclassified during a fiscal period.

We did not make any additions to capitalized exploratory well costs pending a determination of proved reserves during 2018 or 2017.

The guidance set forth in the Continued Capitalization of Exploratory Well Costs paragraph of the Extractive Activities Topic of the FASB ASC requires that we evaluate all existing capitalized exploratory well costs and disclose the extent to which any such capitalized costs have become impaired and are expensed or reclassified during a fiscal period.

We did not make any additions to capitalized exploratory well costs pending a determination of proved reserves during 2019 and 2018.

We did not charge any previously capitalized exploratory well costs to expense upon adoption of Topic.

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Oil and gas sales

Production related costs

Lease Impairment

Production related costs (Lease Operating)

Depreciation, depletion and amortization

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Income Taxes (Benefit)

NOTE 4 –

ASSET RETIREMENT OBLIGATION

The Asset Retirement and Environmental Obligations Topic of the FASB Accounting Standards Codification requires that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred or becomes determinable (as defined by the standard), with an associated increase in the carrying amount of the related long-lived asset.

NOTE 4 – ASSET RETIREMENT OBLIGATION

The Asset Retirement and Environmental Obligations Topic of the ASC requires that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred or becomes determinable (as defined by the standard), with an associated increase in the carrying amount of the related long-lived asset.

The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset.

The ARO is recorded at fair value, and accretion expense will be recognized over time as the discounted liability is accreted to its expected settlement value.

The fair value of the ARO is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate.

The ARO is recorded at the estimated fair value, and accretion expense will be recognized over time as the discounted liability is accreted to its expected settlement value.

Accretion expense is included as part of Depreciation, Depletion and Amortization in the Consolidated Statement of Operations The fair value of the ARO is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate.

The provisions of this Topic apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, development, and operation of a long-lived asset.

Asset retirement obligation, Beginning of the year

During the year ended December 31, 2019, the Company recorded $922,698 in increased costs related to estimates for abandonment of its’ share of certain California oil properties.

These estimates relate to properties likely to be abandoned in the current period.

As a result, the Company has recorded them as impairment expense at year end 2019.

Asset retirement obligation

Beginning of the year

Liabilities incurred during the period

Merger Additions

Changes in estimates

Accretion expense

Asset retirement obligation, End of year

NOTE 5 –

TURNKEY DRILLING OBLIGATION

Royale Energy receives funds under turnkey drilling contracts, which require Royale Energy to drill oil and gas wells within a reasonable time period from the date of receipt of the funds.

At December 31, 2018 and 2017, Royale Energy had recorded deferred turnkey drilling associated with undrilled wells of $6,213,283 and $5,891,898, respectively, as a current liability.

NOTE 6 –

NOTES PAYABLE

The Company records accretion expense as part of Depreciation, Depletion and Amortization

NOTE 5 – NOTES PAYABLE

On October 3, 2018, the Company issued a promissory note for a principal amount of $517,585 to Forza Operating, LLC.

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The note was the result of an agreement regarding the plugging and abandonment of the CL&F #1 and the CL&F #1 SWD wells.

The Company agreed to include the current joint interest billing balance due to Forza Operating of $233,367 and Royale’s share of future plugging and abandonment costs of $284,218.

Immediately following the merger with the Matrix entities, it acquired the Matrix loan with Arena which was subsequently paid off with the closing of the RMX joint venture.

The Company agreed to include the current joint interest billing balance due to Forza Operating of $233,367 and Royale’s share of future plugging and abandonment costs of $284,218.

At December 31, 2019 and 2018, Royale Energy had Notes Payable of $55,573 and $390,839, respectively, as a current liability.

NOTE 7 –

NOTE 6 – INCOME TAXES

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.

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enacted significant changes to U.S.

tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Tax Act”).

The Tax Act permanently reduces the U.S.

federal corporate tax rate from a maximum 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limits the deduction of interest expense for certain companies.

Accounting Standard Codification (“ASC”) 740 requires filers to record the effect of tax law changes in the period enacted.

However, the SEC issued Staff Accounting Bulletin No.

118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period ending no later than one year from the date of enactment.

ASC 740 requires filers to record the effect of tax law changes in the period enacted.

However, the SEC issued Staff Accounting Bulletin (“SAB”) 118 that permits filers to record provisional amounts during a measurement period ending no later than one year from the date of enactment.

