ROYL filing — read by section

Item 9A. Controls and Procedures

Item 9A Controls and Procedures 

 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.

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 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.

 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 

 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.

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 PART III 

 Item 10 Directors and Executive Officers of the Registrant 

 All of our directors serve one-year terms from the time of their election to the time their successor is elected and qualified. 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:

 Name 

 Age 

 First Became Director or Executive Officer 

 Positions Held 

 Mel G. Riggs (4)

 65

 2018

 Chairman of the Board

 Jonathan Gregory

 55

 2014

 Vice-Chair of the

 Board of Directors

 Johnny Jordan

 59

 2018

 Chief Executive and

 Operating officer

 and Director

 Thomas M. Gladney (1) (2)(3)(4)

 67

 2018

 Director

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

 61

 2019

 Director

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

 60

 2018

 Director

 (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, 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.

 Mel G. Riggs – Chairman of the Board

 Mel G. Riggs presently is affiliated with the Clayton Williams family office. Mr. Riggs previously served as President of Clayton Williams Energy, Inc. (NYSE: CWEI) from March 2015 until April 2017 when CWEI was acquired for $2.7 billion by Noble Energy, Inc. (NYSE: NBL). Mr. 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

 Mr. 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. From December 2004 to April 2012, Mr. Gregory was head of the energy lending group in Houston, Texas for Texas Capital Bank, N.A. Mr. Gregory is presently CEO of RMX Resources, LLC, a private Texas based oil and gas company with oil and gas properties primarily located in California. Mr. Gregory is also a Credit Committee Advisor to Anvil Capital Partners, a private debt capital provider to upstream energy companies. Mr. Gregory graduated from Lamar University in 1986 with a Bachelor's degree in Finance.

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

 Mr. Jordan is a petroleum engineer with expertise in acquisitions, field economics and reserves analysis, bank negotiations, reservoir and field operations, and multi-team interaction. Mr. Jordan served on the Board of Directors of Matrix. Mr. Jordan has been active in the oil and gas industry since 1980 beginning as a floor hand on a well service rig. He has held various staff and supervisory positions for Exxon, Mack Energy, Enron Oil and Gas and Venoco Corporation. He was the team leader of a multi-discipline team from 1992 to 1996 that added 455 BCF and 79 MMCFD through acquisitions (71 BCF) and field development (365 wells) in the Val Verde Basin in West Texas. Mr. Jordan has managed acquisition evaluations in many of the oil and gas producing basins in the US. He has coordinated field development for various recovery mechanisms that include waterflood, tertiary flood, water drive oil and gas reservoirs, and pressure depletion fields with gas cap expansion or gravity drainage. Mr. Jordan received a B.S. 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.

 Thomas M. Gladney - Director

 Thomas M. Gladney, since 2006, has served as president of privately held Bodog Resources, LLC, as a wholly owned private entity which invests in oil and gas, water treatment oil field services, and real estate. Mr. Gladney previously served as executive vice president of Plains Exploration and Production Company (PXP) where he helped increase proved reserves from 239 MMEB to more than 400 MMEB while directing various projects to include integration of the merger of two large public companies, work on development and exploration projects in the Gulf of Mexico and on several key engineering projects. Mr. Gladney has a BS in Petroleum Engineering from Mississippi State University.

 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. Ms. 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. He is a seasoned executive with extensive background in the energy industry. Mr. Vogel previously was Vice President and Treasurer of Hess Corporation. He serves as the Chairman of BlinkNow Foundation, an organization that supports women and children in Nepal. Mr. Vogel holds a BS in Chemical Engineering from the University of Colorado and an MBA from New York University.

 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 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. Gladney.

 Code of Business Conduct and Ethics 

 We have adopted a code of business conduct and ethics for our directors and executive officers. The code is posted on our website, www.royl.com .

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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.

 Year 

 Year 

 Salary (3) 

 Bonus 

 Option Awards

 (1) 

 All Other

 Compensation (2) 

 Total 

 Johnny Jordan (5)

 2019 
 
 $ 
 255,769 
 
 $ 
 - 
 
 $ 
 255,769 
 
 (CEO)

 2018

 $ 
 213,141 
 
 $ 
 - 
 
 $ 
 213,141 
 
 2017

 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 Jonathan Gregory (4)

 2019

 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 2018

 $ 
 72,909 
 
 $ 
 9,583 
 
 $ 
 82,492 
 
 2017

 $ 
 242,469 
 
 - 
 
 $ 
 242,469 
 
 Donald Hosmer

 2019

 $ 
 189,344 
 
 $ 
 95,193 
 
 $ 
 18,930 
 
 $ 
 303,467 
 
 (Business Development)

 2018

 $ 
 236,331 
 
 $ 
 18,930 
 
 $ 
 255,261 
 
 2017

 $ 
 236,331 
 
 $ 
 19,090 
 
 $ 
 255,421 
 
 Stephen Hosmer

 2019

 $ 
 230,192 
 
 $ 
 18,906 
 
 $ 
 249,098 
 
 (CFO)

 2018

 $ 
 230,192 
 
 $ 
 64,954 
 
 $ 
 18,750 
 
 $ 
 313,896 
 
 2017

 $ 
 230,192 
 
 $ 
 18,906 
 
 $ 
 249,098 
 
 (1) On October 10, 2018, the company entered into an agreement to issue Mr. Hosmer 250,000 options to purchase common stock previously approved by the Board of Directors with an exercise price of $0.31. 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. Hosmer, who also received a $12,000 car allowance. This category also includes Board fees for Mr. Gregory.

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

 (4) Mr. Gregory served as CEO of the Company during 2016, 2017 and part of 2018. Mr. Gregory resigned from the CEO position with the execution of the RMX joint venture.

 (5) Mr. Jordan became CEO of the Company in January 2019. Mr. Jordan joined the Company upon the merger with the Matrix entities on March 7, 2018

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 Stock Options and Equity Compensation; Outstanding Equity Awards at Fiscal Year End 

 The following table presents the number of unexercised options at the 2019 year end for each named executive officer. No unvested stock awards were outstanding at the end of 2019.

 Options 

 Name 

 Number of securities 

 underlying unexercised 

 options (1) 

 exercisable 

 Number of securities underlying unexercised 

 options (1) 

 unexercisable 

 Option exercise 

 price 

 ($) 

 Option 

 expiration 

 date 

 Stephen M. Hosmer

 250,000 
 (1) 
 
 $ 
 0.31 
 
 10/09/2028

 (1)

 On October 10, 2018, the Board of Directors of Royale granted Mr. Stephen M. Hosmer 250,000 options to purchase common stock at an exercise price of $0.31 per share. These options expire on October 9, 2028.

 Compensation Committee Report 

 Our executive compensation committee has reviewed and discussed the following Compensation Discussion and Analysis with management and, based on its discussion and review, has recommended that the Compensation Discussion and Analysis be included in this proxy statement.

 Members of the Compensation Committee:

 Thomas M. Gladney, Karen Kerns (Chair), and Robert Vogel

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

 Compensation Discussion and Analysis 

 Our executive compensation policy is designed to motivate, reward and retain the key executive talent necessary to achieve our business objectives and contribute to our long-term success. Our compensation policy for our executive officers focuses primarily on determining appropriate salary levels and performance-based cash bonuses.

 The elements of executive compensation at Royale consist mainly of cash salary and, if appropriate, a cash bonus at year end. The compensation committee makes recommendations to the board of directors annually on the compensation of the three top executives: Johnny Jordan, Chief Executive Officer, Donald H. Hosmer, Business Development, and Stephen M. Hosmer, Chief Financial Officer . 

 Royale also does not provide extensive personal benefits to its executives beyond those benefits, such as health insurance, that are provided to all employees. Donald Hosmer and Stephen Hosmer each receive an annual car allowance.

 Policy 

 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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 Determination 

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

 Compensation Elements 

 Base. Base salaries for our executive officers are established based on the scope of their responsibilities, taking into account competitive market compensation paid by our peers. Base salaries are reviewed annually. The salaries we paid to our most highly paid executive officers for the last three years are set forth in the Summary Compensation Table included under Executive Compensation .

 Bonus . 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. No cash bonuses were paid to executive officers in 2019 or 2018.

 Compensation of Directors 

 In 2019, board members or committee member accrued or received fees for attendance at board meetings or committee meetings during the year. In addition to cash payments, common stock was issued in lieu of compensation or reimbursements. Royale also reimbursed directors for the expenses incurred for their services.

 The following table describes the compensation paid to our directors who are not also named executives for their services in 2019.

 Name 

 Fees paid in Cash or 

 Common Stock 

 Stock 

 awards 

 Option 

 awards 

 All Other 

 Compensation 

 Total 

 Mel G. Riggs

 $ 
 44,000 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 44,000 
 
 Thomas M. Gladney

 $ 
 38,000 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 38,000 
 
 Karen Kerns

 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 Robert Vogel

 $ 
 47,000 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 47,000 
 
 Jonathan Gregory (1)

 $ 
 33,000 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 33,000 
 
 Former Board Members

 Rod Eson (1)

 $ 
 25,500 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 25,500 
 
 Barry Lasker

 $ 
 35,000 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 35,000 
 
 Harry E. Hosmer

 $ 
 13,685 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 $ 
 13,685 
 
 (1)

 Mr. 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 

 Common Stock 

 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. 

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 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. The holdings reported are based on reports filed with the Securities and Exchange Commission and the Company by the officers and directors.

