What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-14 compared with 2020-11-13 · 191 added, 211 removed, 283 unchanged (59% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

March 31, 2021

December 31, 2020

Current Assets

3 unchanged sentences

Revenue Receivables

Assets Held for Sale

Prepaid Expenses

1 unchanged sentence

Total Current Assets

Investment in Joint Venture

Right of Use Assets - Leases

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

March 31, 2021

December 31, 2020

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

4 unchanged sentences

Due to RMX Resources, LLC

Asset Retirement Obligation - Current

Deferred Drilling Obligation

Lease Liability - current

Operating Leases - Current

Total Current Liabilities

2 unchanged sentences

Accrued Unpaid Guaranteed Payments

Lease Liability - long-term

Operating Leases - Long Term

Asset Retirement Obligation

3 unchanged sentences

Stockholders' Equity (Deficit):

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

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

2 unchanged sentences

Total Stockholders' Equity (Deficit)

Total Liabilities, Mezzanine Equity and Stockholders' Equity (Deficit)

Total Liabilities and Stockholders' Equity (Deficit)

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the three months ended

For the nine months ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

For the 3 months ended

March 31, 2021

March 31, 2020

Oil, NGL and Gas Sales

4 unchanged sentences

Depreciation, Depletion and Amortization

Lease Impairment

Bad Debt Expense

Geological and Geophysical Expense

Legal and Accounting

2 unchanged sentences

Gain on Turnkey Drilling

Gain (Loss) From Operations

(Loss) From Operations

Other Income (Expense):

1 unchanged sentence

Gain (Loss) on Settlement of Accounts Payable

Gain (Loss) on Sale of Assets

Gain (Loss) on Investment in Joint Venture

Gain on Investment in Joint Venture

Income (Loss) Before Income Tax Expense

1 unchanged sentence

Preferred Stock Dividend

Net Loss available to common stock

Net Income (Loss) Available to Common Stock

Shares Used in Computing Basic Net Loss Per Share

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE nine MONTHS ENDED September 30, 2020 AND 2019

September 30, 2020

September 30, 2019

Cash Flows Used in Operating Activities:

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

March 31, 2021

March 31, 2020

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

Cash Used in Operating Activities:

Depreciation, Depletion and Amortization

Loss on Lease Impairment

(Gain) Loss on Sale of Assets

(Gain) Loss on Turnkey Drilling Programs

(Gain) on Turnkey Drilling Programs

(Gain) Loss on Settlement of Accounts Payable

(Gain) Loss on Investment in Joint Venture

(Gain) on Investment in Joint Venture

Bad Debt Expense

Right of Use Asset Depreciation

Stock Based Compensation

Geological & Geophysical Costs

Gain on Other

(Increase) Decrease in:

Right of use asset depreciation

Changes in assets and liabilities

Other & Revenue Receivables

1 unchanged sentence

Accounts Payable and Accrued Expenses

Royalties Payable

Due to Affiliate

Other Liabilities

Net Cash (Used in) Operating Activities

2 unchanged sentences

Proceeds from Turnkey Drilling Programs

Net Cash Provided (Used) by Investing Activities

Net Cash (Used in) Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from Long-Term Debt

Principal Payments on Long-Term Debt

Principal Payments on Seismic Financing Agreement

Net Cash Provided (Used) by Financing Activities

Net Increase (Decrease) in Cash and Cash Equivalents

Net Cash (Used in) Financing Activities

Net (Decrease in) Cash and Cash Equivalents

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

2 unchanged sentences

Cash Paid for Taxes

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:

Increase (Decrease) in Capital Accrued Balance

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Accumulated Comprehensive

December 31, 2018 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2019 Balance

Accumulated Comprehensive

Preferred Stock Series B

Shares Issued

and Outstanding

Shares Issued

and Outstanding

Comprehensive Deficit

December 31, 2019 Balance

2 unchanged sentences

Reclassify Preferred B to Mezzanine

September 30, 2020 Balance

Accumulated Comprehensive

June 30, 2019 Balance

March 31, 2020 Balance

Preferred Stock Series B

Shares Issued

and Outstanding

Shares Issued

and Outstanding

Comprehensive Deficit

December 31, 2020 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2019 Balance

Accumulated Comprehensive

June 30, 2020 Balance

Preferred Series B 3.5% Dividend

Stock Issued in lieu of Compensation

September 30, 2020 Balance

March 31, 2021 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 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 nine-month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations.