For the period ending December 31, 2018, the Company re-measured the applicable deferred tax assets based on the rates at which they are expected to reverse.

The gross deferred tax assets and liabilities have been adjusted and a corresponding offset has been recorded to the full valuation allowance against the Company’s net deferred tax assets, which resulted in no net effect to its provision for income taxes and effective tax rate.

No other provisional adjustments have been made as a result of the Act.

Significant components of the Company’s deferred assets and liabilities at December 31, 2018 and 2017, respectively, are as follows:

Significant components of the Company’s deferred assets and liabilities at December 31, 2019 and 2018, respectively, are as follows:

Deferred Tax Assets (Liabilities):

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Investment in RMX Joint Venture

Section 481(a) Adjustments

Valuation Allowance

Net Deferred Tax Asset

At the end of 2016, management reviewed the realizability of the Company’s net deferred tax assets.

Due to the Company’s cumulative losses in recent years, Royale and its management concluded that it is not “more-likely-than-not”

its deferred tax assets will be realized.

As a result, the Company recorded a full valuation allowance against the net deferred tax assets in 2016.

At the end of 2017, management reviewed the reliability of the Company’s net deferred tax assets, and due to the Company’s continued cumulative losses in recent years, Royale and its management concluded it is not “more-likely-than-not”

its deferred tax assets will be realized.

The Company recorded a full valuation allowance against the net deferred tax assets in 2016.

As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2019.

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Royale Energy, Inc.

have available net operating loss carryforwards of $19,151,810 generated in tax years ended before January 1,2018, which if not utilized, begin to expire in the year 2024.

and its subsidiaries have available net operating loss carryforwards of $22.9 million generated in tax years ended before January 1,2018, which if not utilized, begin to expire in the year 2024.

Royale Energy, Inc.

has no net operating loss carryforwards generated after December 31, 2017, which can be carried forward indefinitely.

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at December 31, 2018 and 2017, respectively, to pretax income is as follows:

Tax (benefit) computed at statutory rate of 21% for 2018 and 34% for 2017

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at December 31, 2019 and 2018, respectively, to pretax income is as follows:

Tax (benefit) computed at statutory rate of 21% at December 31, 2019 and 2018, respectively

Increase (decrease) in taxes resulting from:

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Provision (benefit)

The components of the Company’s tax provision are as follows:

Current tax provision (benefit) –

Deferred tax provision (benefit) –

The components of the Company’s tax provision are as follows:

Current tax provision (benefit) - federal

Current tax provision (benefit) - state

Deferred tax provision (benefit) - federal

Deferred tax provision (benefit) - state

Total provision (benefit)

In January 2007, Royale adopted additional provisions from the Income Taxes Topic of the FASB Accounting Standards Codification, which clarified the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return.

In January 2007, Royale adopted additional provisions from the Income Taxes Topic of the ASC, which clarified the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return.

As a result of our implementation of the Topic at the time of adoption and at December 31, 2018, the Company did not recognize a liability for uncertain tax positions.

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NOTE 7 - SERIES B PREFERRED STOCK

Pursuant to the terms of the Merger all Class A limited partnership interests of Matrix Investments, LP (“Matrix Investments”) were exchanged for Royale Common stock using conversion ratios according to the relative value of the Class A limited partnership interests, and $20,124,000 of Matrix Investments preferred limited partnership interests were converted into 2,012,400 shares of Series B Convertible Preferred Stock of Royale.

The Board of Directors of Royale Energy, prior to the merger, authorized 3,000,000 shares of Series B Convertible Preferred, which carries a liquidation preference and a 3.5% dividend, payable in cash or Paid-In-Kind shares.

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The shareholders of the Series B Convertible Preferred may vote the number of shares into which they would be entitled to convert, beginning in 2020.

On December 17, 2018, the board authorized the issuance of 59,416 shares of Series B Convertible Preferred shares, valued at $594,613, for the outstanding dividends as Paid-In-Kind shares.

At December 31, 2018, the shares were outstanding but not issued.

No cash was used to pay dividends on Series B preferred shares in 2018.

For 2019 and 2018, the board has authorized the payment of all dividends of Series B Convertible Preferred shares, as Paid-In-Kind shares.

During 2019 the Company had issued 73,473 and 59,461 shares for the year ended 2019 and 2018 respectively, representing a value of $734,725 and $594,613 for the same periods.

No cash was used to pay dividends on Series B preferred shares in 2019 or 2018.

NOTE 8 - COMMON STOCK

In November 2015, Royale entered in a securities purchase agreement and related agreements with ten investors.

Under the terms of the agreement, the investors purchased 497,740 shares of Royale’s common stock at $0.408 per share and received warrants to purchase up to 248,873 shares (the “Warrants’) of stock at $1.00 per share for three (3) years, for a total of $203,080 in gross proceeds.

In April 2016, Royale entered in a securities purchase agreement and related agreements with one investor.

Under the terms of the agreement, the investor purchased 622,316 shares of Royale’s common stock at $0.3214 per share, and received warrants to purchase up to 311,158 shares (the “Warrants’) of stock at $0.5356 per share for three (3) years, for a total of $200,000 in gross proceeds.

In July 2016, Royale entered in securities purchase agreements and related agreements with three investors.

Under the terms of the agreement, the investors purchased 2,392,500 shares of Royale’s common stock at $0.40 per share, and received warrants to purchase up to 478,500 shares (the “Warrants’) of stock at $0.80 per share for two (2) years, for a total of $957,000 in gross proceeds.

On April 13, 2018, Royale Energy, Inc., and two of Royale’s subsidiaries, Royale Energy Funds, Inc.

As part of the agreement a warrant (“Warrant”) was issued to acquire up to 4,000,000 shares of Royale’s common stock at an exercise price of $.01 per share and registration rights pursuant to a Registration Rights Agreement.

See Note 2 for full discussion.

On April 13, 2018, Royale Energy, Inc., and two of Royale’s subsidiaries, Royale Energy Funds, Inc.

As further described in NOTE 2 – Merger with Matrix Oil Management Corporation and Formation of RMX .

During the year 2019, the Company issued shares of its Common Stock in lieu of cash payments for salaries, fees or incentives to various officers and board members, including our CEO.

NOTE 9 - OPERATING LEASES

Royale Energy occupies office space through the use of certain leases, one for their office in El Cajon, CA and one for an office and yard in Woodland, CA.

The El Cajon lease is under a 62 month lease contract, with a yearly increase of 3.5%, which expires in January 2020.

The El Cajon lease calls for monthly payments ranging from $6,148 to $10,801, and the Woodland lease calls for monthly payments of $500.

Royale rents an office and yard in Woodland, CA on a month-to-month basis that currently calls for monthly payments of $500.

Additionally, Royale has assumed the use of and responsibility for the payments under a lease for an office space in Santa Barbara, CA.

The Santa Barbara lease calls for monthly payments of $7,843, through expiration in September 2019.

The Company is currently in discussion to extend the term in exchange for a reduction in rate and amendment name Royale as the contracting party.

Rental expense for the years ended December 31, 2018 and 2017 was $210,280 and $110,909 respectively.

The Company has elected a modified retrospective transition approach for the implementation methodology of ASC 842, Leases .

Consequently, financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019.

The standard did not materially impact our consolidated results of operations, earnings per share, and had no impact on cash flows.

The most significant effects relate to:

(1) the recognition of new ROU assets in long-term assets on the balance sheet;

(2) lease liabilities, both short-term and long-term, on our balance sheet;

and, (3) providing significant new disclosures about our leasing activities.

The interest rate used in each lease analysis was the risk-free rate for the period of the lease plus 400 basis points as the Company’s risk premium.

The Company has two office leases.

One at 1870 Cordell Court, El Cajon, California, the location of its corporate offices and one at 104 W.

Anapamu, Santa Barbara, California, the location of the Company’s CEO and engineering team.

The corporate office lease was entered into on August 31, 2016 and expires on October 31, 2021 with initial monthly payments of $6,148 with escalations.

The lease in Santa Barbara was initiated in December of 2006 and, through several extensions and renewals, will expire in March of 2022.

The initial base rental payment was $5,086 with various adjustments to market and planned escalations.

These two leases were initially recorded as operating leases at January 1, 2019 as listed below.

Operating Lease – ROU Asset

Operating Lease Liability – Current

Operating Lease Liability – Long-Term

In July 2019, we entered into a 60 month agreement with MRC for the leasing of two Xerox machines with monthly payments of $1,049.

This lease was initially recorded as a financing lease on July 31, 2019 as listed below:

Financing Lease - ROU Asset

Financing Lease Liability - Current

Financing Lease Liability - Long-Term

The new standard provides practical expedients for an entity’s ongoing accounting.

We have elected the short-term lease recognition exemption for all leases that qualify.

This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.

We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our finance leases.

For our real estate operating leases, we have only considered the fixed portion of our lease payment commitment and have excluded the variable components from the capitalized ROU and lease liability.

Lease expense for operating as well as finance leases are included in General and Administrative expense and interest expense on the Consolidated Statement of Operations, while the lease expense for those leases that are short-term are included in Oil and Gas Lease Operating Expenses.

The amounts are as follows:

December 31, 2019

Operating lease expense

Financing lease expense

Operating – short-term

Short Term - field

Total lease expense

The following tables summarized the operating and financing lease obligations.

Lease Obligations

Total undiscounted lease payments

Amount representing interest

Total Operating & Financing lease liabilities

Long-term lease liabilities as of December 31, 2019

NOTE 10 - RELATED PARTY TRANSACTIONS

Significant Ownership Interests

As of March 14, 2019, Mr.

Hosmer owned 2.69% of Royale Energy common stock (as calculated under SEC Rule 13d-3).

Our Chief Executive, Johnny Jordan, had been an employee of Matrix prior to the Merger.

Pursuant to this employment, he had accrued certain unpaid salaries, which were assumed by the Company.

At December 31, 2019 Mr.

Jordan was owed $22,107 in accrued unpaid guaranteed payments.

Our Chief Financial Officer, Stephen Hosmer has participated individually in 179 wells under the 1989 policy.

During 2019 and 2018, Stephen did not participate in fractional interests.

At December 31, 2019, the Company had a receivable balance of $15,524 due from Stephen Hosmer for normal drilling and lease operating expenses.

Donald Hosmer has participated individually in 179 wells under the 1989 policy.

During 2019 and 2018, Donald did not participate in fractional interests.

At December 31, 2018, Royale had a payable balance of $2,994 due to Donald Hosmer for normal drilling and lease operating expenses.

As of March 14, 2019, Stephen M.

Hosmer owned 2.93% of Royale Energy common stock (as calculated under SEC Rule 13d-3).

Stephen Hosmer has participated individually in 179 wells under the 1989 policy.

During 2018 and 2017, Stephen did not participate in fractional interests.

At December 31, 2018, Royale had a receivable balance of $14,706 due from Stephen Hosmer for normal drilling and lease operating expenses.

At December 31, 2018, we had a total payable of $552,645 due to RMX Resources, LLC and its subsidiary, Matrix Oil Corporation, related to the ongoing transactions between the Royale Energy and RMX Resources, LLC.

Of this balance, approximately $312,000 was received on behalf RMX Resources from various oil and gas customers.

See related discussion in Note 17 –

Subsequent Events.

Prior to the Merger, Matrix had outstanding accrued unpaid guaranteed payments for unpaid salaries due to certain Matrix employees.

At December 31, 2018, the balance due these employees was $1,616,205.

Prior to the Merger, Matrix had outstanding long term liabilities for interest on notes payable due to certain Matrix principals.

The balance due these principals at December 31, 2018, was $1,306,605.

At December 31, 2019, Royale had a receivable balance of $3,441 due from Donald Hosmer for normal drilling and lease operating expenses.

For the same period, the Company also had prepaid expenses and other current assets of $2,680,155 primarily for the drilling of three wells, expected to commence in 2020.

Royale had outstanding accrued unpaid guaranteed payments for unpaid salaries due to certain Matrix employees, for periods prior to the Merger.

At December 31, 2019, the balance due was $1,306,605.

Michael McCaskey and Jeffery Kerns, each former directors of Royale, have consulting agreements to provide services as directed and at the discretion of the Company.

Kerns wife is a director.

NOTE 11 - STOCK COMPENSATION PLAN

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The Black-Scholes model, using the values listed above, valued each option at $0.26 making the award of $250,000 options worth $64,954.

There were no other stock options issued in 2018 or 2017.

A summary of the status of Royale Energy’s stock option plan as of December 31, 2018 and 2017, and changes during the years ending on those dates is presented below:

There were no other stock options issued in 2019 and 2018.

A summary of the status of Royale Energy’s stock option plan as of December 31, 2019 and 2018, and changes during the years ending on those dates is presented below:

Outstanding and Exercisable at Beginning of Year

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Weighted-average Fair Value of Options Granted During the Year

At December 31, 2018, Royale Energy’s stock price, $0.13, was less than the weighted average exercise price, and as such the outstanding and exercisable stock options had no intrinsic value.

The remaining outstanding stock options have a weighted-average remaining contractual term of one year as of December 31, 2018.

The Company had no non-vested stock option at December 31, 2018 or 2017.

At December 31, 2019, Royale Energy’s stock price, $0.11, was less than the weighted average exercise price, and as such the outstanding and exercisable stock options had no intrinsic value.

All stock options were fully vested at December 31, 2019 and 2018.

During 2019 and 2018, we recognized $0 and $64,954, respectively, in compensation costs for the vested stock options.

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In April 1998, the Company established a Simple IRA pension plan covering all employees.

The Company will contribute a matching contribution to each eligible employee’s Simple IRA equal to the employee’s salary reduction contributions up to a limit of 3% of the employee’s compensation for the year.

The employer contribution for the years ending December 31, 2019 and 2018, were $30,336 and $35,312 respectively.

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Management monitors these laws and regulations and periodically assesses the propriety of its operational and accounting policies related to environmental issues.

The nature of Royale Energy’s business requires routine day-to-day compliance with environmental laws and regulations.

Royale Energy incurred no material environmental investigation, compliance and remediation costs in 2019 or 2018.

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The Company maintains cash in depository institutions that are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per institution for our interest bearing accounts in the years ended December 31, 2019 and 2018.

At December 31, 2016, and 2015, the Company’s non-interest bearing accounts were fully insured by the FDIC.

At December 31, 2019 and 2018, cash in banks exceeded the FDIC limits by approximately $3.4 million and $5.7 million, respectively.

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The Company believes that none of these actions, individually or in the aggregate, will have a material adverse effect on its financial position or results of operations, though any adverse decision in these cases or the costs of defending or settling such claims could have a material effect on its business.

The Company sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations.

The Company sponsors turnkey drilling agreement arrangements in proved and unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations.

The contracts require the participants pay Royale the full contract price upon execution of the agreement.

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NOTE 16 - SUBSEQUENT EVENTS

Settlement Agreement and Well Participation Agreement with RMX

On March 11, 2019 Royale entered into a Settlement Agreement with RMX Resources to resolve differences resulting from the calculation of certain post-closing amounts as called for under Section 7.3 of the Subscription and Contribution Agreement.

Under the terms of this provision, Royale estimates that it may owe RMX approximately $552,645 related to its calculation of this post-closing amount under this provision.

In addition, there are other disputed amounts related to certain joint owner billing amounts remaining unpaid at year end.

In settlement of these differences, Royale has agreed to assign its remaining interests in the Bellevue Field, located in Kern County and the W.

Whittier Field located in Los Angeles County, California to RMX.

At December 31,2018, the Bellevue and W.

Whittier fields accounted for 5.145 and 140.647 Mboe in reserves and were valued at $67,671 and $2.4 million, respectively using SEC pricing and discounted at 10 percent.

Royale will continue to be responsible for the liability for the payment of all royalties and suspended funds incurred prior to March 1, 2018.

As part of this Settlement Agreement, RMX will offer Royale the right, but not the obligation to participate in a number of wells to be drilled in the Sansinena, Sempra, Whittier and/or East LA properties in Los Angeles County, California at an offered working interest up to 75% of RMX’s working interest in each of the offered wells.

The minimum number of wells to be offered to Royale in each year is 2 net wells as determined by an agreed upon methodology.

The Agreement also calls for certain credits toward future drilling costs of the offered wells.

Settlement with Sunny Frog

Matrix Oil Company (“MOC”

or “Matrix”) operated the Sansinena Field and the East LA Fields.

Sunny Frog Oil, LLC (“Sunny Frog”) was a non-operator working interest participant in these fields.

During the merger negotiations with Matrix Oil, LLC held during 2017, Royale entered into a purchase and sales agreement with Sunny Frog for the purchase of their 50% interest in the Sansinena and East La Fields on November 27, 2017.

After Matrix completed the merger with Royale during March of 2018, it then committed to sell or contributed the Sansinena Field to the RMX joint venture along with certain other properties in April of 2018.

In addition, Royale contributed it right to purchase the Sunny Frog interests in the Sansinena and East LA Fields to the RMX joint venture.

On April 4, 2018, RMX closed with Sunny Frog for all of their interests in the Sansinena and East LA Fields.

Subsequent to the closing by RMX of the properties with Sunny Frog, Sunny Frog commissioned an audit of the joint accounts during the period that MOC operated the properties.

The audit report reflected a large balance due Sunny Frog from MOC.

(MOC became part of RMX following the contribution of assets by Royale in early April.) Pursuant to Section 14.2 of the Purchase Agreement, RMX was to deliver any objections to the Preliminary Settlement Statement within 120 days following the closing Date.

RMX did not tender its objections to the audit within the proscribed 120-day time limit.

In addition, subsequent to the audit, other matters of controversy arose between Sunny Frog and RMX.

On February 11, 2019, a settlement and release agreement was entered into by Sunny Frog and RMX whereby RMX agreed to pay $75,000 to settle any and all differences between MOC and Sunny Frog.

This settlement includes any liabilities payable by Royale.

Royale has reviewed its accounts and made any required adjustments.

Issuance of Common Stock

During the first quarter of 2019, in lieu of cash payments for salaries, fees or incentives, Royale issued 989,966 shares of its Common stock valued at approximately $240,008 to various employees, officers and board members.

In late 2019 and continuing into 2020, there was a global outbreak of novel coronavirus (COVID-19) that has resulted in changes in global supply and demand of certain mineral and energy products.

While the direct and indirect negative impacts that may affect the Company cannot be determined, they could have a prospective material impact to the Company's operations, cash flows and liquidity.

NOTE 17 - SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

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Netherland, Sewell & Associates, Inc.

provided reserve value information for the Company’s California, Texas, Oklahoma, Utah and Louisiana properties.

Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures.

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All activities and reports performed and completed by Netherland, Sewell & Associates, Inc.

with regards to our reserve valuation estimates are reviewed Royale’s management.

These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC).

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and foreign government actions, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited.

Estimates of future net cash flows presented do not represent management’s assessment of future profitability or future cash flows to Royale Energy.

Management’s investment and operating decisions are based upon reserve estimates that include proved reserves prescribed by the SEC as well as probable reserves, and upon different price and cost assumptions from those used here.

Estimates of future net cash flows presented do not represent management’s assessment of future profitability or future cash flows to Royale Energy.

It should be recognized that applying current costs and prices and a 10 percent standard discount rate does not convey absolute value.

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Total Proved Reserves

Proved developed and

undeveloped reserves:

Beginning of period

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At December 31, 2019, our previously estimated proved developed and undeveloped natural gas reserve quantities were revised downward by approximately 890,032 MCF of natural gas.

This downward revision was mainly the result of one California location which had proved undeveloped reserves 333,524 MCF of natural gas at December 31, 2017, which the Company has decided not to drill.

At December 31, 2018, our previously estimated proved developed and undeveloped oil reserve quantities were revised downward by approximately 79,135 BBL of oil.

This downward revision was mainly the result of a Texas field acquired during the Matrix merger which had 81,054 BBL of oil lower proved developed producing reserves than originally estimated at the time of the merger.

For December 31, 2017, our previously estimated proved developed and undeveloped reserve quantities were revised upward by approximately 307,371 MCF of natural gas.

This upward revision reflected higher than previously estimated proved producing and non-producing natural gas reserves at eight California wells and one Utah well.

A location which had 63,350 MCF in proved developed reserves at December 31, 2016, was drilled and began in 2011, was revised upward 122,998 MCF at December 31, 2017.

Two locations which had 128,165 MCF in proved developed reserves at December 31, 2016, were drilled and began producing prior to 2000, were revised upward 118,006 MCF at December 31, 2017.

A location which was drilled and began producing in 2010, which had proved developed reserves of 618,709 was revised upward 15,227 MCF at December 31, 2017.

A location in Utah which was drilled and began producing in 2006, was revised upward 14,688 MCF at December 31, 2017.

A location which was drilled and began producing in 2012, had no proved developed reserves at December 31, 2016, was revised upward 10,994 MCF at December 31, 2017.

A location which was drilled and began producing in 2008, had proved developed reserves of 13,878 at December 31, 2016, was revised upward 6,084 MCF at December 31, 2017.

A location which had proved undeveloped reserves of 314,925 MCF at December 31, 2016, was revised upward 18,598 MCF at December 31, 2017.

This downward revision was mainly the result of a decrease in proved undeveloped natural gas reserves from drilling locations which the Company had contracted.

At December 31, 2019, our previously estimated proved developed and undeveloped oil reserve quantities were revised upward by approximately 1,052,086 BBL of oil.

This upward revision was mainly the result an increase in the quantity and quality of undrilled wells, in which the Company has the right to participate.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

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This statement discloses the sources of changes in the standardized measure from year to year.

The amount reported as “Net changes in prices and production costs”

represents the present value of changes in prices and production costs multiplied by estimates of proved reserves as of the beginning of the year.

The “accretion of discount”

was computed by multiplying the ten percent discount factor by the standardized measure on a pretax basis as of the beginning of the year.

The “Sales of oil and gas produced, net of production costs”

are expressed in actual dollar amounts.

“Revisions of previous quantity estimates”

is expressed at year-end prices.

The “Net change in income taxes”

is computed as the change in present value of future income taxes.

The amount reported as “Net changes in prices and production costs” represents the present value of changes in prices and production costs multiplied by estimates of proved reserves as of the beginning of the year.

The “accretion of discount” was computed by multiplying the ten percent discount factor by the standardized measure on a pretax basis as of the beginning of the year.

The “Sales of oil and gas produced, net of production costs” are expressed in actual dollar amounts.

“Revisions of previous quantity estimates” is expressed at year-end prices.

The “Net change in income taxes” is computed as the change in present value of future income taxes.

Future cash inflows

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If the reserve estimates are inaccurate, production rates may decline more rapidly than anticipated, and future production revenues may be less than estimated.

Additional data relating to Royale Energy’s oil and natural gas properties is disclosed in Supplemental Information About Oil and Gas Producing Activities (Unaudited), attached to Royale Energy’s Financial Statements, beginning on page F-1.

Historic Development Costs for Proved Reserves

In each year we expend funds to drill and develop some of our proved undeveloped reserves.

The following table summarizes our historic costs incurred in each of the past three fiscal years to drill and develop reserves that were classified as proved undeveloped reserves as of December 31 of the immediately preceding year:

We have incurred no cost in any of the past three fiscal years to drill and develop reserves that were classified as proved undeveloped reserves as of December 31 of the immediately preceding year.

RMX Resources, LLC

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Net to Royale (20%)

Proved developed and undeveloped reserves:

Beginning of period –

formation of RMX

Beginning of period –

(2018 - at formation of RMX)

Revisions of previous estimates

Extensions, discoveries and improved recovery

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Net to Royale (20%)

Proved developed reserves:

Beginning of period –

formation of RMX

Beginning of period – (2018 at formation of RMX)

End of period

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Net to Royale (20%)

Proved undeveloped reserves:

Beginning of period –

formation of RMX

Beginning of period – (2018 at formation of RMX)

End of period

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This statement discloses the sources of changes in the standardized measure from year to year.

The amount reported as “Net changes in prices and production costs”

represents the present value of changes in prices and production costs multiplied by estimates of proved reserves as of the beginning of the year.

The “accretion of discount”

was computed by multiplying the ten percent discount factor by the standardized measure on a pretax basis as of the beginning of the year.

The “Sales of oil and gas produced, net of production costs”

are expressed in actual dollar amounts.

“Revisions of previous quantity estimates”

is expressed at year-end prices.

The “accretion of discount” was computed by multiplying the ten percent discount factor by the standardized measure on a pretax basis as of the beginning of the year.

The “Sales of oil and gas produced, net of production costs” are expressed in actual dollar amounts.

“Revisions of previous quantity estimates” is expressed at year-end prices.

Because RMX was formed in April of 2018, this analysis only provides the reserve information as of year-end without a comparison and reciliation to a beginning reserve report.

Net to Royale

Future cash inflows

1,527,930,900

Future production costs

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Future net cash flows

10% annual discount for estimated timing of

10% annual discount for estimated timing of cash flows

Standardized measure of discounted future net cash flows

Sales of oil and gas produced,

net of production costs

Sales of oil and gas produced, net of production costs

Formation of RMX Joint Venture

Revisions of previous quantity estimates

Net changes in prices and production costs

Net changes in prices and production costs and revisions of previous quantity estimates

Sales of minerals in place

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures