What changed in this filing

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Item 1. Financial Statements

2020-05-19 compared with 2019-11-14 · 165 added, 288 removed, 292 unchanged (61% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

March 31, 2020

December 31, 2019

Current Assets

4 unchanged sentences

Prepaid Expenses

Prepaid Drilling to RMX Resources, LLC

Total Current Assets

1 unchanged sentence

Right of Use Assets - Leases

Oil and Gas Properties, (Successful Efforts Basis), net

Furniture, Fixtures & Equipment, net

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

See notes to unaudited condensed consolidated financial statements.

ROYALE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEET S (UNAUDITED)

September 30,

LIABILITIES AND

STOCKHOLDERS' EQUITY (DEFICIT):

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

March 31, 2020

December 31, 2019

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:

Accounts Payable and Accrued Expenses

Notes Payable, Current

Royalties Payable

Notes Payable

Due to RMX Resources, LLC

Accrued Liabilities

Deferred Drilling Obligation

7 unchanged sentences

Total Liabilities

Mezzanine Equity:

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

Stockholders' Equity (Deficit):

Convertible Preferred Stock, Series B, $10 par value, 3,000,000 Shares Authorized, 2,089,740 shares issued and outstanding at September 30, 2019 and 2,012,400 issued and outstanding at December 31, 2018, respectively.

Shares declared but not issued at September 30, 2019, 36,833.

Common Stock, $.001 Par Value, 280,000,000 Shares Authorized 51,302,878 shares issued and outstanding at September 30, 2019 and 49,421,387 issued and outstanding at December 31,2018, respectively

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

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

Additional Paid in Capital

Accumulated Deficit

Total Stockholders' Equity

Total Liabilities and Stockholders' Equity

Total Stockholders' Equity (Deficit)

Total Liabilities, Mezzanine and Stockholders' Equity (Deficit)

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE PERIODS ENDED S EPTEMBER 30 , 2019 AND 2018

Three Months Ended September 30,

Nine Months Ended September 30,

For the 3 months ended

March 31, 2020

March 31, 2019

Oil, NGL and Gas Sales

2 unchanged sentences

Costs and Expenses:

Lease Operating

Geological and Geophysical Expense

Well Equipment Write Down

Lease Impairment

Oil and Gas Lease Operating

Depreciation, Depletion and Amortization

Bad Debt Expense

General and Administrative

Geological and Geophysical Expense

Legal and Accounting

Depreciation, Depletion and Amortization

General and Administrative

Total Costs and Expenses

Gain on Turnkey Drilling

Income (Loss) From Operations

Other Income (Loss):

Loss From Operations

Other Income (Expense):

Interest Expense

Gain on Settlement of Payables

Gain on Settlement of Accounts Payable

Loss on Sale of Assets

Gain (Loss) on Investment in Joint Venture

Loss on Derivative Instruments

Loss on Issuance of Warrants

Income (Loss) Before Income Tax Expense

1 unchanged sentence

Preferred Stock Dividend

Preferred Stock Dividend in Arrears

Net Income (Loss) Attributable to

Common Shareholders

Shares used in computing Basic Net Income (Loss) per share

Basic Net Income (Loss) Per Share

Shares used in computing Diluted Net Income (Loss) per share

Diluted Net Income (Loss) Per Share

Net Income (Loss) available to common stock

Shares used in computing Basic Net Loss per share

Basic and Diluted (Loss) Per Share

Shares used in computing Diluted Net Loss per share

(Loss) Per Share

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

FOR THE three MONTHS ENDED March 31 , 2020 AND 2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

Adjustments to Reconcile Net Loss to Net

Cash Used in Operating Activities:

Cash Provided by ( Used in ) Operating Activities:

Depreciation, Depletion and Amortization

Loss on Lease Impairment

Loss on Sale of Assets

Gain on Turnkey Drilling Programs

Gain on Settlement of Payables

Loss on Investment in Joint Venture

Loss on Issuance of Warrants

(Gain) Loss on Sale of Assets

(Gain) Loss on Turnkey Drilling Programs

(Gain) Loss on Settlement of Accounts Payable

(Gain) Loss on Investment in Joint Venture

Bad Debt Expense

Well Equipment Write Down

Loss on Derivative Instruments

Geological & Geophysical Costs

Stock Based Compensation

Debt Issuance Costs Amortization

Right of use asset depreciation

(Increase) Decrease in:

3 unchanged sentences

Accounts Payable and Accrued Expenses

Royalties Payable

Due to Affiliate

Other Liabilities

Net Cash Used in Operating Activities

Net Cash Provided (Used) in Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

1 unchanged sentence

Proceeds from Turnkey Drilling Programs

Proceeds from Sale of Assets, net

Cash Acquired in Merger

Net Cash Provided by Investing Activities

Net Cash Provided (Used) by Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Principal Payments on Long-Term Debt

Principal Payments on Seismic Financing Agreement

Cash Advances on Pending Transactions Settlement

Net Cash Used by Financing Activities

Seismic Financing Agreement

Net Cash Provided (Used) by Financing Activities

Net Increase (Decrease) in Cash and Cash Equivalents

4 unchanged sentences

Cash Paid for Taxes

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:

Issuance of Common Stock in Acquisition

Issuance of Convertible Preferred Stock, Series B, in Acquisition

Issuance of Warrants in Joint Venture

Issuance of Common Stock for Cash Advances and Interest

Asset Retirement Obligation Addition

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

( UNAUDITED )

Preferred Stock

Preferred Stock Series B

Shares Issued

3 unchanged sentences

Comprehensive Deficit

Nine Months Ended September 30, 2018

December 31, 2019 Balance

Matrix Merger

Stock issued for conversion of notes pursuant to merger agreement

Warrants issued to CIC with Sale of Assets to RMX

Preferred Series B 3.5% Dividend

September 30, 2018 Balance

Nine Months Ended September 30, 2019

December 31, 2018 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2019 Balance

Three Months Ended September 30, 2018

June 30, 2018 Balance

Preferred Series B 3.5% Dividend Adjustment

Preferred Series B 3.5% Dividend

September 30, 2018 Balance

Three Months Ended September 30, 2019

June 30, 2019 Balance

Reclassify Preferred B to Mezzanine

March 31, 2020 Balance

Preferred Stock Series B

Shares Issued

and Outstanding

Shares Issued

and Outstanding

Comprehensive Deficit

December 31, 2018 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2019 Balance

Implementation of ASC 842 - Lease Accounting

March 31, 2019 Balance

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – In the opinion of management, the accompanying unaudited financial statements include all adjustments, necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented.

The results of operations for the nine-month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations.

NOTE 1 – In the opinion of management, the accompanying unaudited condensed consolidated financial statements (“statements”) include all adjustments, necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented.

The results of operations for the three-month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations.

It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report as filed on Form 10-K.

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Liquidity and Going Concern

The Company has had recurring operating and net losses and cash used in operations and the consolidated financial statements reflect a working capital deficiency of $5,662,446 and an accumulated deficit of $73,652,310.

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 2020 financial statements reflect a working capital deficiency of $4,550,447 and a net loss from operations of $889,959.

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

We anticipate that our primary sources of liquidity will be from the sale of oil & gas in the course of normal operations, the sale of oil and gas property, sales of participation interest and possible issuance of debt and/or equity.

If the Company is unable to generate sufficient cash from operations or financing sources, it may become necessary to curtail, suspend or cease operations, sell property, or enter into financing transaction(s) on less favorable terms;

any such outcomes could have a material adverse effect on the Company’s business, results of operations, financial position and liquidity.

Additionally, management has, and plans to continue, to increase revenue and reduce overhead and Lease Operating Expense (LOE) costs.

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.

The accompanying 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, which may be more difficult in light of the volatility created during the COVID-19 pandemic.

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.

Consolidation

The accompanying consolidated financial statements include the accounts of Royale Energy, Inc.

The accompanying financial statements include the accounts of Royale Energy, Inc.

(sometimes called the “Company” “we,” “our,” “us,” “Royale Energy,” or “Royale”), Royale Energy Funds, Inc.

(“REF”), and Matrix Oil Management Corporation and its subsidiaries.

All entities comprising the consolidated financial statements of Royale Energy have fiscal years ending December 31.

All material intercompany accounts and transactions have been eliminated in the consolidated financial statements.