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

The Company has a substantial investment in RMX Resources, LLC (“RMX”), a joint venture with CIC RMX LP.

Royale entered into the RMX joint venture on April 13, 2018 and records its interest in RMX under the equity method as further described below.

Liquidity and Going Concern

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

The primary sources of liquidity have historically been issuances of common stock, oil and gas sales through ongoing operations and the sale of oil and gas properties.

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 $4,475,962 as of September 30, 2020 and a net loss of $540,251 for the nine months ended September 30, 2020.

At March 31, 2021, the Company has $1.529 million in Long Lived Assets Held for Sale (see Prospective East LA Sale below).

At March 31, 2021, the Company’s consolidated financial statements reflect a working capital deficiency of $4,337,733 and a net loss from operations of $581,393.

These factors raise substantial doubt about our ability 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.

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, 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.

Prospective East LA Sale

The Company and its joint venture partner, RMX, have entered into a purchase and sales agreement as well as a second amendment to that certain purchase and sales agreement extending the closing date to the second quarter of 2021.

The Company carries these assets on the books for $1.9 million with an ARO amount of approximately $1.1 million for the existing wells and facilities located on the properties providing a net book value of approximately $0.846 million.

The sale would require the Company to plug and abandon the wells on the property and remove and restore the surface land with an estimated cost of $0.721 million.

The sale price is approximately $1.0 million to the Company.

At December 31, 2020 the Company recorded a loss on the pending sale of these properties of $0.567 million and reflect Assets Held for Sale of $1.0 million reflected in current assets with an ARO balance of $0.721 million in current liabilities.

Consolidation

4 unchanged sentences

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

Correction of Immaterial Errors 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 immaterial errors related to the classification of payments arising from operating leases and to the quantification of the amount of capital expenditures that had been accrued for but not yet paid.

These immaterial errors have been corrected for the comparative period, resulting in an increase in cash flows used in operating activities of $681,388;

an increase in cash flows provided by investing activities of $585,918;

and a decrease in cash flows used in financing activities of $95,470 for the period ending September 30, 2019.

These immaterial errors did not have any impact on our financial position, net loss or total cash flow for the period ending September 30, 2019.

Use of Estimates

4 unchanged sentences

Estimated reserves are used in the calculation of depletion, depreciation and amortization, unevaluated property costs, impairment of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.

Termination of RMX MSA

On December 31, 2018, Royale was formally notified of RMX Resources, LLC’s intent to terminate the Master Service Agreement (“MSA”) as of March 31, 2019.

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

Thereafter, per Article VII, Section 7.2 of the MSA, Royale provided all reasonable assistance requested, by the RMX Board of Directors, to transition the management of RMX through April 30, 2019 at which point all services under the MSA terminated.

Settlement Agreement and Well Participation Agreement with RMX

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

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

In addition, there were other disputed amounts related to certain joint owner billing amounts which remained unpaid at year end.

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

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

At December 31, 2018, the Bellevue and W.

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

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

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

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

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

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

West Coast Settlement

On December 5, 2018, Royale entered into a Purchase and Sale Agreement (“West Coast Agreement”) for properties located in the Jameson North Field Area in Mitchell and Nolan Counties, Texas and the Big Mineral Creek Field Area in Grayson County, Texas.

The seller was West Coast Energy Properties, LP.

The West Coast Agreement called for a post-closing settlement.

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

Prospective East LA Sale

On June 24, 2020, Royale and RMX Resources, LLC entered into a Purchase and Sale Agreement to sell a portion of property jointly owned by Royale and RMX, located in Los Angeles County, California for a gross price of $2,150,000.

The property is jointly owned by Royale and RMX, and calls for, among other things, the abandonment of one well, located on the subject lands.

The gross sale proceeds to Royale, if and when the sales closes, will be $1,075,000.

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

11 unchanged sentences

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 regarding the sale of our share of production and recognize revenue for the volumes associated with our net 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.

13 unchanged sentences

Turnkey Drilling

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.

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

For the nine months ended September 30, 2019, the Company recognized $610,971 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 proved and unproved properties.

5 unchanged sentences

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.

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.

Funds received in excess of cost are recognized as Gain on Turnkey Drilling, while cost that exceed participant funds are recorded as capitalized drilling costs.

Restricted Cash

Prior to commencement of drilling, Royale classifies turnkey drilling funds 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, 2021

December 31, 2020

Cash and Cash Equivalents

7 unchanged sentences

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.

As of September 30, 2020, we evaluated our investment in RMX 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:

September 30, 2020

December 31, 2019

Balance Sheet

Total Liabilities

Member Equity

For the 9 months ended

September 30, 2020

September 30, 2019

Results of Operations:

Net Operating revenue

Income (Loss) from operations

Net Income (Loss)

For the 3 months ended

September 30, 2020

September 30, 2019

Results of Operations:

Net Operating revenue

Income (Loss) from operations

Net Income (Loss)

At year-end 2020, we evaluated our investment in RMX and determined that an allowance for the full value of the asset was warranted.

As a result of the valuation allowance, the Company has not included any gain or loss on its Investment in Joint Venture for the period ended March 31, 2021.

During the period ended Mach 31, 2020, the Company recorded a gain of $1,309,851 reflecting our share of net earnings or losses directly attributable to this equity method investment.

For the period ending March 31, 2021, no gain or loss was recorded as a result of the valuation allowance.

Other Receivables

4 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, 2020 and December 31, 2019, the Company maintained an allowance for uncollectable accounts of $1,942,911 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.

At March 31, 2021 and December 31, 2020, the Company maintained an allowance for uncollectable accounts of $2,582,093, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

Fair Value Measurements

11 unchanged sentences

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

At September 30, 2020 and December 31, 2019, Royale Energy does not have any financial assets measured and recognized at fair value on a recurring basis.

At March 31, 2021 and December 31, 2020, 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 ”.

7 unchanged sentences

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.

The Company accrued $192,583 and $185,971 for dividends related to the Preferred shares during the third quarters of 2020 and 2019, respectively.

In the third quarter of 2020, the Board of Directors authorized the issuance of Preferred shares, for the settlement of dividends accumulated through December 31, 2021.

The Company accrued $191,718 and $187,200 for dividends related to the Preferred shares during the first quarters of 2021 and 2020, respectively.

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

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

Risks and Uncertainties

In December 2019, a novel strain of coronavirus (which triggers a respiratory disease called COVID-19) was reported in Wuhan, China.

The World health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” The COVID-19 outbreak has caused a major reduction in the consumption of hydrocarbon-based transportation fuels as airlines have grounded flights worldwide and countries around the world have asked residents to suspend automobile travel.

In addition to a substantial loss of demand for crude oil, in March, Saudi Arabia entered into a price war with Russia and added additional supplies of crude oil to an already over supplied market.

The result was a precipitous decline in the price of crude oil received by the Company in 2020.

At March 31, 2021, the price of West Texas Intermediate crude oil had reached $59.16 per barrel.

ACCOUNTING STANDARDS

Recently 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 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 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 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 has not had a material impact on our consolidated financial statements.

ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12 simplifying the accounting for income taxes.

The updated guidance is intended to simplify the accounting for income taxes by removing certain exceptions contained in existing guidance, and clarifying or amending existing guidance to simplify other income tax accounting matters.

The Company adopted this new standard on January 1, 2021, and there was no material impact on its condensed consolidated financial statements.

Not Yet Adopted

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

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.

ASU 2016-13, Credit Impairment

In June of 2016, the FASB issued ASC Topic 326, Financial Instruments – Credit Losses.

This new guidance replaces the current incurred loss impairment model with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased.

This new Current Expected Credit Losses (“CECL”) model applies to (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and financial assets measured at fair value, and (4) beneficial interests in securitized financial assets.

This ASU was effective for SEC filers beginning after December 15, 2019;

however, on November 15, 2019, the FASB issued ASU 2019-10, which delayed the effective date for “smaller reporting companies.” Therefore, ASU 2016-13 is effective for "smaller reporting companies" (as defined by the Securities and Exchange Commission) such as Royale, for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under the modified retrospective method.

Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those years.

Adoption of this standard is not expected to have a material impact on our consolidated financial statements and cash flows.

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

Undeveloped or unevaluated properties

Undeveloped properties

Lease and well equipment

Total Oil & Gas

Accumulated depletion, depreciation & amortization

Total Oil & Gas Net

Net capitalized costs Total

Commercial and Other

Furniture and equipment

Total Commercial and Other

Accumulated depreciation

Total Commercial and Other Net

Oil & Gas Property and Equipment and Fixtures

Net capitalized costs Total

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.

30 unchanged sentences

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

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

During the nine months ended September 30, 2020, no impairment losses were incurred.

During the three months ended March 31, 2021 and 2020, 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, 2020 and December 31, 2019, Royale Energy had Deferred Drilling Obligations of $3,870,774 and $5,232,675, respectively.

At March 31, 2021 and December 31, 2020, Royale Energy had Deferred Drilling Obligations of $2,747,439 and $3,127,500, 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.

2 unchanged sentences

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 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% annual dividend, payable quarterly in cash or Paid-In-Kind (“PIK”) 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 stock 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.

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.

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.

For 2021 and 2020, the board authorized the payment of each quarterly dividend of Series B Convertible Preferred shares, as “PIK” to be paid immediately following the end of the quarter.

For the quarter ending March 31, 2021, the Company issued 19,172 shares with a value of $191,718.

During 2021 and 2020 no cash was used to pay dividends on Series B preferred shares.

NOTE 4 – LOSS PER SHARE

Basic and diluted loss per share are calculated as follows:

Three Months ending

September 30, 2020

September 30, 2019

Net Income (Loss)

Preferred Stock Dividend

Preferred Stock Dividend In Arrears

Net Income (Loss) Attributable to

Common Shareholders

Weighted average common shares outstanding

Effect of dilutive securities

Weighted average common shares, including Dilutive effect

Net Income (Loss)

Nine Months ending

September 30, 2020

September 30, 2019

For the period ending

March 31, 2021

March 31, 2020

Net Income (Loss)

1 unchanged sentence

Preferred Stock Dividend In Arrears

Net Income (Loss) Attributable to

Common Shareholders

Net Income (Loss) Attributable to Common Shareholders

Weighted Average Common Shares Outstanding

2 unchanged sentences

Net Income (Loss)

For the nine months ended September 30, 2020 and 2019, Royale Energy had dilutive securities of 25,160,750 and 23,967,039, respectively.

For the three months ended September 30, 2020 and 2019, Royale Energy had dilutive securities of 25,166,967 and 23,938,358, respectively.

For the three months ended March 31, 2021, Royale Energy had dilutive securities of 26,119,183.

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 2021.

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at September 30, 2020 and 2019, respectively, to pretax income is as follows:

Nine months ended

September 30, 2020

September 30, 2019

Tax benefit computed at statutory rate of 21% at September 30, 2020 and 2019, 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, 2021 and 2020, respectively, to pretax income is as follows:

For the quarter ended

March 31, 2021

March 31, 2020

Tax expense (benefit) computed at statutory rate of 21% at March 31, 2021 and 2020, respectively

Increase (decrease) in taxes resulting from:

1 unchanged sentence

Other non-deductible expenses

Provision-to-Return Adjustments

Change in valuation allowance

1 unchanged sentence

NOTE 6 – ISSUANCE OF COMMON STOCK

During the nine months ended September 30, 2020, in lieu of cash payments for salaries and board fees, Royale issued 2,273,245 shares of its Common stock valued at approximately $288,876 to an executive officer and board members, compared to the issuance of 1,881,491 shares issued with an approximate value of $455,146 in the same period of 2019.

NOTE 7 – Cares act – ppp loan

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.

During the period, the Company submitted an application for loan forgiveness for the full amount outstanding.

On November 10, the Company received notice that the SBA has remitted funds to the initiating bank in the amount of $198,846 in repayment of its PPP loan, leaving a balance of $10,054.

During the three months ended March 31, 2021, in lieu of cash payments for salaries and board fees, Royale issued 1,023,413 shares of its Common stock valued at approximately $118,736 to an executive officer and board members, compared to the issuance of 377,763 shares issued with an approximate value of $53,336 in the same period of 2020.

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

FORWARD-LOOKING STATEMENTS

In addition to historical information contained herein, this discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, subject to various risks and uncertainties that could cause our actual results to differ materially from those in the “forward-looking statements”.

While we believe our forward-looking statements are based upon reasonable assumptions, there are factors that are difficult to predict and that are influenced by economic and other conditions beyond our control.

Investors are directed to consider such risks and other uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission.

RESULTS OF OPERATIONS

In late 2019 and continuing into 2021, 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.

For more information, see Item 3 below.

For the three months ended March 31, 2021, we had a net loss of $572,167 compared to the net income of $384,362, during the three months ended March 31, 2020.

The difference was primarily the result of a gain of $1.3 million relating to our equity method investment in RMX recorded during the three months ended March 31, 2020.

During the fourth quarter in 2020, it was determined that an allowance for the full value of the asset was warranted so there was no comparative gain or loss in the current year period.

During the first three months of 2021, revenues from oil and gas production increased $24,452 or 6.5% to $398,937 from the 2020 first three months revenues of $374,485.

This increase was mainly due to higher oil and natural gas commodity prices.

The net sales volume of oil and condensate for the three months ended March 31, 2021, was approximately 5,574 barrels with an average price of $56.08 per barrel, versus 5,031 barrels with an average price of $47.87 per barrel for the first three months of 2020.

This represents an increase in net sales volume of 543 barrels or 10.8%.

This increase was due to wells drilled and placed into production during the year in 2020 and to lower volumes produced during the first quarter of 2020.

The net sales volume of natural gas for the three months ended March 31, 2021, was approximately 29,659 Mcf with an average price of $2.91 per Mcf, versus 52,453 Mcf with an average price of $2.55 per Mcf for the same period in 2020.

This represents a decrease in net sales volume of 22,794 Mcf or 43.5%.

The decrease in natural gas production volume was due to certain wells that were offline and waiting on workovers and to lower volumes on existing wells due to natural declines.

Oil and natural gas lease operating expenses decreased by $103,291 or 25.6%, to $300,162 for the three months ended March 31, 2021, from $403,453 for the same period in 2020.

This was lower due mainly to decreases in outside operated lease operating costs as certain non-operated wells were either disposed of during the year in 2020 or offline and waiting on workovers.

Depreciation, depletion and amortization expense increased to $124,405 from $79,935, an increase of $44,470 or 55.6% for the three months ended March 31, 2021, as compared to the same period in 2020.

The depletion rate is calculated using production as a percentage of reserves.

This increase in depletion expense was due to increased capitalized well costs for wells drilled during 2020 and to a decrease in expected recoverable reserves which increased the depletion rate.

At March 31, 2021, Royale Energy had a Deferred Drilling Obligation of $2,747,439.

During the first three months of 2021, we disposed of $1,841,061 of drilling obligations upon completing the drilling of two oil wells in Texas, while incurring expenses of $1,576,280, resulting in a gain of $264,780.

At March 31, 2020, Royale Energy had a Deferred Drilling Obligation of $4,025,589.

During the first three months of 2020, we disposed of $2,382,086 of drilling obligations upon completing the drilling of two wells, one oil well in Southern California and one oil well in Texas, while incurring expenses of $2,344,311, resulting in a gain of $37,775.

General and administrative expenses increased by $43,920 or 8.4% to $564,983 for the three months ended March 31, 2021, from $521,063 for the same period in 2020.

This increase was mainly due to absorption of a greater percentage of drilling management costs.

Production and drilling overhead offset general and administrative costs.

During the first quarter of 2020 four wells were completed.

Marketing expense for the three months ended March 31, 2021, increased $4,655, or 13.5%, to $39,049, compared to $34,394 for the same period in 2020.

Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs.

Legal and accounting expense increased to $218,763 for the three month period in 2021, compared to $86,535 for the same period in 2020, a $132,228 or 152.8% increase.

These increases were primarily due to the timing of the receipt of invoices for audit related expenses during the periods in 2021 and 2020.

During the three months ended March 31, 2020, we recorded a gain of $1,309,851, on investment in joint venture as our 20% share of RMX Resources, LLC’s.

As a result of recognizing an impairment for the full value of the investment, the company did not recognize any gain or loss in subsequent periods.

See note Equity Method Investment in Note 1 above.

During the quarter ended March 31, 2021, we recorded a gain on settlement of $10,061 due to the payment by the SBA of the remaining balance on our PPP loan obtained in 2020.

During the three months ended March 31, 2020, we recorded a loss on settlement of $31,500 related to a 2018 seismic sales agreement.

Bad debt expense for the periods ended March 31, 2021 and 2020 were $74 and $186,168, respectively.

During the period in 2020 approximately $106,000 was related to revenue receivable from an industry partner whose collectability was in doubt.

Approximately $80,000 of the expenses in 2020 arose from identified uncollectable receivables relating to our oil and natural gas properties either plugged and abandoned or scheduled for plugging and abandonment and our period end oil and natural gas reserve values.

We periodically review our accounts receivable from working interest owners to determine whether collection of any of these charges appears doubtful.

By contract, the Company may not collect some charges from its Direct Working Interest owners for certain wells that ceased production or had been sold during the year, to the extent that these charges exceed production revenue.

Interest expense decreased to $835 for the three months ended March 31, 2021, from $4,030 for the same period in 2020, a $3,195 decrease.

This decrease was mainly due to lower principal balances on notes payable during the three-month period in 2021.

CAPITAL RESOURCES AND LIQUIDITY

At March 31, 2021, we had current assets totaling $4,813,096 and current liabilities totaling $9,150,829, a $4,337,733 working capital deficit.

We had $310,617 in cash and $1,999,256 in restricted cash at March 31, 2021, compared to $255,112 in cash and $2,146,571 in restricted cash at December 31, 2020.

In accordance with ASC 480-10-S99 the Company reclassified the Series B Convertible Preferred Stock from Permanent Equity to Mezzanine capital as a result of the change in voting rights provided at the time it of issuance.

For more information, see Note 3 – Series B Convertible Preferred Stock.

At March 31, 2021, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $526,252, compared to $462,777 at December 31, 2020, a $63,475 increase.

This increase was mainly due to higher receivables from direct working interest owners for lease operating expenses for new wells that began production at the end of 2020.

At March 31, 2021, revenue receivable was $208,534, an increase of $4,385, compared to $204,149 at December 31, 2020, due to higher commodity prices during the quarter in 2021.

At March 31, 2021, our accounts payable and accrued expenses totaled $4,622,556, an increase of $461,447 from the accounts payable at December 31, 2020, of $4,161,109, which was mainly due to drilling costs of two wells during the first quarter in 2021.

The Company has had recurring operating and net losses and cash used in operations and the financial statements reflect a working capital deficiency of $4,337,733 and an accumulated deficit of $83,062,670.

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 and 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.

Operating Activities.

Net cash used by operating activities totaled $25,416 and $733,512 for the three months ended March 31, 2021 and 2020, respectively.

This decrease in cash used was mainly due to the difference in accounts payable and accrued expenses during the quarters related mainly to the wells drilled during the periods.

Investing Activities.

Net cash used by investing activities totaled $63,806 and $544,948 for the three months ended March 31, 2021 and 2020, respectively.

During the period in 2021, we received approximately $1.46 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $1.5 million in the drilling and completing of two Texas oil wells.

During the period in 2020, we received approximately $1.2 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $1.7 million in the drilling and completing of one Southern California oil well and one Texas oil wells.

Financing Activities.

Net cash used by financing activities totaled $2,588 and $58,010 for the three months ended March 31, 2021 and 2020, respectively.

During the period in 2021, the total used was for financing lease payments while during the period in 2020, approximately $56,000 were principal payments on our notes payable and $2,437 was for financing lease payments.

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