 Stockholder (1) 

 Number 

 Percent 

 Stephen M. Hosmer (2)

 1,127,054 
 
 2.16 
 % 
 
 Johnny Jordan (3)

 21,276,245 
 
 40.73 
 % 
 
 Jonathan Gregory (4)

 497,460 
 
 * 
 
 Mel G. Riggs

 190,131 
 
 * 
 
 Karen Kerns

 - 
 
 * 
 
 Thomas M. Gladney

 262,938 
 
 * 
 
 Robert Vogel

 307,270 
 
 * 
 
 All officers and directors as a group

 23,661,098 
 
 45.30 
 % 
 
 * Less than 1%. 

 (1) The mailing address of each listed stockholder is 1870 Cordell Court, Suite 210, El Cajon, California 92020.

 (2) Includes 12,000 shares owned by Stephen M. 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 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. 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. The holdings reported are based on reports filed with the Securities and Exchange Commission and the Company by the 5% shareholders.

 Stockholder (1) 

 Number 

 Percent 

 Johnny Jordan (2)

 21,276,245 
 
 40.73 
 % 
 
 Jeff Kerns (3)

 17,212,173 
 
 32.95 
 % 
 
 Michael McCaskey (4)

 4,703,209 
 
 9.00 
 % 
 
 (1) The mailing address of each listed stockholder is 1870 Cordell Court, Suite 210, El Cajon, California 92020.

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

 (3) Includes 8,917,540 shares issuable upon conversion of Series B Convertible Preferred Stock.

 (4) Includes 397,054 shares issuable upon conversion of Series B Convertible Preferred Stock.

 Item 13 Certain Relationships and Related Transactions 

 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.

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 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.

 Mr. Kerns is married to Karen Kerns, a director.

 Item 14 Principal Accountant Fees and Services 

 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:

 2019 

 2018 

 Moss Adams LLP 

 SingerLewak LLP 

 Total 

 SingerLewak LLP 

 Audit fees (1)

 226,000 
 
 27,650 
 
 253,650 
 
 265,062 
 
 Audit Related Fees

 5,000 
 
 5,000 
 
 13,225 
 
 Tax fees (2)

 - 
 
 - 
 
 - 
 
 All other fees (3)

 - 
 
 - 
 
 Total

 226,000 
 
 32,650 
 
 258,650 
 
 278,287 
 
 (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.

 (2) Tax fees consist of tax planning, consulting and tax return reviews.

 (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 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.

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 PART IV 

 Item 15 Exhibits and Financial Statement Schedules 

 The agreements included as exhibits to this report are included to provide information about their terms and not to provide any other factual or disclosure information about Royale or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that were made solely for the benefit of the other agreement parties and:

 ● should not be treated as categorical statements of fact, but rather as a way of allocating the risk among the parties if those statements prove to be inaccurate;

 ● have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

 ● may apply standards of materiality in a way that is different from the way investors may view materiality; and

 ● were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

 1. Financial Statements . See Index to Financial Statements, page F-1

 2. Schedules . None.

 3. Exhibits . Certain of the exhibits listed in the following index are incorporated by reference.

 2.1

 Amended and Restated Agreement and Plan of Merger among Royale Energy, Inc., Royale Energy Holdings, Inc. Royale Merger Sub, Inc., Matrix Merger Sub, Inc., and Matrix Oil Management Corporation, filed as Exhibit 2.1, Annex A to the Form S-4/A of Royale Energy Holdings, Inc., filed July 21, 2017 

 2.2

 Amendment No. 7 to the Amended and Restated Agreement and Plan of Merger among Royale Energy, Inc., the Company, Royale Merger Sub, Inc., Matrix Merger Sub, Inc., and Matrix Oil Management Corporation, filed as Exhibit 2.2 to the Form 8-A of Royale Energy Holdings, Inc. (Commission File No. 000-55912), filed March 8, 2018 

 2.3

 Joint Waiver of Closing Conditions between Matrix Oil Management Corporation, on behalf of itself and as general partner of Matrix Investments, L.P., Matrix Permian Investments, LP, , Matrix Las Cienegas Limited Partnership, Matrix Oil Corporation, and all of the holders of preferred limited partnership interests of Matrix Investments (February 28, 2018), filed as Exhibit 2.6 to the Form 8-A of Royale Energy Holdings, Inc. (Commission File No. 000-55912), filed March 8, 2018 

 2.4

 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 

 3.1

 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. 

 3.2

 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. 

 3.3

 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 

 4.1

 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 

 10.1

 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 

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 10.2

 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 

 10.3

 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 

 10.4

 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 

 10.5

 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 

 10.6

 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 

 10.7

 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 

 10.10

 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 

 10.11

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

 10.12

 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 

 10.13

 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 

 10.14

 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 

 10.15

 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 

 10.16

 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 

 10.17

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

 10.19

 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 

 10.20

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

 10.21

 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 

 10.22

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

 10.23

 Employment Agreement between the Company and Mel. G. Riggs, filed as Exhibit 10.7 to the Company’s Form S-8 filed October 29, 2018 

 10.24

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

 10.25

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

 10.26

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

 27

 Table of Contents 

 10.27

 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 

 10.28

 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 

 21.1

 Subsidiaries, filed herewith. 

 31.1

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

 31.2

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

 32.1

 Section 1350 Certification, filed herewith. 

 32.2

 Section 1350 Certification, filed herewith. 

 99.1

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

 99.2

 Consolidated Financial Statements of RMX Resources, LLC 

 101.INS*

 XBRL Instance Document

 101.SCH*

 XBRL Taxonomy Extension Schema

 101.CAL*

 XBRL Taxonomy Extension Calculation Linkbase

 101.DEF*

 XBRL Taxonomy Extension Definition Linkbase

 101.LAB*

 XBRL Taxonomy Extension Label Linkbase

 101.PRE*

 XBRL Taxonomy Extension Presentation Linkbase

 * Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. 

 28

 Table of Contents 

 SIGNATURES 

 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 Royale Energy, Inc. 

 Date: March 30, 2020

 /s/ Johnny Jordan 

 Johnny Jordan

 Chief Executive Officer

 Date: March 30, 2020

 /s/ Stephen M. Hosmer 

 Stephen M. Hosmer

 Chief Financial Officer, Secretary and Principle Accounting Officer

 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.

 Date: March 30, 2020

 /s/ Mel G. Riggs 

 Mel G. Riggs

 Chairman of the Board of Directors

 Date: March 30, 2020

 /s/ Jonathan Gregory 

 Jonathan Gregory

 Vice-Chair of the Board of Directors

 Date: March 30, 2020

 /s/ Thomas M. Gladney 

 Thomas M. Gladney

 Director

 Date: March 30, 2020

 /s/ Karen Kerns 

 Karen Kerns

 Director

 Date: March 30, 2020

 /s/ Robert Vogel 

 Robert Vogel

 Director

 29

 Table of Contents 

 ROYALE ENERGY, INC. 

 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 

 AND SUPPLEMENTARY DATA 

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 F-2

 CONSOLIDATED BALANCE SHEETS 

 F-4

 CONSOLIDATED STATEMENTS OF OPERATIONS 

 F-6

 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

 F-7

 CONSOLIDATED STATEMENTS OF CASH FLOWS 

 F-8

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 F-9

 SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (Unaudited) 

 F-29

 F-1

 Table of Contents 

 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. 842.

 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.

 F-2

 Table of Contents 

 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 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. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for RMX Resources, LLC, is based solely on the report of the other auditors.

 Going Concern 

 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, and its total liabilities exceed its total assets. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 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 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 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 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 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 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

 We have served as the Company's auditor since 2014.

 Denver, Colorado

 April 15, 2019

 F-3

 Table of Contents 

 ROYALE ENERGY, INC. 

 CONSOLIDATED BALANCE SHEETS 

 DECEMBER 31, 

 2019 

 2018 

 ASSETS 

 Current Assets:

 Cash and Cash equivalents

 $ 
 1,031,014 
 
 $ 
 1,853,742 
 
 Restricted Cash

 2,845,515 
 
 4,501,300 
 
 Other Receivables, net

 1,189,892 
 
 1,411,144 
 
 Revenue Receivables

 589,151 
 
 316,974 
 
 Prepaid Expenses and Other Current Assets

 376,587 
 
 174,852 
 
 Prepaid Drilling to RMX Resources, LLC

 2,680,155 
 
 - 
 
 Total Current Assets

 8,712,314 
 
 8,258,012 
 
 Investment in Joint Venture

 6,185,995 
 
 6,583,931 
 
 Other Assets

 708,554 
 
 509,955 
 
 Right of Use Asset - Operating Leases

 392,774 
 
 - 
 
 Oil and Gas Properties (Successful Efforts Basis), Real Property and Equipment and Fixtures, net

 4,590,990 
 
 6,407,490 
 
 Total Assets

 $ 
 20,590,627 
 
 $ 
 21,759,388 
 
 The accompanying notes are an integral part of these consolidated financial statements.

 F-4

 Table of Contents 

 ROYALE ENERGY, INC. 

 CONSOLIDATED BALANCE SHEETS 

 DECEMBER 31, 

 2019 

 2018 

 LIABILITIES AND STOCKHOLDERS’ EQUITY 

 Current Liabilities:

 Accounts Payable and Accrued Expenses

 $ 
 6,031,034 
 
 $ 
 4,895,533 
 
 Royalties Payable

 623,405 
 
 1,676,865 
 
 Notes Payable

 55,573 
 
 390,839 
 
 Due RMX Resources, LLC

 32,367 
 
 552,645 
 
 Accrued Liabilities

 - 
 
 1,254,204 
 
 Operating Leases - Current

 162,272 
 
 - 
 
 Deferred Drilling Obligations

 5,232,675 
 
 6,213,283 
 
 Total Current Liabilities

 12,137,326 
 
 14,983,369 
 
 Noncurrent Liabilities:

 Asset Retirement Obligation

 3,632,423 
 
 2,366,455 
 
 Operating Leases - Non-current

 231,071 
 
 - 
 
 Accrued Unpaid Guaranteed Payments

 1,616,205 
 
 1,616,205 
 
 Accrued Liabilities - Non-current

 1,306,605 
 
 1,306,605 
 
 Total Liabilities

 18,923,630 
 
 20,272,634 
 
 Stockholders’ Equity:

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

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

 at December 31, 2019 and 2018, respectively

 21,453,338 
 
 20,718,613 
 
 Common Stock, .001 Par Value, 280,000,000 Shares Authorized

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

 at December 31, 2019 and 2018, respectively

 51,854 
 
 49,421 
 
 Additional Paid in Capital

 53,549,543 
 
 53,023,350 
 
 Accumulated Deficit

 (73,387,738 
 ) 
 
 (72,304,630 
 ) 
 
 Total Stockholder’s Equity

 1,666,997 
 
 1,486,754 
 
 Total Liabilities and Stockholders’ Equity

 $ 
 20,590,627 
 
 $ 
 21,759,388 
 
 The accompanying notes are an integral part of these consolidated financial statements.

 F-5

 Table of Contents 

 ROYALE ENERGY, INC. 

 CONSOLIDATED STATEMENTS OF OPERATIONS 

 FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018, 

 2019 

 2018 

 Revenues:

 Sale of Oil and Gas

 $ 
 2,329,275 
 
 $ 
 1,599,362 
 
 Supervisory Fees and Other

 637,908 
 
 1,683,679 
 
 Total Revenues

 2,967,183 
 
 3,283,041 
 
 Costs and Expenses:

 Lease Operating

 1,764,538 
 
 1,613,368 
 
 Impairment

 977,682 
 
 1,183,515 
 
 Geological and Geophysical Expense

 264,219 
 
 - 
 
 Well Equipment Write Down

 28,343 
 
 9,790 
 
 Depreciation, Depletion and Amortization

 468,143 
 
 722,935 
 
 Bad Debt Expense

 60,512 
 
 648,518 
 
 General and Administrative

 1,991,819 
 
 3,136,009 
 
 Legal and Accounting

 751,935 
 
 1,391,037 
 
 Marketing

 414,971 
 
 340,641 
 
 Total Costs and Expenses

 6,722,162 
 
 9,045,813 
 
 Gain on Turnkey Drilling Programs

 2,909,908 
 
 2,558,716 
 
 Loss from Operations

 (845,071 
 ) 
 
 (3,204,056 
 ) 
 
 Other Income (Expense):

 Interest Expense

 (20,559 
 ) 
 
 (177,171 
 ) 
 
 Gain (Loss) on Investment in Joint Venture

 (397,936 
 ) 
 
 333,931 
 
 Gain on Settlement of Payables

 897,708 
 
 287,134 
 
 Other Gain

 172,523 
 
 - 
 
 Loss on Hedging Activities

 - 
 
 (105,130 
 ) 
 
 Loss on Issuance of Stock Warrants

 - 
 
 (1,439,990 
 ) 
 
 Loss on Sale of Assets

 (155,048 
 ) 
 
 (19,199,045 
 ) 
 
 Loss Before Income Tax Expense

 (348,383 
 ) 
 
 (23,504,327 
 ) 
 
 Provision for Income Taxes

 - 
 
 - 
 
 Net Loss

 (348,383 
 ) 
 
 (23,504,327 
 ) 
 
 Basic Loss Per Share

 (0.02 
 ) 
 
 (0.55 
 ) 
 
 Diluted Loss Per Share

 (0.02 
 ) 
 
 (0.55 
 ) 
 
 The accompanying notes are an integral part of these consolidated financial statements.

 F-6

 Table of Contents 

 ROYALE ENERGY, INC. 

 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

 FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 

 Common Stock 

 Preferred Stock

 Series B 

 Number Shares 

 Issued and 

 Outstanding 

 Amount 

 Number Shares 

 Issued and 

 Outstanding 

 Amount 

 Additional

 Paid in 

 Capital 

 Accumulated

 Comprehensive

 Deficit 

 Total 

 Balance, December 31, 2017 

 21,850,185 
 
 $ 
 40,561,882 
 
 - 
 
 $ 
 - 
 
 $ 
 703,567 
 
 $ 
 (48,205,690 
 ) 
 
 $ 
 (6,940,241 
 ) 
 
 Matrix Merger

 25,800,186 
 
 (40,165,982 
 ) 
 
 2,012,400 
 
 20,124,000 
 
 50,407,050 
 
 - 
 
 30,365,068 
 
 Stock issued for conversion of notes payable pursuant to merger agreement

 750,000 
 
 (347,500 
 ) 
 
 - 
 
 - 
 
 - 
 
 - 
 
 (347,500 
 ) 
 
 Stock issued in lieu of Compensation

 1,021,016 
 
 1,021 
 
 - 
 
 - 
 
 407,779 
 
 - 
 
 408,800 
 
 Warrants Issued to CIC with

 Sale of Assets to RMX

 - 
 
 - 
 
 - 
 
 - 
 
 1,440,000 
 
 - 
 
 1,440,000 
 
 Executive’s Stock Option Grant

 - 
 
 - 
 
 - 
 
 - 
 
 64,954 
 
 - 
 
 64,954 
 
 Preferred Series B 3.5% Dividend

 - 
 
 - 
 
 59,461 
 
 594,613 
 
 - 
 
 (594,613 
 ) 
 
 - 
 
 Net (Loss)

 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 (23,504,327 
 ) 
 
 (23,504,327 
 ) 
 
 Balance, December 31, 2018 

 49,421,387 
 
 $ 
 49,421 
 
 2,071,861 
 
 $ 
 20,718,613 
 
 $ 
 53,023,350 
 
 $ 
 (72,304,630 
 ) 
 
 1,486,754 
 
 Stock issued in lieu of Compensation

 2,432,749 
 
 2,433 
 
 - 
 
 - 
 
 526,193 
 
 - 
 
 528,626 
 
 Preferred Series B 3.5% Dividend

 - 
 
 - 
 
 73,473 
 
 734,725 
 
 - 
 
 (734,725 
 ) 
 
 - 
 
 Net (Loss)

 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 (348,383 
 ) 
 
 (348,383 
 ) 
 
 Balance, December 31, 2019 

 51,854,136 
 
 $ 
 51,854 
 
 2,145,334 
 
 $ 
 21,453,338 
 
 $ 
 53,549,543 
 
 $ 
 (73,387,738 
 ) 
 
 1,666,997 
 
 The accompanying notes are an integral part of these consolidated financial statements.

 F-7

 Table of Contents 

 ROYALE ENERGY, INC. 

 CONSOLIDATED STATEMENTS OF CASH FLOWS 

 FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 

 2019 

 2018 

 CASH FLOWS FROM OPERATING ACTIVITIES:

 Net (Loss)

 $ 
 (348,383 
 ) 
 
 $ 
 (23,504,327 
 ) 
 
 Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities:

 Depreciation, Depletion, and Amortization

 468,143 
 
 722,935 
 
 Impairment

 977,682 
 
 1,183,515 
 
 Loss on Sale of Assets

 155,048 
 
 19,199,045 
 
 Gain on Turnkey Drilling Programs

 (2,909,908 
 ) 
 
 (2,558,716 
 ) 
 
 Gain on Settlement of Accounts Payable

 (897,708 
 ) 
 
 (287,134 
 ) 
 
 Loss (Gain) on Investment in Joint Venture

 397,936 
 
 (333,931 
 ) 
 
 Bad Debt Expense

 60,512 
 
 648,518 
 
 Geological & Geophysical Costs

 264,219 
 
 - 
 
 Gain on Other

 (172,523 
 ) 
 
 - 
 
 Stock-Based Compensation

 528,626 
 
 64,954 
 
 Loss on Issuance of Stock Warrants

 - 
 
 1,439,990 
 
 Well Equipment and Other Assets Write Down

 28,343 
 
 9,790 
 
 Loan Fee Amortization

 - 
 
 144,186 
 
 Change in Fair Value of Derivative Investments

 - 
 
 105,130 
 
 (Increase) Decrease in:

 Other & Revenue Receivables

 84,372 
 
 (858,096 
 ) 
 
 Prepaid Expenses and Other Assets

 (2,535,103 
 ) 
 
 (26,464 
 ) 
 
 Increase (Decrease) in:

 Accounts Payable and Accrued Expenses

 960,638 
 
 286,109 
 
 Royalties Payable

 (9,386 
 ) 
 
 301,222 
 
 Due to Affiliate

 (302,628 
 ) 
 
 547,030 
 
 Other Long-Term Liabilities

 - 
 
 50,415 
 
 Net Cash Used by Operating Activities

 (3,250,120 
 ) 
 
 (2,865,829 
 ) 
 
 CASH FLOWS FROM INVESTING ACTIVITIES:

 Expenditures for Oil and Gas Properties

 (9,487,884 
 ) 
 
 (3,221,099 
 ) 
 
 Proceeds from Turnkey Drilling Programs

 10,981,159 
 
 6,450,000 
 
 Proceeds from Sale of Assets

 - 
 
 4,406,138 
 
 Cash Acquired in Merger

 - 
 
 548,805 
 
 Net Cash Provided by (Used In) Investing Activities

 1,493,275 
 
 8,183,844 
 
 CASH FLOWS FROM FINANCING ACTIVITIES:

 Settlement of Liabilities from Cash Advances from Investors

 - 
 
 (1,900,000 
 ) 
 
 Principal Payments on Long-Term Debt

 (535,656 
 ) 
 
 (401,666 
 ) 
 
 Seismic Financing Agreement Payments

 (186,012 
 ) 
 
 - 
 
 Net Cash Provided by Financing Activities

 (721,668 
 ) 
 
 (2,301,666 
 ) 
 
 Net Increase (Decrease) in Cash

 (2,478,513 
 ) 
 
 3,016,349 
 
 Cash, Cash Equivalents, and Restricted Cash at Beginning of Year

 6,355,042 
 
 3,338,693 
 
 Cash, Cash Equivalents, and Restricted Cash at End of Year

 $ 
 3,876,529 
 
 $ 
 6,355,042 
 
 Cash Paid for Interest

 $ 
 20,559 
 
 $ 
 172,171 
 
 Cash Paid for Taxes

 $ 
 19,374 
 
 $ 
 4,800 
 
 Supplemental Schedule of Non-Cash Investing and Financing Transactions:

 Asset Retirement Obligation Addition

 $ 
 - 
 
 $ 
 362,192 
 
 Issuance of Common Stock for Accrued Compensation Expense

 $ 
 - 
 
 $ 
 408,800 
 
 Warrants Issued with Sale of Assets

 $ 
 - 
 
 $ 
 1,440,000 
 
 Series B Paid-In-Kind Dividends 
 
 $ 
 734,725 
 
 $ 
 594,613 
 
 Conversion of Convertible Notes to Common Stock 

 $ 
 - 
 
 $ 
 347,500 
 
 Notes paid with proceeds from sale of Assets

 $ 
 - 
 
 $ 
 11,616,885 
 
 Contributions to J.V.

 $ 
 - 
 
 $ 
 6,250,000 
 
 The accompanying notes are an integral part of these consolidated financial statements.

 F-8

 Table of Contents 

 ROYALE ENERGY, INC. 

 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 – 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.

 Description of Business 

 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, 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.

 Use of Estimates 

 The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 Estimated quantities of crude oil and condensate, NGLs and natural gas reserves is a significant estimate that requires judgment. All of the reserve data included in this Form 10-K are estimates. Reservoir engineering is a subjective process of estimating underground accumulations of crude oil and condensate, NGLs and natural gas. There are numerous uncertainties inherent in estimating quantities of proved crude oil and condensate, NGLs and natural gas reserves. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. 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 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. Although we believe these estimates, actual results could differ from these estimates.

 Liquidity and Going Concern 

 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 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 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. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

 F-9

 Table of Contents 

 Restricted Cash 

 Royale sponsors turnkey drilling arrangements in proved and unproved properties. The contracts require that participants pay Royale the full contract price upon execution of the drilling agreement. Each participant earns an undivided interest in the well bore at the completion of the well. A portion of the funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling a well. If something changes, the Company may designate these funds for a substitute well. Under certain conditions, a portion of these funds may be required to be returned to a participant. Once the well is drilled, the funds are used to satisfy the drilling cost. Royale classifies these funds prior to commencement of drilling as restricted cash based on guidance codified as under 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, 

 2019 

 2018 

 Cash and cash equivalents

 $ 
 1,031,014 
 
 $ 
 1,853,742 
 
 Restricted cash

 2,845,515 
 
 4,501,300 
 
 Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 3,876,529 
 
 6,355,042 
 
 Equity Method Investments 

 Investments in entities over which we have significant influence, but not control, are accounted for using the equity method of accounting. Income from equity method investments represents our proportionate share of net income generated by the equity method investees and is reflected in revenue and other income in our consolidated statements of income. Equity method investments are included as noncurrent assets on the consolidated balance sheet.

 Equity method investments are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value may have occurred as called for under ASC 323. When a loss is deemed to have occurred and is other than temporary, the carrying value of the equity method investment is written down to fair value, and the amount of the write-down is included in income.

 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 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.

 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, 

 2019 

 2018 

 Oil & Condensate Sales

 $ 
 1,504,936 
 
 $ 
 1,211,818 
 
 Natural Gas Sales

 824,339 
 
 385,803 
 
 NGL Sales

 - 
 
 1,741 
 
 $ 
 2,329,275 
 
 $ 
 1,599,362 
 
 F-10

 Table of Contents 

 The pricing in our hydrocarbon sales agreements are variable, determined using various published benchmarks which are adjusted for negotiated quality and location differentials. As a result, revenue collected under our agreements with customers is highly dependent on the market conditions and may fluctuate considerably as the hydrocarbon market prices rise or fall. Typically, our customers pay us monthly, within a short period of time after we deliver the hydrocarbon products. As such, we do not have any financing element associated with our contracts. We do not have any issues related to returns or refunds, as product specifications are standardized for the industry and are typically measured when transferred to a common carrier or midstream entity, and other contractual mechanisms (e.g., price adjustments) are used when products do not meet those specifications.

 In limited cases, we may also collect advance payments from customers as stipulated in our agreements; payments in excess of recognized revenue are recorded as contract liabilities on our consolidated balance sheet.

 Under our hydrocarbon sales agreements, the entire consideration amount is variable either due to pricing and/or volumes. We recognize revenue in the amount of variable consideration allocated to distinct units of hydrocarbons transferred to a customer. Such allocation reflects the amount of total consideration we expect to collect for completed deliveries of hydrocarbons and the terms of variable payment relate specifically to our efforts to satisfy the performance obligations under these contracts. Our performance obligations under our hydrocarbon sales agreements are to deliver either the entire production from the dedicated wells or specified contractual volumes of hydrocarbons.

 We often serve as the operator for jointly owned oil and gas properties. As part of this role, we perform activities to explore, develop and produce oil and gas properties in accordance with the joint operating arrangement and collective decisions of the joint parties. Other working interest owners reimburse us for costs incurred based on our agreements. We determined that these activities are not performed as part of customer relationships, and such reimbursements are recorded as cost reimbursements.

 We commonly market the share of production belonging to other working interest owners as the operator of jointly owned oil and gas properties. Those marketing activities are carried out as part of the collaborative arrangement, and we do not purchase or otherwise obtain control of other working interest owners’ share of production. Therefore, we act as a principal only in regards to the sale of our share of production and recognize revenue for the volumes associated with our net production.

 The Company frequently sells a portion of the working interest in each well it drills or participates in to third party investors and retains a portion of the prospect for its own account. The Company typically guarantees a cost to drill to the third-party drilling participants and records a loss or gain on the difference between the guaranteed price and the actual cost to drill the well. When monies are received from third parties for future drilling obligations, the Company records the liability as 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.

 Crude oil and condensate 

 For the crude sales agreements, we satisfy our performance obligations and recognize revenue once customers take control of the crude at the designated delivery points, which include pipelines, trucks or vessels.

 Natural Gas and NGLs 

 When selling natural gas and NGLs, we engage midstream entities to process our production stream by separating natural gas from the NGLs. Frequently, these midstream entities also purchase our natural gas and NGLs under the same agreements. In these situations, we determined the performance obligation is complete and satisfied at the tailgate of the processing plant when the natural gas and NGLs become identifiable and measurable products. We determined the plant tailgate is the point in time where control, as defined in the new revenue standard, is transferred to midstream entities and they are entitled to significant risks and rewards of ownership of the natural gas and NGLs.

 The amounts due to midstream entities for gathering and processing services are recognized as shipping and handling cost and included as lease operating expense in our consolidated statement of operations, since we make those payments in exchange for distinct services with the exception of natural gas sold to PG&E where transportation is netted directly against revenue. Under some of our natural gas processing agreements, we have an option to take the processed natural gas and NGLs in-kind and sell to customers other than the processing company. In those circumstances, our performance obligations are complete after delivering the processed hydrocarbons to the customer at the designated delivery points, which may be the tailgate of the processing plant or an alternative delivery point requested by the customer.

 F-11

 Table of Contents 

 Turnkey Drilling Obligations 

 These Turnkey Agreements are managed by the Company for the participants of the well. The collections of pre-drilling AFE amounts are segregated by the Company and the gains and losses on the Turnkey Agreements are recorded in income or expense at the time of the casing point election in accordance with ASC 932-323-25 and 932-360. The Company manages the performance obligation for the well participants and only records revenue or expense at the time the performance obligation of the Turnkey Agreement has been satisfied.

 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 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 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. 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 

 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. Royale Energy amortizes the costs of productive wells under the unit-of-production method.

 Royale Energy carries, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where Royale Energy is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expense. Other exploratory expenditures, including geophysical costs and annual lease rentals, are expensed as incurred. Acquisition costs of proved properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves.

 Capitalized exploratory drilling and development costs associated with productive depletable extractive properties are amortized using unit-of-production rates based on the amount of proved developed reserves of oil and gas that are estimated to be recoverable from existing facilities using current operating methods. Under the unit-of-production method, oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank.

 Production Cost 

 Production costs are expensed as incurred. Production involves lifting the oil and gas to the surface and gathering, treating, field processing and field storage of the oil and gas. The production function normally terminates at the outlet valve on the lease or field production storage tank. Production costs are those incurred to operate and maintain Royale Energy’s wells and related equipment and facilities. They become part of the cost of oil and gas produced. These costs, sometimes referred to as lifting costs, include such items as labor costs to operate the wells and related equipment; repair and maintenance costs on the wells and equipment; materials, supplies and energy costs required to operate the wells and related equipment; and administrative expenses related to the production activity.

 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. Maintenance and repairs, including planned major maintenance, are expensed as incurred. Major renewals and improvements are capitalized, and the assets replaced are retired.

 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.

 F-12

 Table of Contents 

 Impairment 

 We evaluate our oil and gas producing properties, including capitalized costs of exploratory wells and development costs, for impairment of value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected undiscounted future cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset. Oil and gas producing properties are reviewed for impairment on a field-by-field basis or, in certain instances, by logical grouping of assets if there is significant shared infrastructure or contractual terms that cause economic interdependency amongst separate, discrete fields. Oil and gas producing properties deemed to be impaired are written down to their fair value, as determined by discounted future net cash flows or, if available, comparable market value. We evaluate our unproved property investment and record impairment based on time or geologic factors. Information such as drilling results, reservoir performance, seismic interpretation or future plans to develop acreage is also considered. When unproved property investments are deemed to be impaired, this amount is reported in exploration expenses in our consolidated statements of income. 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” 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. Royale Energy completes the drilling activities typically between 10 and 30 days after drilling begins. The participant retains an undivided or proportional beneficial interest in the property, and is also responsible for its proportionate share of operating costs. Royale Energy retains legal title to the lease. The participants purchase a working interest directly in the well bore.

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

 A certain portion of the turnkey drilling participant’s funds received are non-refundable. The Company holds all funds invested as Deferred Drilling Obligations until drilling is complete. Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations. At December 31, 2019 and 2018, Royale Energy had Deferred Drilling Obligations of $5,232,675 and $6,213,283, respectively.

 If Royale Energy is unable to drill the wells, and a suitable replacement well is not found, Royale would retain the non-refundable portion of the contact and return the remaining funds to the participant. Included in cash and cash equivalents are amounts for use in completion of turnkey drilling programs in progress.

 Losses on properties sold are recognized when incurred or when the properties are held for sale and the fair value of the properties is less than the carrying value.

 F-13

 Table of Contents 

 Other Receivables 

 Our other receivables consist of receivables from direct working interest investors and industry partners. We provide for uncollectible accounts receivable using the allowance method of accounting for bad debts. Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected. The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable. All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance. At 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 

 Our revenue receivables consist of receivables related to the sale of our natural gas and oil. Once a production month is completed, we receive payment approximately 15 to 30 days later. Historically, Royale has not had issues related to the collection of revenue receivables, and as such has determined that an allowance for revenue receivables is not currently necessary.

 Equipment and Fixtures 

 Equipment and fixtures are stated at cost and depreciated over the estimated useful lives of the assets, which range from three to seven years, using the straight-line method. Repairs and maintenance are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment, other than oil and gas, are reflected in operations.

 Income (Loss) Per Share 

 Basic and diluted losses per share are calculated as follows:

 Year Ended December 31, 

 2019 

 2018 

 Basic 

 Diluted 

 Basic 

 Diluted 

 Net Loss

 $ 
 (348,383 
 
 )

 $ 
 (348,383 
 
 )

 $ 
 (23,504,327 
 
 )

 $ 
 (23,504,327 
 
 )

 Less: Preferred Stock Dividend

 734,725 
 
 734,725 
 
 594,613 
 
 594,613 
 
 Less: Preferred Stock Dividend in Arrears

 - 
 
 - 
 
 - 
 
 - 
 
 Net Loss Attributable to Common Shareholders

 (1,083,108 
 
 )

 (1,083,108 
 
 )

 (24,098,940 
 
 )

 (24,098,940 
 
 )

 Weighted average common shares outstanding

 50,871,447 
 
 50,871,447 
 
 44,174,209 
 
 44,174,209 
 
 Effect of dilutive securities

 - 
 
 - 
 
 - 
 
 - 
 
 Weighted average common shares, including Dilutive effect

 50,871,447 
 
 50,871,447 
 
 44,174,209 
 
 44,174,209 
 
 Per share:

 Net Loss

 $ 
 (0.02 
 
 )

 $ 
 (0.02 
 
 )

 $ 
 (0.55 
 
 )

 $ 
 (0.55 
 
 )

 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 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 ASC 805.

 F-14

 Table of Contents 

 Income Taxes 

 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 ASC740. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Under the Topic, deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 The provision for income taxes is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported net amounts.

 Fair Value Measurements 

 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). The three levels of the fair value hierarchy are described below:

 Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

 Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

 Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions

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

 F-15

 Table of Contents 

 Accounts Payable and Accrued Expenses 

 At December 31, 2019 and 2018, the components of accounts payable and accrued expenses consisted of:

 2019 

 2018 

 Trade Payables including accruals

 3,107,012 
 
 2,589,518 
 
 Direct working interest investors related accruals

 1,811,649 
 
 1,223,588 
 
 Current drilling efforts accrued expenses

 508,246 
 
 413,701 
 
 Accrued Liabilities

 393,245 
 
 391,641 
 
 Employee related accruals

 195,998 
 
 232,010 
 
 Deferred rent

 14,884 
 
 32,752 
 
 Federal and State income taxes payable

 - 
 
 12,323 
 
 6,031,034 
 
 4,895,533 
 
 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 

 From time-to-time, the Company acquires businesses in the oil and gas industry. Royale primarily targets businesses in geological basins that the Company considers to be in a focus area. Businesses are included in the consolidated financial statements from the date of acquisition.

 We recognize, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition-date fair values. We measure and recognize goodwill as of the acquisition date as the excess of: (1) the aggregate of the fair value of consideration transferred, the fair value of any noncontrolling interest in the acquiree (if any) and the acquisition date fair value of our previously held equity interest in the acquiree (if any), over (2) the fair value of assets acquired and liabilities assumed. If information about facts and circumstances existing as of the acquisition date is incomplete by the end of the reporting period in which a business combination occurs, we report provisional amounts for the items for which the accounting is incomplete. The measurement or allocation period ends once we receive the information we are seeking; however, this period will generally not exceed one year from the acquisition date. Any material adjustments recognized during the measurement period will be reflected retrospectively in the consolidated financial statements of the subsequent period. We recognize third-party transaction related costs as expense currently in the period in which they are incurred.

 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.

 F-16

 Table of Contents 

 Accounting Standards 

 Recently Adopted 

 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 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 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 

 Merger 

 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”). 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.”

 F-17

 Table of Contents 

 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 more detail in our Form 8-K dated March 7, 2018 (SEC File No. 000-55912).

 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 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. The Company considered two valuation methods in its determination of fair value for the oil and natural gas properties; the discounted cash flow analysis and comparable transaction analysis. Assumptions for the discounted cash flow analysis include commodity price, operating costs and capital outlay for future development of the acquired properties, pricing differentials, reserve risking, and discount rates. NYMEX strip pricing, less applicable pricing differentials, was utilized in the discounted cash flow analysis. Risking levels in the discounted cash flow analysis are determined based on a variety of factors, such as existing well performance, offset production and analogue wells. Discount rates used in the discounted cash flow analysis were determined by using the estimated cost of capital, discount rates, as well as industry knowledge and experience. 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. 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.

 The following table summarizes the consideration transferred, fair value of assets acquired and liabilities assumed:

 March 7, 2018 

 Consideration: 

 Value of Royale Common Stock issued

 $ 
 9,546,068 
 
 Value of Series B Convertible Preferred Stock issued

 20,124,000 
 
 Total consideration

 $ 
 29,670,068 
 
 Fair Value of Liabilities Assumed: 

 Current liabilities

 19,624,592 
 
 Other liabilities

 3,125,394 
 
 Asset Retirement obligations

 1,419,544 
 
 Total fair value of liabilities assumed

 24,169,530 
 
 Total consideration plus liabilities assumed

 $ 
 53,839,598 
 
 Fair Value of Assets Acquired: 

 Cash

 $ 
 548,805 
 
 Current assets

 1,073,532 
 
 Proved and unproved crude oil and gas properties

 51,214,512 
 
 Land

 1,002,750 
 
 Total Fair Value of Assets Acquired

 $ 
 53,839,598 
 
 F-18

 Table of Contents 

 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. and Matrix Oil Management Corporation and its affiliates. These unaudited supplemental pro forma results of operations for the consolidated companies as of December 31, 2018, are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the consolidated company for the periods presented or that may be achieved by the consolidated company in the future.

 Year ended December 31, 2018 

 Royale Energy, Inc. 

 Matrix Oil Management Corp 

 Consolidated 

 Revenue

 $ 
 723,172 
 
 $ 
 1,199,684 
 
 $ 
 1,922,856 
 
 Net Loss

 $ 
 (1,633,713 
 
 )

 $ 
 (149,936 
 
 )

 $ 
 (1,783,649 
 
 )

 Net Loss available to common shareholders

 $ 
 (1,633,713 
 
 )

 $ 
 (149,936 
 
 )

 $ 
 (1,783,649 
 
 )

 Pro forma Loss per common share Basic and diluted

 $ 
 (0.04 
 
 )

 $ 
 (0.00 
 
 )

 $ 
 (0.04 
 
 )

 Amounts previously estimated have changed during the measurement period. 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. Depletion expense increased by an immaterial amount as a result of these measurement-period adjustments and all amounts referenced below are inclusive of these measurement period adjustments. As of December 31, 2018, the purchase accounting for the Matrix acquisition was complete.

 Original 

 Adjustment 

 Revised 

 Cash

 $ 
 548,805 
 
 $ 
 - 
 
 $ 
 548,805 
 
 Current Assets

 $ 
 3,655,173 
 
 $ 
 (2,581,641 
 
 )

 $ 
 1,073,532 
 
 Oil and gas properties

 $ 
 48,632,870 
 
 $ 
 2,581,641 
 
 $ 
 51,214,512 
 
 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. 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. In connection with the Second Closing, the parties entered into a letter agreement related to the preliminary Settlement Statement process. The parties agreed that, in lieu of the payment originally contemplated under Section 1.6(v) of the Contribution Agreement, the Royale Entities would receive the sum of $4,000,000, subject to adjustment. The $4,000,000 delivered at the Second Closing was an advance against amounts due the Royale Entities as Purchase Price, and the advance was subject to further adjustment in accordance with the Contribution Agreement.

 RMX has a six-member board of managers. Royale has two seats on the board giving it a third of the Board. 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.

 F-19

 Table of Contents 

 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. It was the operating entity for the Matrix group of companies that were acquired on February 28, 2018, discussed above. This allows the RMX joint venture to be the operator of record for the contributed assets.

 Royale accounts for its ownership interest in RMX following the equity method of accounting, in accordance with ASC 323. Pursuant to the Subscription and Contribution agreement, Royale has an initial equity value of $6.25 million or 20% of the total equity of the joint venture with CIC having an initial equity value of $25.0 million or 80% of the total equity of the joint venture.

 The Royale Entities contributed 100% of their interest in the Sansinena Field, 100% of the Sempra Field, 50% of the Bellevue Field, 100% of the Whittier Main Field, and 50% of the Whittier Field. The result of the transfer of oil and gas properties and surface rights for cash as described above and a 20% interest in RMX resulted in Royale recording a loss of approximately $17.9 million. The issuance by Royale of warrants to acquire 4,000,000 shares of Royale common stock, by CIC, caused Royale to record a loss of approximately $1.44 million. In addition, the Contribution Agreement called for an effective date of the property transfer of February 28, 2018 which required a purchase price adjustment of approximately $334,000 in the form of a cash contribution to RMX and an increase in the loss on the sale. 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 $19,403,800 drawn at December 31, 2019.

 RMX MSA 

 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.

 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.

 Post-Closing 

 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.

 F-20

 Table of Contents 

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

 Twelve Months Ended 

 December 31, 2019 

 March 27, 2018

 (Inception) through 

 December 31, 2018 

 RMX Resources, LLC 

 RMX Resources, LLC 

 Balance Sheet:

 Total Assets

 $ 
 72,401,841 
 
 $ 
 71,758,262 
 
 Total Liabilities

 $ 
 41,573,426 
 
 $ 
 38,838,608 
 
 Members Equity

 $ 
 30,828,415 
 
 $ 
 32,919,654 
 
 Results of Operations:

 Net operating revenue

 $ 
 16,392,305 
 
 $ 
 8,773,661 
 
 Loss from operations

 $ 
 1,456,290 
 
 $ 
 (181,464 
 
 )

 Net income

 $ 
 (2,091,239 
 
 )

 $ 
 1,669,654 
 
 NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES 

 Oil and gas properties, equipment and fixtures consist of:

 Year ended December 31, 

 2019 

 2018 

 Oil and Gas 

 Producing properties, including intangible drilling costs

 $ 
 7,792,156 
 
 $ 
 9,340,779 
 
 Undeveloped properties

 46,990 
 
 25,582 
 
 Lease and well equipment

 3,304,565 
 
 3,350,893 
 
 11,143,711 
 
 12,717,254 
 
 Accumulated depletion, depreciation and amortization

 (6,559,182 
 ) 
 
 (6,402,657 
 ) 
 
 Net capitalized costs Total

 $ 
 4,584,529 
 
 $ 
 6,314,597 
 
 Commercial and Other 

 2019 

 2018 

 Real estate, including furniture and fixtures

 $ 
 - 
 
 $ 
 83,405 
 
 Vehicles

 40,061 
 
 40,061 
 
 Furniture and equipment

 1,097,428 
 
 1,095,149 
 
 1,137,489 
 
 1,218,615 
 
 Accumulated depreciation

 (1,131,028 
 ) 
 
 (1,125,722 
 ) 
 
 6,461 
 
 92,893 
 
 Net capitalized costs Total

 $ 
 4,590,990 
 
 $ 
 6,407,490 
 
 The following sets forth costs incurred for oil and gas property acquisition and development activities, whether capitalized or expensed at December 31:

 Year ended December 31, 

 2019 

 2018 

 Acquisition - Proved

 $ 
 - 
 
 $ 
 - 
 
 Acquisition - Unproved

 - 
 
 - 
 
 Development

 9,680,298 
 
 3,838,998 
 
 Exploration

 - 
 
 - 
 
 F-21

 Table of Contents 

 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. Undeveloped properties are not subject to depletion, depreciation or amortization.

 Year ended December 31, 

 2019 

 2018 

 Beginning balance at January 1

 - 
 
 - 
 
 Additions to capitalized exploratory well costs pending the determination of proved reserves

 - 
 
 - 
 
 Reclassifications to wells, facilities, and equipment based on the determination of proved reserves

 - 
 
 - 
 
 Ending balance at December 31

 - 
 
 - 
 
 Results of Operations from Oil and Gas Producing and Exploration Activities 

 The results of operations from oil and gas producing and exploration activities (excluding corporate overhead and interest costs) are as follows: 

 Year Ended December 31, 

 2019 

 2018 

 Oil and gas sales

 $ 
 2,329,275 
 
 $ 
 1,599,362 
 
 Production related costs (Lease Operating)

 (1,764,538 
 
 )

 (1,613,368 
 
 )

 Impairment

 (977,682 
 
 )

 (1,183,515 
 
 )

 Depreciation, depletion and amortization

 (468,143 
 
 )

 (722,935 
 
 )

 Results of operations from producing and exploration activities

 $ 
 (881,088 
 
 )

 $ 
 (1,920,456 
 
 )

 Income Taxes (Benefit)

 - 
 
 - 
 
 Net Results

 $ 
 (881,088 
 
 )

 $ 
 (1,920,456 
 
 )

 F-22

 Table of Contents 

 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 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. 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.

 2019 

 2018 

 Asset retirement obligation

 Beginning of the year

 $ 
 2,366,456 
 
 $ 
 1,000,908 
 
 Liabilities incurred during the period

 210,643 
 
 595,583 
 
 Settlements

 - 
 
 (52,636 
 ) 
 
 Merger Additions

 - 
 
 1,419,544 
 
 Sales

 (33,026 
 ) 
 
 (486,585 
 ) 
 
 Changes in estimates

 922,698 
 
 - 
 
 Accretion expense

 165,651 
 
 (110,358 
 ) 
 
 End of year

 $ 
 3,632,422 
 
 $ 
 2,366,456 
 
 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. At an interest rate of 5.5%. Beginning October 3, 2018, principal and interest is due and payable in 12 monthly installments of $44,428. 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. At December 31, 2019 and 2018, Royale Energy had Notes Payable of $55,573 and $390,839, respectively, as a current liability.

 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. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. In 2016, the Company adopted Accounting Standards Update (ASU) 2015-17 and has classified all of its deferred tax assets and liabilities as noncurrent on its balance sheet.

 On December 22, 2017, the U.S. 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. 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.

 F-23

 Table of Contents 

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

 2019 

 2018 

 Deferred Tax Assets (Liabilities):

 Statutory Depletion Carry Forward

 $ 
 367,149 
 
 $ 
 367,149 
 
 Net Operating Loss

 6,489,891 
 
 7,121,912 
 
 Other

 595,990 
 
 708,057 
 
 Share-Based Compensation

 86,510 
 
 86,510 
 
 Capital Loss / AMT Credit Carry Forward

 9,458 
 
 9,458 
 
 Charitable Contributions Carry Forward

 3,890 
 
 6,158 
 
 Allowance for Doubtful Accounts

 466,060 
 
 597,519 
 
 Oil and Gas Properties and Fixed Assets

 5,404,787 
 
 5,987,061 
 
 Investment in RMX Joint Venture

 (1,238,551 
 ) 
 
 (1,247,847 
 ) 
 
 Section 481(a) Adjustments

 (214,859 
 ) 
 
 - 
 
 $ 
 11,970,325 
 
 $ 
 13,635,977 
 
 Valuation Allowance

 (11,970,325 
 ) 
 
 (13,635,977 
 ) 
 
 Net Deferred Tax Asset

 $ 
 - 
 
 $ 
 - 
 
 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. As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2019. The Company will assess the realizability of the deferred tax assets at least yearly and make appropriate updates as needed. Royale Energy, Inc. 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, 2019 and 2018, respectively, to pretax income is as follows: 

 2019 

 2018 

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

 $ 
 (71,680 
 ) 
 
 $ 
 (4,935,909 
 ) 
 
 Increase (decrease) in taxes resulting from:

 Meals & Entertainment

 1,583 
 
 1,320 
 
 Investor Incentive Expense

 - 
 
 7 
 
 Transaction Costs

 - 
 
 160,927 
 
 Loss on Warrants Issued to RMX

 - 
 
 302,398 
 
 Prior-year true-up for Books

 1,461,914 
 
 2,075,440 
 
 Deferred State Taxes, net of federal benefit

 214,161 
 
 (1,009,601 
 ) 
 
 Other non-deductible expenses

 59,674 
 
 (264,359 
 ) 
 
 Change in valuation allowance

 (1,665,652 
 ) 
 
 3,669,777 
 
 Provision (benefit)

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

 2019 

 2018 

 Current tax provision (benefit) - federal

 $ 
 - 
 
 $ 
 - 
 
 Current tax provision (benefit) - state

 - 
 
 - 
 
 Deferred tax provision (benefit) - federal

 - 
 
 - 
 
 Deferred tax provision (benefit) - state

 - 
 
 - 
 
 Total provision (benefit)

 $ 
 - 
 
 $ 
 - 
 
 F-24

 Table of Contents 

 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. Currently, the only differences between our financial statements and our income tax returns relate to normal timing differences such as depreciation, depletion and amortization, which are recorded as deferred taxes on our balance sheets. We do not expect our unrecognized tax benefits to change significantly over the next 12 months. The tax years 2013 through 2018 remain open to examination by the taxing jurisdictions in which we file income tax returns.

 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. The Series B Convertible Preferred Stock is convertible at the option of the security holder at the rate of ten shares of common stock for one share of Series B Convertible Preferred Stock. The Series B Preferred Stock has never been registered under the Securities Exchange Act of 1934, and no market exists for the shares. Additionally, the Series B Convertible Preferred shares will automatically convert to common at any time in which the Volume Weighted Average Price (VWAP) of the common stock exceeds $3.50 per share for 20 consecutive trading days, the shares are registered with the SEC and the volume of common shares trades exceeds 200,000 shares per day. 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.

 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 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. 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. 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. 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 

 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.

 F-25

 Table of Contents 

 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.

 Debit/Credit 

 Operating Lease – ROU Asset

 483,504 
 
 Operating Lease Liability – Current

 (140,831 
 ) 
 
 Operating Lease Liability – Long-Term

 (342,673 
 ) 
 
 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:

 Debit/Credit 

 Financing Lease - ROU Asset

 54,655 
 
 Financing Lease Liability - Current

 (9,725 
 ) 
 
 Financing Lease Liability - Long-Term

 (44,930 
 ) 
 
 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:

 Year ended

 December 31, 2019 

 Operating lease expense

 184,374 
 
 Financing lease expense

 10,757 
 
 Operating – short-term

 7,886 
 
 Short Term - field

 6,000 
 
 Total lease expense

 209,017 
 
 The following tables summarized the operating and financing lease obligations.

 Lease Obligations 

 Operating

 Lease

 Obligations 

 Financing

 Lease Obligations 

 Total

 Lease

 Obligations 

 2020

 173,809 
 
 12,588 
 
 186,397 
 
 2021

 179,630 
 
 12,588 
 
 192,218 
 
 2022

 24,408 
 
 12,588 
 
 36,996 
 
 Thereafter

 - 
 
 19,931 
 
 19,931 
 
 Total undiscounted lease payments

 $ 
 377,847 
 
 57,695 
 
 435,542 
 
 Less: Amount representing interest

 35,174 
 
 7,025 
 
 42,199 
 
 Total Operating & Financing lease liabilities

 $ 
 342,673 
 
 50,670 
 
 393,343 
 
 Long-term lease liabilities as of December 31, 2019

 $ 
 152,314 
 
 9,958 
 
 162,272 
 
 Long-term lease liabilities as of December 31, 2019

 $ 
 190,359 
 
 40,712 
 
 231,071 
 
 F-26

 Table of Contents 

 NOTE 10 - RELATED PARTY TRANSACTIONS 

 Significant Ownership Interests 

 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 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. Mr. Kerns wife is a director.

 NOTE 11 - STOCK COMPENSATION PLAN 

 On October 10, 2018, the Company entered into an Incentive Stock Option Award Agreement with Stephen M. Hosmer, Chief Financial Officer. Mr. Hosmer was granted 250,000 options to purchase common stock at an exercise price of $0.31 per share. These options were granted for a period of 10 years and will expire after October 10, 2028. These options become vested exercisable immediately. These options were valued using the Black-Scholes methodology. The Black-Scholes assumptions were as follows: Exercise price per share, $0.31; Current stock price (as of the close on October 10, 2018) $0.34; Risk-free interest rate of 3.22%; Time to maturity of 10 years; and, Stock volatility of 66.48%. 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 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:

 2019 

 2018 

 Weighted- 

 Weighted- 

 Average 

 Average 

 Exercise 

 Exercise 

 Shares 

 Price 

 Shares 

 Price 

 Options

 Outstanding and Exercisable at Beginning of Year

 250,000 
 
 $ 
 0.31 
 
 - 
 
 Granted or Vested

 - 
 
 250,000 
 
 $ 
 0.31 
 
 Exercised

 - 
 
 - 
 
 Forfeited

 - 
 
 - 
 
 Options Outstanding and Exercisable at Year End

 250,000 
 
 $ 
 0.31 
 
 250,000 
 
 $ 
 0.31 
 
 Weighted-average Fair Value of Options Granted During the Year

 $ 
 - 
 
 $ 
 64,954 
 
 F-27

 Table of Contents 

 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. The Company will incur no future expense related to these options.

 NOTE 12 - SIMPLE IRA PLAN 

 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.

 NOTE 13 - ENVIRONMENTAL MATTERS 

 Royale Energy has established procedures for the continuing evaluation of its operations to identify potential environmental exposures and assure compliance with regulatory policies and procedures. 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.

 Royale Energy is unable to predict whether its future operations will be materially affected by these laws and regulations. It is believed that legislation and regulations relating to environmental protection will not materially affect the results of operations of Royale Energy.

 NOTE 14 - CONCENTRATIONS 

 The Company bids its gas sales on a month to month basis and generally sells to a single customer without commitment to future gas sales to any particular customer. The Company normally sells approximately 32% of its monthly natural gas production to one customer on a month to month basis. Since we are able to sell our natural gas to other readily available customers, the loss of any one customer would not have an adverse effect on our overall sales operations.

 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, 2019 and 2018, cash in banks exceeded the FDIC limits by approximately $3.4 million and $5.7 million, respectively. The Company has not experienced any losses on deposits.

 NOTE 15 - COMMITMENTS AND CONTINGENCIES 

 The Company may become involved from time to time in litigation on various matters, which are routine to the conduct of its business. 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 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. Royale typically begins the drilling activities within 12 months of funding and reaches total depth between 10 and 30 days after drilling begins.

 F-28

 Table of Contents 

 NOTE 16 - SUBSEQUENT EVENTS 

 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) 

 The following estimates of proved oil and gas reserves, both developed and undeveloped, represent interests owned by Royale Energy which are located solely in the United States. Proved reserves represent estimated quantities of crude oil and natural gas which geological and engineering data demonstrate to be reasonably certain to be recoverable in the future from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells, with existing equipment and operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for which relatively major expenditures are required for completion.

 Disclosures of oil and gas reserves, which follow, are based on estimates prepared by independent petroleum engineering consultant Netherland, Sewell & Associates, Inc., the net reserve value of its proved developed and undeveloped reserves was approximately $57.8 million at December 31, 2018, based on the average Henry Hub natural gas price spot price of $3.10 per MCF and for oil volumes, the average West Texas Intermediate price of $65.56 per barrel as applied on a field-by-field basis. 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. These estimates do not include probable or possible reserves.

 The technical persons responsible for preparing the reserves estimates presented in the report of Netherland, Sewell & Associates, Inc., meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Netherland, Sewell & Associates, Inc. is a firm of independent petroleum engineers, geologists, geophysicists, and petrophysicists; and do not own an interest in our properties and are not employed on a contingent basis. 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). Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, largely influenced and controlled by U.S. 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.

 It should be recognized that applying current costs and prices and a 10 percent standard discount rate does not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved reserves.

 F-29

 Table of Contents 

 Changes in Estimated Reserve Quantities 

 The net interest in estimated quantities of proved developed reserves of crude oil and natural gas at December 31, 2019 and 2018, and changes in such quantities during each of the years then ended, were as follows:

 Total Proved Reserves 

 2019 

 2018 

 Oil (BBL) 

 Gas (MCF) 

 Oil (BBL) 

 Gas (MCF) 

 Beginning of period

 1,146,400 
 
 2,986,200 
 
 202 
 
 2,132,221 
 
 Revisions of previous estimates

 1,052,086 
 
 (890,032 
 ) 
 
 (79,136 
 ) 
 
 (401,498 
 ) 
 
 Production

 (27,663 
 ) 
 
 (292,472 
 ) 
 
 (20,329 
 ) 
 
 (135,396 
 ) 
 
 Extensions, discoveries and improved recovery

 22,042 
 
 2,516,046 
 
 - 
 
 25,014 
 
 Merger Acquisition

 - 
 
 - 
 
 11,375,784 
 
 13,459,933 
 
 Purchase of minerals in place

 - 
 
 - 
 
 29,300 
 
 116,110 
 
 Sales of minerals in place

 (21,865 
 ) 
 
 (12,842 
 ) 
 
 (10,159,421 
 ) 
 
 (12,210,184 
 ) 
 
 Proved reserves end of period

 2,171,000 
 
 4,306,900 
 
 1,146,400 
 
 2,986,200 
 
 Proved Developed 

 2019 

 2018 

 Oil (BBL) 

 Gas (MCF) 

 Oil (BBL) 

 Gas (MCF) 

 Proved developed reserves:

 Beginning of period

 148,600 
 
 1,914,900 
 
 202 
 
 1,798,697 
 
 End of period

 232,200 
 
 2,790,300 
 
 148,600 
 
 1,914,900 
 
 Proved Undeveloped 

 2019 

 2018 

 Oil (BBL) 

 Gas (MCF) 

 Oil (BBL) 

 Gas (MCF) 

 Proved undeveloped reserves:

 Beginning of period

 997,800 
 
 1,071,300 
 
 - 
 
 333,524 
 
 End of period

 1,938,800 
 
 1,516,600 
 
 997,800 
 
 1,071,300 
 
 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 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.

 F-30

 Table of Contents 

 Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves 

 The future net cash inflows are developed as follows:

 •

 Estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on year-end economic conditions.

 •

 The estimated future production of proved reserves is priced on the basis of year-end prices.

 •

 The resulting future gross revenue streams are reduced by estimated future costs to develop and to produce proved reserves, based on year-end estimates. Estimated future development costs by year are as follows:

 2020

 $

 10,331,900

 2021

 4,500,000

 2022

 4,511,800

 Thereafter

 1,244,100

 Total

 $

 20,587,800

 The resulting future net revenue streams are reduced to present value amounts by applying a ten percent discount. 

 Disclosure of principal components of the standardized measure of discounted future net cash flows provides information concerning the factors involved in making the calculation. In addition, the disclosure of both undiscounted and discounted net cash flows provides a measure of comparing proved oil and gas reserves both with and without an estimate of production timing. The standardized measure of discounted future net cash flow relating to proved reserves reflects estimated income taxes.

 F-31

 Table of Contents 

 Changes in standardized measure of discounted future net cash flow from proved reserve quantities 

 The standardized measure of discounted future net cash flows is presented below for the years ended December 31, 2019 and 2018.

 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.

 2019 

 2018 

 Future cash inflows

 143,045,000 
 
 87,467,200 
 
 Future production costs

 (28,967,400 
 ) 
 
 (22,390,900 
 ) 
 
 Future development costs

 (20,587,800 
 ) 
 
 (7,256,900 
 ) 
 
 Future income tax expense

 (28,046,940 
 ) 
 
 (17,345,820 
 ) 
 
 Future net cash flows

 65,442,860 
 
 40,473,580 
 
 10% annual discount for estimated timing of cash flows

 (35,801,989 
 ) 
 
 (9,827,666 
 ) 
 
 Standardized measure of discounted future net cash flows

 29,640,871 
 
 30,645,914 
 
 Sales of oil and gas produced, net of production costs

 (624,744 
 ) 
 
 (40,557 
 ) 
 
 Revisions of previous quantity estimates

 14,035,099 
 
 (71,162 
 ) 
 
 Net changes in prices and production costs

 (14,331,770 
 ) 
 
 11,683,159 
 
 Sales of minerals in place

 (272,507 
 ) 
 
 (3,061,278 
 ) 
 
 Purchases of minerals in place

 - 
 
 287,300 
 
 Merger Acquisition

 - 
 
 29,903,670 
 
 Extensions, discoveries and improved recovery

 2,157,052 
 
 59,191 
 
 Accretion of discount

 2,900,123 
 
 2,670,000 
 
 Net change in income tax

 (4,868,296 
 ) 
 
 (12,429,097 
 ) 
 
 Net increase (decrease)

 (1,005,043 
 ) 
 
 29,001,226 
 
 F-32

 Table of Contents 

 Future Development Costs 

 In order to realize future revenues from our proved reserves estimated in our reserve report, it will be necessary to incur future costs to develop and produce the proved reserves. The following table estimates the costs to develop and produce our proved reserves in the years 2020 through 2022.

 Future development cost of:

 2020 

 2021 

 2022 

 Proved developed reserves (PDP)

 $ 
 - 
 
 $ 
 - 
 
 $ 
 - 
 
 Proved non-producing reserves (PDNP)

 126,900 
 
 - 
 
 11,800 
 
 Proved undeveloped reserves (PUD)

 10,205,000 
 
 4,500,000 
 
 4,500,000 
 
 Total

 $ 
 10,331,900 
 
 $ 
 4,500,000 
 
 $ 
 4,511,800 
 
 Common assumptions include such matters as the real extent and average thickness of a particular reservoir, the average porosity and permeability of the reservoir, the anticipated future production from existing and future wells, future development and production costs and the ultimate hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and discounted present value estimates are frequently revised in subsequent periods to reflect production data obtained after the date of the original estimate. 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. 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.

 F-33

 Table of Contents 

 RMX Resources, LLC 

 Royale has a 20% interest in RMX Resources, LLC, as described in Note 2 – Merger With Matrix Oil Management Corporation And Formation Of RMX

 The estimates listed below of proved oil and gas reserves and revenues, both developed and undeveloped represent the gross volume attributable to RMX as a whole and to the 20 percent interest of RMX held by Royale. The reserve values were prepared by independent petroleum engineering consultants Netherland, Sewell & Associates, Inc. These estimates do not include probable or possible reserves and revenue and are presented on the same bases as that of Royale. RMX is not subject to U.S. Federal or state income taxes related to crude oil and natural gas production. RMX has elected to be taxed as a partnership; therefore, the reserve information provided below does not consider Federal or state income taxes.

 Total Proved Reserves 

 2019 

 2018 

 Net to Royale (20%) 

 Net to Royale (20%) 

 Oil (BBL) 

 Gas (MCF) 

 Oil (BBL) 

 Gas (MCF) 

 Proved developed and undeveloped reserves:

 Beginning of period – 

 (2018 - at formation of RMX)

 4,219,140 
 
 4,378,060 
 
 3,739,820 
 
 4,403,654 
 
 Revisions of previous estimates

 (188,726 
 ) 
 
 (3,388,497 
 ) 
 
 - 
 
 - 
 
 Production

 (49,894 
 ) 
 
 (23,023 
 ) 
 
 (41,240 
 ) 
 
 (25,594 
 ) 
 
 Extensions, discoveries and improved recovery

 - 
 
 - 
 
 - 
 
 - 
 
 Purchase of minerals in place

 - 
 
 - 
 
 520,560 
 
 - 
 
 Sales of minerals in place

 - 
 
 - 
 
 - 
 
 - 
 
 Proved reserves end of period

 3,980,520 
 
 966,540 
 
 4,219,140 
 
 4,378,060 
 
 Proved Developed 

 Net to Royale (20%) 

 Net to Royale (20%) 

 Oil (BBL) 

 Gas (MCF) 

 Oil (BBL) 

 Gas (MCF) 

 Proved developed reserves:

 Beginning of period – (2018 at formation of RMX)

 993,080 
 
 635,180 
 
 791,073 
 
 660,774 
 
 End of period

 1,186,080 
 
 653,920 
 
 993,080 
 
 635,180 
 
 Proved Undeveloped 

 Net to Royale (20%) 

 Net to Royale (20%) 

 Oil (BBL) 

 Gas (MCF) 

 Oil (BBL) 

 Gas (MCF) 

 Proved undeveloped reserves:

 Beginning of period – (2018 at formation of RMX)

 3,226,060 
 
 3,742,880 
 
 2,917,721 
 
 3,742,880 
 
 End of period

 2,794,440 
 
 312,620 
 
 3,226,060 
 
 3,742,880 
 
 F-34

 Table of Contents 

 Changes in Standardized measure of discounted future net cash flow from proved reserve quantities 

 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. 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.

 2019 

 2018 

 Net to Royale

 (20%) 

 Net to Royale

 (20%) 

 Future cash inflows

 247,894,600 
 
 305,586,180 
 
 Future production costs

 (72,400,860 
 ) 
 
 (84,222,980 
 ) 
 
 Future development costs

 (22,142,340 
 ) 
 
 (28,801,620 
 ) 
 
 Future income tax expense

 (46,005,420 
 ) 
 
 - 
 
 Future net cash flows

 107,345,980 
 
 192,561,580 
 
 10% annual discount for estimated timing of cash flows

 (61,882,856 
 ) 
 
 (118,962,940 
 ) 
 
 Standardized measure of discounted future net cash flows

 45,463,124 
 
 73,598,640 
 
 Sales of oil and gas produced, net of production costs

 (1,308,378 
 ) 
 
 (810,635 
 ) 
 
 Formation of RMX Joint Venture

 - 
 
 60,282,536 
 
 Net changes in prices and production costs and revisions of previous quantity estimates

 (14,702,806 
 ) 
 
 - 
 
 Sales of minerals in place

 - 
 
 - 
 
 Purchases of minerals in place

 - 
 
 8,673,117 
 
 Extensions, discoveries and improved recovery

 - 
 
 - 
 
 Accretion of discount

 7,359,864 
 
 5,453,622 
 
 Net change in income tax

 (19,484,196 
 ) 
 
 - 
 
 Net increase (decrease)

 (28,135,516 
 ) 
 
 73,598,640 
 
 F-35
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Royale Energy, Inc. 10-K

Item 9A. Controls and Procedures