All entities comprising the financial statements of Royale Energy have fiscal years ending December 31.

All material intercompany accounts and transactions have been eliminated in the financial statements.

Correction of an Immaterial Error in Previously Issued Financial Statements

Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2019, the Company concluded that the Statement of Cash Flows for the year ending December 31, 2019 contained an immaterial error related to the classification of payments arising from operating leases as net cash used in financing activities rather than net cash used in operating activities.

This immaterial error has been corrected for the comparative period shown by reclassifying $35,207 from cash flows from financing activities to cash flows used in operating activities for the year ending December 31, 2019.

This immaterial error did not have any impact on our financial position, net loss or total cash flow for the year ending December 31, 2019.

Use of Estimates

1 unchanged sentence

Actual results could differ from those estimates.

As reflected in the accompanying financial statements, the Company has negative working capital, losses from operations and negative cash flows from operations.

Material estimates that are particularly susceptible to significant change relate to the estimate of Company oil and gas reserves prepared by an independent engineering consultant.

17 unchanged sentences

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 during 1 st quarter 2019.

The Company recorded a loss of $1,237,126 on the settlement during the three months ended March 31, 2019.

West Coast Settlement

3 unchanged sentences

On July 11, 2019, Royale entered into a post-closing settlement as called for under the terms of the West Coast Agreement calling for payment due seller of $156,975 to be made in equal monthly payments of $26,163 commencing July 31, 2019 with the final payment on December 31, 2019.

As part of the post-closing settlement, we capitalized approximately $165,000 to the North Jameson field and increased short term liabilities for approximately $165,000, approximately $157,000 for the total settlement payments and $8,000 for royalties payable assumed in the settlement.

Vanco Agreement

On September 10, 2019, Royale granted to Vanco Oil and Gas Corporation, the right to purchase all of Matrix’s right, title and interest in certain non-operated oil and gas properties in west Texas.

While the purchase has not been consummated, the company is engaged in an ongoing effort to complete this, or a similar transaction in the near future.

Revenue Recognition

The majority of our ongoing 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.

For the Three Months

Ended September 30,

For the Nine Months

Ended September 30,

For the three months ended March 31 ,

Oil & Condensate Sales

Natural Gas Sales

Oil, NGL and Gas Sales

The pricing in our hydrocarbon sales agreements are variable, determined using various published benchmarks which are adjusted for negotiated quality and location differentials.

3 unchanged sentences

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.

When we serve as the operator for jointly owned oil and gas properties, 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.

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, accordingly, these reimbursements are not reported as revenue.

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

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

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.

9 unchanged sentences

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 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.

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 Pacific Gas & Electric (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.

Turnkey Drilling Obligations

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 (Extractive Activities - Investments - Equity Method and Joint Ventures) and 932-360 (Extractive Activities - Oil and Gas Property, Plant, and Equipment).

Turnkey Drilling

These Turnkey Agreements are managed by the Company for the participants of the well.

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.

At September 30, 2019 we had Deferred Drilling Obligations of $6,077,583, during the first nine months of 2019 we disposed of $9,382,519 of drilling obligations upon completing the drilling of eight wells, six natural gas wells in Northern California and two oil wells in Southern California, while incurring expenses of $7,484,260 resulting in a gain of $1,898,259.

At September 30, 2018, Royale Energy had a Deferred Drilling Obligation of $5,406,678.

During the first nine months of 2018, we disposed of $4,797,720 of drilling obligations upon completing the drilling of three natural gas wells in Northern California while incurring expenses of $2,603,261, resulting in a gain of $2,194,459.

Supervisory Fees and Other

These amounts include proceeds from the MSA with RMX for the providing of land, engineering, accounting and support services for the RMX joint venture.

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

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

During the first half of 2019, we recognized $540,000 or 39% of our total revenues from these services.

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

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.

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

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

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

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

Restricted Cash

Royale sponsors turnkey drilling arrangements in both proved and exploratory properties.

Royale sponsors turnkey drilling arrangements in proved and unproved properties.

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

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

Royale classifies these funds prior to drilling as restricted cash.

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 consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows:

September 30 ,

March 31, 2020

December 31, 2019

Cash and Cash Equivalents

3 unchanged sentences

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.

1 unchanged sentence

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 Joint Venture (JV), reflect our share of net earnings or losses directly attributable to this equity method investment.

We evaluated our investment in RMX as of March 31, 2020 and determined that any losses were not other than temporary.

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

RMX Resources

Royale Energy, Inc.

September 30,

December 31, 2018

September 30,

For the period ended

March 31, 2020

December 31, 2019

2 unchanged sentences

Member Equity

RMX Resources

Royale Energy, Inc.

For the three months ended September 30, 2019

For the nine months ended September 30, 2019

For the three months ended September 30, 2019

For the nine months ended September 30, 2019

For the 3 months ended

March 31, 2020

March 31, 2019

Results of Operations:

Net Operating revenue

Income (Loss) from operations

Loss from operations

Net Income (Loss)

5 unchanged sentences

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

At September 30, 2019 and December 31, 2018, the Company maintained an allowance for uncollectable accounts of $2,260,077 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.

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 for Company operated properties.

For outside operated properties, we generally receive payment approximately 45 to 60 days later.

At March 31, 2020 and December 31, 2019, the Company maintained an allowance for uncollectable accounts of $1,868,508 and $1,791,162, respectively, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

Fair Value Measurements

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

According to Fair Value Measurements and Disclosures Topic of the FASB 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.

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

The Company estimates the fair value of asset retirement obligations (ARO’s) based on discounted cash flow projections using numerous estimates, assumptions and judgements regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates.

At September 30, 2019 and December 31, 2018, Royale Energy did not have any financial assets measured and recognized at fair value on a recurring basis.

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

At March 31, 2020 and December 31, 2019, Royale Energy does not have any financial assets measured and recognized at fair value on a recurring basis.

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

The estimates of the fair value the ARO’s are based on discounted cash flow projections using numerous estimates, assumptions and judgements regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates.

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.

3 unchanged sentences

These items are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances.

Dividends on Convertible Preferred Stock, Series B

The Convertible Preferred Stock, Series B (“Preferred”), has an obligation to pay a 3.5% cumulative dividend, in kind or cash, on a quarterly basis.

In the first quarter of 2019, the Board of Directors authorized the issuance of Preferred shares, for the settlement of dividends accumulated through March 31, 2019.

As a result, the Company issued 59,461 Preferred shares for dividends accumulated through December 31, 2018 and 17,879 additional shares for dividends accumulated for the quarter ended March 31, 2019.

On September 20, 2019, the Board authorized the settlement, via the issuance of Preferred shares, of each quarterly dividend that will accrue in 2019.

Dividends on Series B Convertible Preferred Stock

The Series B Convertible Preferred Stock, (“Preferred”), has an obligation to pay a 3.5% cumulative dividend, in kind or cash, on a quarterly basis.

In the first quarter of 2019, the Board of Directors authorized the issuance of Preferred shares, for the settlement of dividends accumulated through December 31, 2020.

As a result, the Company accrued $187,200 and $178,794 for dividends related to the Preferred shares during the first quarters of 2020 and 2019, respectively.

Each quarter, the Company charges retained earnings for the accumulating dividend as the amounts add to the liquidation preference of the Preferred.

Through September 30, 2019, the total number of shares issued was 77,340.

For further information regarding the Preferred see Note 3, below.

Accounting Standards

Recently Adopted

ASU 842, Lease Accounting Standard

In February 2016, the FASB issued a new leasing accounting standard, which modified the definition of a lease and established comprehensive accounting and financial reporting requirements for leasing arrangements.

It requires lessees to recognize a lease liability and a right-of-use ("ROU") asset for all leases, including operating leases, with a term of greater than 12 months on the balance sheet.

On January 1, 2019, we adopted the new lease accounting standard as further described in Note 5 using the modified retrospective method and applied to all leases that existed as of that date.

It does not apply to oil & gas mineral leases and contracts to explore for or use minerals, oil, natural gas and similar non-regenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained.

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

ASU 2018-02, Reporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

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

We adopted this standard during the first quarter of 2019.

It did not have a material impact to our financial statements or financial statement disclosures.

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

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

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

The guidance is effective beginning in 2019.

We have not historically used derivatives to hedge our commodity price risk;

this ASU did not have a material impact on our consolidated financial statements.

NOT YET ADOPTED

We adopted the following ASUs during 2020, none of which had a material impact to our financial statements or financial statement disclosures:

ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606

This is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Application of this ASU is not expected to have a material impact on our consolidated financial statements.

Application of this ASU did not have a material impact on our consolidated financial statements.

ASU 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities

Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Application of this ASU is not expected to have a material impact on our consolidated financial statements.

Application of this ASU has not had a material impact on our consolidated financial statements.

ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-400), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

Effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019.

Application of this ASU is not expected to have a material impact on our consolidated financial statements.

ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-720), Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans

Effective for financial statements issued for fiscal years ending after December 15, 2020.

Application of this ASU is not expected to have a material impact on our consolidated financial statements.

Application of this ASU has not had a material impact on our consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for fair value measurement

Effective for fiscal years, and interim periods within those years, beginning after December 15, 2019.

Application of this ASU is not expected to have a material impact on our consolidated financial statements.

ASU 2017-04, Intangible – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued a new ASU that eliminates the requirement to calculate the implied fair value of the goodwill (Step 2 of goodwill impairment test under the current guidance) to measure a goodwill impairment charge.

We anticipate the standard to require entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (measure the charge based on Step 1 under the current guidance).

This standard is effective for us in the first quarter of 2020 and shall be applied on a prospective basis.

Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

We plan to adopt the standard on a prospective basis, and do not expect a material impact on our consolidated results of operations, financial position or cash flows for prior periods.

Application of this ASU has not had a material impact on our financial statements.

NOT YET ADOPTED

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments

Effective for fiscal years beginning after December 15, 2020 including interim periods within those fiscal years.

Earlier application is permitted only for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Application of this ASU is not expected to have a material impact on our consolidated financial statements.

ASU 2016 - 13, Credit Losses - CECL – Current Expected Credit Losses Methodol ogy

The Financial Accounting Standards Board (FASB) issued a new expected credit loss accounting standard in June 2016.

The new accounting standard introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses.

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

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

The standard is effective for SEC filers in fiscal years and interim periods beginning after December 15, 2019.

For public business entities that are not SEC filers, the standard takes effect in fiscal years and interim periods beginning after December 15, 2020.

For an entity that is not a public business entity, it takes effect in fiscal years beginning after December 15, 2020.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments -- Credit Losses ( Topic 326 ) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").

The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under a modified retrospective method approach.

The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's consolidated financial statements.

NOTE 2 – OIL AND GAS PROPERTY AND EQUIPMENT AND FIXTURES

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

September 30,

Producing properties, including drilling costs

5 unchanged sentences

Commercial and Other

Real estate, including furniture and fixtures

Furniture and equipment

3 unchanged sentences

Oil & Gas Property and Equipment and Fixtures

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

We did not make any additions to capitalized exploratory well costs pending a determination of proved reserves during the periods ended September 30, 2019 or in 2018.

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 the periods ended March 31, 2020 or in 2019.

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

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Impairments are measured by the amount the carrying value exceeds fair value.

During the nine months ended September 30, 2019, we recorded a lease impairment of $40,223 on various lease and land costs that were no longer viable.

During the nine months ended September 30, 2018, no impairment losses were incurred.

During the three months ended March 31, 2020 and 2019, no impairment losses were incurred.

Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that Royale Energy expects to hold the properties.

17 unchanged sentences

Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations.

At September 30, 2019 and December 31, 2018, Royale Energy had Deferred Drilling Obligations of $6,077,583 and $6,213,283, respectively.

At March 31, 2020 and December 31, 2019, Royale Energy had Deferred Drilling Obligations of $4,025,589 and $5,232,675, 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 contract and return the remaining funds to the participant.

1 unchanged sentence

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.

NOTE 3 – LOSS PER SHARE

Basic and diluted loss per share are calculated as follows:

Three Months Ended September 30,

Preferred Stock Dividend

Preferred Stock Dividend in Arrears

Net (Loss) Attributable to Common Shareholders

Weighted average common shares outstanding

Effect of dilutive securities

Weighted average common shares, including Dilutive effect

Nine Months Ended September 30,

NOTE 3 - SERIES B PREFERRED STOCK

On March 7, 2018, the Company was 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”).

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 became entitled to vote the number of shares into which they would be entitled to convert, beginning in 2020.

In accordance with ASC 480-10-S99-1.02, the Company has determined that the conversion or redemption of these shares are outside the sole control of the Company and that they should be classified in mezzanine or temporary equity as redeemable noncontrolling interest beginning at the reporting period, ended March 31, 2020.

NOTE 4 – NET INCOME (LOSS) PER SHARE

Basic and diluted Net Income (Loss) per share are calculated as follows:

For the 3 months ended

March 31, 2020

March 31, 2019

Net Income (Loss)

Preferred Stock Dividend

Preferred Stock Dividend in Arrears

Net Income (Loss) Attributable to Common Shareholders

Net Income (Loss) Attributable to

Common Shareholders

Weighted average common shares outstanding

Effect of dilutive securities

Weighted average common shares, including Dilutive effect

For the nine months ended September 30, 2019 and 2018, Royale Energy had dilutive securities of 23,967,039 and 24,024,647, respectively.

Weighted average common shares,

including Dilutive effect

Net Income (Loss)

For the three months ended March 31, 2019, Royale Energy had dilutive securities of 23,980,471.

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

5 unchanged sentences

As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2020.

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at September 30, 2019 and 2018, respectively, to pretax income is as follows:

September 30, 2019

September 30, 2018

Tax benefit computed at statutory rate of 21% at September 30, 2019 and 2018, respectively

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at March 31, 2020 and 2019, respectively, to pretax income is as follows:

For the quarter ended

March 31, 2020

March 31, 2019

Tax expense (benefit) computed at statutory rate of 21% at March 31, 2020 and 2019, respectively

Increase (decrease) in taxes resulting from:

1 unchanged sentence

Other non-deductible expenses

Provision-to-Return adjustments

Change in valuation allowance

Provision (benefit)

NOTE 5 – IMPLEMENTATION OF ASC 842 – LEASE ACCOUNTING

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;

2018-10, Codification Improvements to Topic 842, Leases;

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

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

● Operating Lease Liability – Current

● Operating Lease Liability – Long-Term

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

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

Debit (Credit)

● Financing Lease – ROU Asset

● Financing Lease Liability – Current

● Financing Lease Liability – Long-Term

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

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

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

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

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

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

The amounts are as follows:

Nine Months ended

September 30, 2019

Three Months ended

September 30, 2019

Operating lease expense

Financing lease expense

Operating – short-term

Short Term - field

Total lease expense

The following tables summarized the operating and financing lease obligations.

Lease Obligations

Operating Lease Obligations

Financing Lease Obligations

Total Lease Obligations

2019 (remaining 3 months)

Total undiscounted lease payments

Amount representing interest

Total Operating & Financing lease liabilities

Current portion of long-term liabilities as September 30, 2019

Long-term lease liabilities as of September 30, 2019

NOTE 6 – ISSUANCE OF COMMON STOCK

During the nine months ended September 30, 2019, in lieu of cash payments for salaries and fees, Royale issued 1,881,491 shares of its Common stock valued at approximately $455,146 to various officers and board members.

During the three months ended March 31, 2020, in lieu of cash payments for salaries, Royale issued 377,763 shares of its common stock valued at approximately $53,336 to an executive officer, compared to the issuance of 989,966 shares issued with a value of $240,008 in the same period of 2019.

NOTE 7 – SUBSEQUENT EVENT

On April 22, 2020, the Company entered into a loan (the "PPP Loan") evidenced by a promissory note (the "Promissory Note"), under the Paycheck Protection Program sponsored by the U.S.

Small Business Administration ("SBA") through the Bank of Southern California N.A.

providing for $207,800 in proceeds, which amount was funded to the Company on April 23, 2020.

The PPP Loan was made pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA.

The Promissory Note matures April 22, 2022 and provides for 18 monthly payments of principal and interest commencing on November 21, 2020.

The interest rate on the PPP Loan is 1.00%.

The Promissory Note is unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Bank of Southern California N.A., or breaching the terms of the PPP Loan.

The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company.

The Promissory Note principal may be forgiven subject to the terms of the Paycheck Protection Program.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements