What changed in this filing

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Item 1. Financial Statements

2023-06-26 compared with 2022-11-17 · 199 added, 242 removed, 264 unchanged (63% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2022

March 31, 2023

December 31, 2022

11 unchanged sentences

Equipment and Fixtures, net

Furniture, Fixtures & Equipment, net

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2022

March 31, 2023

December 31, 2022

3 unchanged sentences

Royalties Payable

Notes Payable

Due to RMX Resources, LLC

11 unchanged sentences

Mezzanine Equity:

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

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

3.5% annual dividend, 2,381,986 and 2,361,154

shares issued and outstanding as of March 31, 2023

and December 31, 2022 respectively

Stockholders' Equity (Deficit):

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

61,876,957 shares issued and outstanding as of

March 31, 2023 and December 31, 2022

Additional Paid in Capital

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the 3 Months ended

For the 9 Months ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

For the three months ended

March 31, 2023

March 31, 2022

Oil, NGL and Gas Sales

4 unchanged sentences

Depreciation, Depletion and Amortization

Bad Debt Expense

Well Equipment Write Down

Legal and Accounting

1 unchanged sentence

Total Costs and Expenses

Gain (Loss) on Turnkey Drilling

Loss From Operations

Gain on Turnkey Drilling

Gain (Loss) From Operations

Other Income (Expense):

Interest Expense

Gain on Other

Gain on Settlement of Accounts Payable

Gain (Loss) on Sale of Assets

Loss Before Income Tax Expense

Income (Loss) Before Income Tax Expense

Income Tax Provision

Net Income (Loss)

Preferred Stock Dividend

Net 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

Diluted Net Income (Loss) per Share

Net Income (Loss) available to common stock

Shares used in computing Basic Net Income/Loss per share

Basic Income (Loss) per share

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

Diluted Income (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, 2022 AND 2021

September 30, 2022

September 30, 2021

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

For the Three Months Ended

March 31, 2023

March 31, 2022

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:

Net Income (Loss)

Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities:

Depreciation, Depletion and Amortization

(Gain) Loss on Sale of Assets

(Gain) Loss on Turnkey Drilling Programs

(Gain) Loss on Settlement of Accounts Payable

Bad Debt Expense

Stock Based Compensation

Gain on Turnkey Drilling Programs

Gain on Settlement of Accounts Payable

Gain on Other

Well Equipment Write Down

Right of use asset depreciation

3 unchanged sentences

Accounts Payable and Accrued Expenses

Royalties Payable

Net Cash Used in Operating Activities

2 unchanged sentences

Proceeds from Turnkey Drilling Programs

Proceeds from Sale of Assets, net

Net Cash Provided by Investing Activities

2 unchanged sentences

Net Cash Used in Financing Activities

Net Increase (Decrease) in Cash and Cash Equivalents

Net Change in Cash and Cash Equivalents

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

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

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:

Cash Paid for Interest

1 unchanged sentence

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:

Increase (Decrease) in Capital Accrued Balance

Series B Paid-In-Kind Dividends

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

Common Shares

Common Amount

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

Number of Shares Issued and Outstanding

Additional Paid in Capital

Accumulated Deficit

Accumulated Comprehensive Deficit

Stockholders' Deficit

December 31, 2021 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2021 Balance

Common Shares

Common Amount

Additional Paid In Capital

Accumulated Deficit

March 31, 2022 Balance

December 31, 2022 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2022 Balance

Common Shares

Common Amount

Additional Paid In Capital

Accumulated Deficit

June 30, 2021 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2021 Balance

Common Shares

Common Amount

Additional Paid In Capital

Accumulated Deficit

June 30, 2022 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

September 30, 2022 Balance

March 31, 2023 Balance

See notes to unaudited condensed consolidated financial statements.

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ACCOUNTING STANDARDS

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 and nine-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.

Consolidation

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 financial statements of Royale Energy have fiscal years ending December 31.

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

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

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

(“REF”), and Matrix Oil Management Corporation and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q.

Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations.

Significant intercompany transactions have been eliminated in the consolidation.

In management’s opinion, all adjustments considered necessary for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.

The consolidated balance sheet as of December 31, 2022 was derived from the audited financial statements at that date.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC.

Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023, or for any other period.

Liquidity and Going Concern

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

At September 30, 2022, the Company’s consolidated financial statements reflect a working capital deficiency of $ 7,094,594 and a net loss of $ 739,184 for the nine months ended September 30, 2022.

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

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

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

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

If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, and reduce overhead until sufficient additional capital is raised to support further operations.

There are factors that give rise to substantial doubt about our 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.

At March 31, 2023, our consolidated financial statements reflect a working capital deficiency of $ 5,548,678 .

Although we had net income of $ 1,002,344 for the three months ended March 31, 2023, there is substantial doubt about our ability to continue as a going concern.

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

Management’s plans to alleviate the going concern by cost control measures that include, among other things, the reduction of overhead costs and the sale of non-strategic assets, and obtaining additional financing.

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

If the we are 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.

6 unchanged sentences

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

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

For the three months ended March 31

Oil & Condensate Sales

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We do not have any issues related to returns or refunds, as product specifications are standardized for the industry and are typically measured when transferred to a common carrier or midstream entity, and other contractual mechanisms (e.g., price adjustments) are used when products do not meet those specifications.

In limited cases, we may also collect advance payments from customers as stipulated in our agreements;

payments in excess of recognized revenue are recorded as contract liabilities on our consolidated balance sheets.

Under our hydrocarbon sales agreements, the entire consideration amount is variable either due to pricing and/or volumes.

We recognize revenues in the amount of variable consideration allocated to distinct units of hydrocarbons transferred to a customer.

Such allocation reflects the amount of total consideration we expect to collect for completed deliveries of hydrocarbons and the terms of variable payment relate specifically to our efforts to satisfy the performance obligations under these contracts.

Our performance obligations under our hydrocarbon sales agreements are to deliver either the entire production from the dedicated wells or specified contractual volumes of hydrocarbons.

We often serve as the operator for jointly owned oil and gas properties.

4 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 in regards to the sale of our share of production and recognize revenue for the volumes associated with our net production.

The Company frequently sells a portion of the working interest in each well it drills or participates in, to third-party investors and retains a portion of the prospect for its own account.

The Company typically guarantees a cost to drill to the third-party drilling participants and records a loss or gain on the difference between the guaranteed price and the actual cost to drill the well.

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

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

We frequently sell a portion of the working interest in each well we drill or participate in to third-party investors and retain a portion of the prospect for our own account.

We typically guarantee a cost to drill to the third-party drilling participants and record a loss or gain on the difference between the guaranteed price and the actual cost to drill the well.

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

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

5 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, 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.

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 except for 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.

1 unchanged sentence

Turnkey Drilling

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.

We sponsor turnkey drilling arrangements in proved and unproved properties.

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

Each participant earns an undivided interest in the well bore at the completion of the well.

A portion of the funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling a well.

If something changes, the Company may designate these funds for a substitute well.

A portion of the funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling a well (“Drilling Funds”).

If something changes, we may designate these funds for a substitute well.

Under certain conditions, a portion of these funds may be required to be returned to a participant.

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

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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

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

We manage these Turnkey Agreements for the participants of the well.

We segregate the collections of pre-drilling AFE amounts 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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 932-323-25 and 932-360.

We manage 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.

Restricted Cash

Royale sponsors turnkey drilling arrangements in proved and unproved properties.

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

Each participant earns an undivided interest in the well bore at the completion of the well.

A portion of the funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling a well.

If something changes, the Company may designate these funds for a substitute well.

Under certain conditions, a portion of these funds may be required to be returned to a participant.

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

Royale classifies these funds prior to commencement of drilling as restricted cash based on guidance codified as under 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.

Prior to commencement of drilling, we classify Drilling Funds as restricted cash based on guidance codified as under 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, 2022

March 31, 2023

December 31, 2022

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

Other Receivables

Other receivables consist of joint interest billing receivables from direct working interest investors and industry partners.

Other Receivables, net

Other receivables, net consist of joint interest billing receivables from direct working interest investors and industry partners.

We provide for uncollectible accounts receivable using the allowance method of accounting for bad debts.

2 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, 2022 and December 31, 2021, the Company maintained an allowance for uncollectable accounts of $ 2,761,398 , for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

At March 31, 2023, and December 31, 2022, we maintained an allowance for uncollectable accounts of $ 2,749,445 and $ 2,757,549 , respectively, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

Fair Value Measurements

1 unchanged sentence

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

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

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

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

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

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

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

At September 30, 2022 and December 31, 2021, 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 ”.

At March 31, 2023 and December 31, 2022, we do not have any financial assets measured and recognized at fair value on a recurring basis.

We estimate 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.

1 unchanged sentence

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

Other receivables will be reflected as Level 3.

The fair value of our other receivables is based on credit factors, oil and gas well reserve profiles and commodity prices both current and forecast specific to these financial instruments.

Fair Values - Non-recurring

The Company applies the provisions of the fair value measurement standard to its non-recurring, non-financial measurements including oil and natural gas property impairments and other long-lived asset impairments.

We applied the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including oil and natural gas property impairments and other long-lived asset impairments.

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

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The Board of Directors authorized the issuance of the Preferred Stock, for the settlement of dividends accumulated through December 31, 2023.

The Company accrued $ 206,485 and $ 199,413 for dividends related to the Preferred Stock during the third quarters of 2022 and 2021, respectively.

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

We accrued $ 205,556 and $ 198,516 for dividends related to the Preferred Stock during the first quarters of 2023 and 2022, respectively.

Each quarter, we charge retained earnings for the accumulating dividend as the amounts add to the liquidation preference of the Preferred Stock.

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

ACCOUNTING STANDARDS

Not Yet Adopted

Recently Adopted

ASU 2016-13, Credit Impairment

4 unchanged sentences

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 SEC) 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.

We adopted this new standard on January 1, 2023, and there is no material impact on our consolidated financial statements.

For further information regarding our adoption of this standard, see Note 7 - ALLOWANCE FOR CREDIT LOSSES below.

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

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

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

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

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

Royale Energy carries, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where Royale Energy is making sufficient progress assessing the reserves and the economic and operating viability of the project.

We use the “successful efforts” method to account for our exploration and production activities.

Under this method, we accumulate our proportionate share of costs on a well-by-well basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred and capitalize expenditures for productive wells.

We amortize the costs of productive wells under the unit-of-production method.

We carry, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where we are making sufficient progress assessing the reserves and the economic and operating viability of the project.

Exploratory well costs not meeting these criteria are charged to expense.

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

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

Production costs are those incurred to operate and maintain our wells and related equipment and facilities.

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

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and administrative expenses related to the production activity.

Proved oil and gas properties held and used by Royale Energy are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Royale Energy estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts and whether carrying amounts should be impaired.

The Company performs the evaluation of carrying amounts at least annually or when economic events or commodity prices indicate that a substantial and measurable change in future cash flows has occurred.

Proved oil and gas properties held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

We estimate the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts and whether carrying amounts should be impaired.

We perform the evaluation of carrying amounts at least annually or when economic events or commodity prices indicate that a substantial and measurable change in future cash flows has occurred.

Cash flows used in impairment evaluations are developed using updated evaluation assumptions for crude oil and natural gas commodity prices.

3 unchanged sentences

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

During the nine months ended September 30, 2022 and 2021, no impairment losses were incurred.

During the three months ended March 31, 2023, and 2022, 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.

The valuation allowances are reviewed at least annually.

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

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

Upon the sale or retirement of a complete field of a proven property, we eliminate the cost from our books, and the resulting gain or loss is recorded to the Statement of Operations.

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

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

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

Should our turnkey drilling agreements include unproved property, total drilling costs incurred to satisfy our obligations are recovered by the total funds received under the agreements.

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

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

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

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

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

Royale Energy completes the drilling activities typically between 10 and 30 days after drilling begins.

The participant retains an undivided or proportional beneficial interest in the property and is also responsible for its proportionate share of operating costs.

Royale Energy retains legal title to the lease.

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

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

and are recognized only upon making this determination after our obligations have been fulfilled.

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

We complete the drilling activities typically between 10 and 30 days after drilling begins.

The participant retains an undivided or proportional beneficial interest in the property and is also responsible for our proportionate share of operating costs.

We retain legal title to the lease.

The participants purchase a working interest directly in the well bore.

1 unchanged sentence

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

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

We hold all funds invested as Deferred Drilling Obligations until drilling is complete.

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

At September 30, 2022 and December 31, 2021, Royale Energy had Deferred Drilling Obligations of $ 10,084,011 and $ 7,824,939 , 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.

At March 31, 2023, and December 31, 2022, we had Deferred Drilling Obligations of $ 6,840,855 and $ 8,129,965 , respectively.

If we are unable to drill the wells, and a suitable replacement well is not found, we would retain the non-refundable portion of the contract and return the remaining funds to the participant.

Included in Restricted Cash are amounts for use in completion of turnkey drilling programs in progress.

2 unchanged sentences

The Preferred Stock is convertible at the option of the security holder at the rate of ten shares of common stock for one share of Preferred Stock.

The Preferred Stock have never been registered under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) and no market exists for the shares.

Additionally, the Preferred Stock 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 holders of the Preferred Stock became entitled to vote the number of shares of the Company’s common stock into which the shares of Preferred Stock 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 2022 and 2021, the board authorized the payment of each quarterly dividend on shares of Preferred Stock, as Paid-In-Kind shares (“PIK”) to be paid immediately following the end of the quarter.

For the quarter ending September 30, 2022, the Company accrued 20,650 shares with a value of $ 206,485 .

During 2022 and 2021 no cash was used to pay dividends shares of the on Preferred Stock.

The Preferred Stock has never been registered under the Exchange Act and no market exists for the Preferred Stock.

Additionally, the Preferred Stock will automatically convert into shares of common stock at any time in which the Volume Weighted Average Price (“VWAP”) of our common stock exceeds $3.50 per share for 20 consecutive trading days, the shares of our common stock are registered with the SEC and the trading volume of common shares exceeds 200,000 shares per day.

Beginning in 2020, the holders of the Preferred Stock became entitled to vote the number of shares of our common stock into which the shares of Preferred Stock would be entitled to convert.

In accordance with ASC 480-10-S99-1.02, we have determined that the conversion or redemption of the Preferred Stock 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 2023 and 2022, the board authorized the payment of each quarterly dividend on shares of Preferred Stock, as Paid-In-Kind shares to be paid immediately following the end of the quarter.

For the quarter ending March 31, 2023, we accrued 20,555 shares with a value of $ 205,556 .

During 2023 and 2022 no cash was used to pay dividends on shares of the Preferred Stock.

NOTE 4 – LOSS PER SHARE

Basic and diluted loss per share are calculated as follows:

Three Months Ended September 30,

Preferred Stock Dividend

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,

Three Months Ended March 31,

March 31, 2023

March 31, 2022

Net Income (Loss)

Preferred Stock Dividend

Net Loss Attributable to Common Shareholders

Net Income (Loss) Attributable to Common Shareholders

Weighted average common shares outstanding

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Weighted average common shares, including Dilutive effect

For the nine months ended September 30, 2022 and 2021, Royale Energy had dilutive securities of 26,867,129 and 26,212,211 , respectively.

For the three months ended September 30, 2022 and 2021, Royale Energy had dilutive securities of 26,827,162 and 26,071,245 , respectively.

In both periods, these securities were not included in the dilutive loss per share, due to their antidilutive nature.

Net Income (Loss)

For the three months ended March 31, 2023 and 2022, we had dilutive securities of 27,113,307 and 26,468,433 , respectively.

In 2022, these securities were not included in the dilutive loss per share, due to their antidilutive nature.

NOTE 5 – INCOME TAXES

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

At the end of 2015, management reviewed the reliability of the Company’s net deferred tax assets, and due to the Company’s continued cumulative losses in recent years, the Company concluded it is not “more-likely-than-not” its deferred tax assets will be realized.

As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2022.

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at September 30, 2022 and 2021, respectively, to pretax income is as follows:

For the nine months ended

September 30, 2022

September 30, 2021

Tax benefit computed at statutory rate of 21 % at September 30, 2022 and 2021, respectively

At the end of 2015, management reviewed the reliability of our net deferred tax assets, and due to our continued cumulative losses in recent years, the we concluded it is not “more-likely-than-not” our deferred tax assets will be realized.

As a result, we will continue to record a full valuation allowance against the deferred tax assets in 2023.

A reconciliation of our provision for income taxes and the amount computed by applying the statutory income tax rates at March 31, 2023 and 2022, respectively, to pretax income is as follows:

For the three months ended

March 31, 2023

March 31, 2022

Tax benefit computed at statutory rate of 21 % at March 31, 2023 and 2022, respectively

Increase (decrease) in taxes resulting from:

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NOTE 6 – ISSUANCE OF COMMON STOCK

During the nine months ended September 30, 2022, in lieu of cash payments for salaries and board fees, Royale issued 5,637,242 shares of its common stock valued at approximately $ 395,006 to an executive officer and board members.

For the nine months ended September 30, 2021, Royale issued 1,634,227 shares of its common stock valued at approximately $ 176,709 to an executive officer and board members.

In April 2023, CIC RMX LP exercised in full its warrant to purchase shares of our common stock.

CIC RMX LP elected to make a cashless exercise of the Warrant and as a result we issued 3,266,055 shares of common stock to the Warrant holder.

During the three months ended March 31, 2023, and 2022, no common shares were issued in lieu of cash payments.

NOTE 7 - ALLOWANCE FOR CREDIT LOSSES

We measure our allowance for losses on other receivables including, under ASC 326.

The following table summarizes the activity in the balance of allowance for credit losses on other receivables for the period indicated:

Balance at December 31, 2022

Provision for credit loss

Write-offs charged against the allowance

Balance at March 31, 2023

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

FORWARD-LOOKING STATEMENTS

In addition to historical information contained herein, certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the SEC, press releases, conferences or otherwise, may be deemed to be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

In addition to historical information contained herein, certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and our representatives in other reports, filings with the SEC, press releases, conferences or otherwise, may be deemed to be “forward-looking statements” within the meaning of Section 21E of the Exchange Act.

This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand, and industry conditions.

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In December 2018, Royale became the operator of a newly acquired field in Texas.

The most significant factors affecting the results of operations are (i) changes in oil and natural gas prices, production levels and reserves, (ii) turnkey drilling activities, and (iii) the increase in future cost associated with abandonment of wells.

The most significant factors affecting our results of operations are (i) changes in oil and natural gas prices, production levels and reserves, (ii) turnkey drilling activities, and (iii) the increase in future cost associated with abandonment of wells.

RESULTS OF OPERATIONS

For the nine months ended September 30, 2022 and 2021, we had net losses of $739,184 and $2,577,999, respectively.

The difference was primarily due to the completion of one oil well in Texas and participating in the drilling and completion of two oil wells in southern California where we recognized a gain on turnkey drilling of $627,136 and to a gain on settlement of accounts payable during the period in 2022 of approximately $422,614.

During the three months ended September 30, 2022 and 2021, we had net losses of $426,331 and $982,328, respectively.

The difference was due to higher oil and gas sales during the third quarter in 2022 and to a $254,295 loss on sale of assets during the third quarter in 2021.

During the first nine months of 2022, revenues from oil and gas production increased $526,783 or 43.8%, to $1,729,129 from revenues of $1,202,346 during the first nine months of 2021.

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

The net sales volume of oil and condensate for the nine months ended September 30, 2022, was approximately 11,330 barrels with an average price of $98.69 per barrel, versus 14,734 barrels with an average price of $62.02 per barrel for the nine months of 2021.

This represents a decrease in net sales volume of 3,404 barrels or 23.1%, which was due to lower production volumes due to natural declines in our wells and to the sale of certain non-operated wells during the period in 2021.

The net sales volume of natural gas for the nine months ended September 30, 2022, was approximately 99,830 Mcf with an average price of $6.04 per Mcf, versus 88,287 Mcf with an average price of $3.26 per Mcf for the same period in 2021.

This represents an increase in net sales volume of 11,543 Mcf or 13.1%.

The increase in natural gas production volume was due to certain non-operated wells that had previously been offline were brought back online at the end of 2021.

For the quarter ended September 30, 2022, revenues from oil and gas production increased $117,040 or 27.5% to $542,510 from the 2021 third quarter revenues of $425,470.

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

The net sales volume of oil and condensate for the quarter ended September 30, 2022, was approximately 3,143 barrels with an average price of $96.37 per barrel, versus 4,564 barrels with an average price of $68.05 per barrel for the third quarter of 2021.

This represents a decrease in net sales volume of 1,421 barrels or 31.1% for the third quarter in 2022.

The net sales volume of natural gas for the quarter ended September 30, 2022, was approximately 34,522 Mcf with an average price of $6.86 per Mcf, versus 26,996 Mcf with an average price of $4.24 per Mcf for the third quarter of 2021.

This represents an increase in net sales volume of 7,526 Mcf or 27.9% for the third quarter in 2022.

Oil and natural gas lease operating expenses increased by $56,186 or 4.8%, to $1,229,177 for the nine months ended September 30, 2022, from $1,172,991 for the same period in 2021.

This increase was mainly due to higher trucking and water disposal costs due to increases in manpower and fuel costs from outside vendors.

For the third quarter in 2022, lease operating expenses decreased $43,421 or 9.5% from the same quarter in 2021 due mainly to lower outside plugging and abandonment costs during the quarter in 2022 when compared to the same quarter in 2021.

The aggregate of supervisory fees and other income was $24,349 for nine months ended September 30, 2022, a decrease of $872 from $25,221 during the same period in 2021.

During the third quarter 2022, supervisory fees and other income increased $189 or 2.7% when compared to the quarter in 2021.

Depreciation, depletion and amortization expense decreased to $301,235 from $397,629, a decrease of $96,394 or 24.2% for the nine months ended September 30, 2022, as compared to the same period in 2021.

During the third quarter 2022, depreciation, depletion and amortization expenses also decreased $46,241 or 44.8%.

For the three months ended March 31, 2023, and 2022, we had net income of $1,002,344 and net loss of $52,351, respectively.

The difference was primarily due to the completion of one oil well in Texas and participating in the drilling and completion of an oil well in the Texas Permian basin where we recognized a gain on turnkey drilling of $1,594,354.

During the first three months of 2023, revenues from oil and gas production increased $51,237 or 10.1%, to $558,451 from revenues of $507,214 during the first three months of 2022.

This increase was mainly due to higher natural gas commodity prices during the period in 2023.

The net sales volume of oil and condensate for the three months ended March 31, 2023, were approximately 4,761 barrels with an average price of $73.03 per barrel, versus 3,889 barrels with an average price of $92.44 per barrel for the three months of 2022.

This represents an increase in net sales volume of 872 barrels or 22.4%, which was due to higher production volumes due to drilling efforts in 2022 and the first quarter of 2023.

The net sales volume of natural gas for the three months ended March 31, 2023, was approximately 30,119 Mcf with an average price of $6.94 per Mcf, versus 33,527 Mcf with an average price of $4.37 per Mcf for the same period in 2022.

This represents a decrease in net sales volume of 3,407 Mcf or 10.2%.

The decrease in natural gas production volume was due to the natural declines in our existing wells.

Oil and natural gas lease operating expenses increased by $161,329 or 38.9%, to $575,797 for the three months ended March 31, 2023, from $414,468 for the same period in 2022.

This increase was mainly due to well equipment repairs and supplies mainly on our Texas Jameson wells to increase production on existing wells.

The aggregate of supervisory fees and other income was $13,374 for three months ended March 31, 2023, an increase of $4,083 from $9,291 during the same period in 2022, mainly due to higher interest income.

Depreciation, depletion, and amortization expense decreased to $59,432 from $124,676, a decrease of $65,244 or 52.3% for the three months ended March 31, 2023, as compared to the same period in 2022.

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

This decrease in depletion expense was due to an increase in expected recoverable developed reserves which decreased the depletion rate.

While recoverable developed reserves increased, the company’s Proved Undeveloped reserves decreased as a result of a downward revision in the number and working interest in undrilled wells.

At September 30, 2022, Royale Energy had a Deferred Drilling Obligation of $10,084,011.

During the first nine months of 2022, we removed $3,185,928 of drilling obligations as we completed one oil well in Texas and participated in completing the drilling of two oil wells in southern California, while incurring expenses of $2,558,792, resulting in a gain of $627,136.

At September 30, 2021, Royale Energy had a Deferred Drilling Obligation of $4,922,439.

During the first nine 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 $1,906,204, resulting in a loss of $65,143.

Although these two wells were originally drilled during the first quarter of 2021, we continued additional work during second quarter 2021 to increase production.

General and administrative expenses decreased by $180,653 or 11.6% to $1,381,282 for the nine months ended September 30, 2022 from $1,561,935 for the same period in 2021.

For the third quarter 2022, general and administrative expenses decreased $127,805 or 26.3% when compared to the same period in 2021.

These decreases were mainly due to lower employee related expenses and other administrative cost reduction measures during the periods in 2022.

For the first nine months of 2022, marketing expenses increased $60,222 or 48.6% to $184,040, compared to $123,818 for the first nine months of 2021.

For the third quarter 2022, marketing expenses increased $8,398 or 20.3% when compared to the third quarter in 2021.

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 $440,130 for the nine-month period in 2022, compared to $338,870 for the same period in 2021, a $101,260 or 29.9% increase.

For the third quarter 2022, legal and accounting expenses increased $30,850 or 49.1%, when compared to the third quarter in 2021.

These increases were primarily due to higher outside accounting fees mainly related to conversion of our accounting software during the period in 2022.

During the nine months ended September 30, 2022, we recorded a gain of $422,614 on settlement of accounts payable for a reduced amount.

During the nine months ended September 30, 2021, we recorded a loss of $254,295 on the sale of certain non-operated California properties, we also recorded a gain of $291,249 on the sale of certain non-operated Texas properties.

In both instances, these non-operated properties were originally acquired during the merger with Matrix and booked as Held for Sale at the end of 2020, this resulted in a net gain on sale of assets of $36,954.

During period in 2021, we also recorded a gain on settlement of $12,071 mainly due to the payment by the SBA of the remaining balance on our PPP loan obtained in 2020.

Bad debt expense for the nine months ended September 30, 2022 and 2021 were $0 and $187,348, respectively.

Approximately $180,000 of the expenses in 2021 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 for the nine months ended September 30, 2022 and 2021, were $6,548 and $6,857, respectively.

At March 31, 2023, Royale Energy had a Deferred Drilling Obligation of $6,840,855.

During the first three months of 2023, we removed $2,561,610 of drilling obligations as we completed one oil well in our Texas Jameson field and participated in the drilling and completion of another oil well in the Permian Basin in Texas, while incurring expenses of $967,256, resulting in a gain of $1,594,354.

At March 31, 2022, Royale Energy had a Deferred Drilling Obligation of $8,264,570.

During the first three months of 2022, we removed $2,055,369 of drilling obligations as we participated in the drilling and completion of two oil wells in southern California while incurring expenses of $1,709,764, resulting in a gain of $345,605.

General and administrative expenses decreased by $80,986 or 15.1% to $456,481 for the three months ended March 31, 2023, from $537,467 for the same period in 2022.

This decrease was mainly due to lower employee related expenses due to cost reduction measures during the period in 2023.

For the first three months of 2023, marketing expenses increased $32,873 or 58.8% to $88,819, compared to $55,946 for the first three months of 2022.

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

Legal and accounting expense decreased to $27,892 for the three-month period in 2023, compared to $188,271 for the same period in 2022, a $160,379 or 85.2% decrease.

This decrease was primarily due to the audit fees normally expensed in the first quarter but in 2023 will be recognized during the 2 nd quarter 2023 when the audit was performed.

During the three months ended March 31, 2023, we recorded a gain of $54,975 on other as we reconciled employee related items previously recorded as liabilities.

During the three months ended March 31, 2022, we recorded a gain of $408,644 on settlement of accounts payable for a reduced amount.

CAPITAL RESOURCES AND LIQUIDITY

At September 30, 2022, we had current assets totaling $10,057,496 and current liabilities totaling $17,152,090, a $7,094,594 working capital deficit.

We had $624,767 in cash and $3,765,777 in restricted cash at September 30, 2022, compared to $220,304 in cash and $4,002,500 in restricted cash at December 31, 2021.

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.

At March 31, 2023, we had current assets totaling $8,681,590 and current liabilities totaling $14,230,268, a $5,548,678 working capital deficit.

We had $1,046,900 in cash and $2,609,555 in restricted cash at March 31, 2023, compared to $1,650,507 in cash and $2,249,627 in restricted cash at December 31, 2022.

In accordance with ASC 480-10-S99 we 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 of issuance.

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

At September 30, 2022, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $471,416 compared to $413,133 at December 31, 2021, a $58,283 increase.

This increase was mainly due to accounts receivables from direct working interest owners for lease operating expenses for two wells that were brought online during the period in 2022.

At September 30, 2022, revenue receivable was $308,263, a decrease of $56,887, compared to $365,150 at December 31, 2021, mainly due to lower net receivables during the third quarter in 2022.

At September 30, 2022, our accounts payable and accrued expenses totaled $5,452,949 an increase of $292,465 from the accounts payable at December 31, 2021 of $5,160,484, which was mainly due to higher drilling costs and lease operating costs during the period in 2022.

The Company has had recurring operating and net losses and cash used in operations and the financial statements reflect a working capital deficiency of $7,094,594 and an accumulated deficit of $88,031,685.

At March 31, 2023, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $950,438 compared to $943,633 at December 31, 2022, a $6,805 increase.

This increase was mainly due to higher accounts receivable from direct working interest owners due mainly to increased lease operating expenses on our Texas Jameson wells to increase production volumes.

At March 31, 2023, revenue receivable was $589,900, a decrease of $112,037, compared to $701,937 at December 31, 2022, mainly due to lower net receivables during the first quarter in 2023, mainly due to lower commodity prices.

At March 31, 2023, our accounts payable and accrued expenses totaled $5,789,204, an increase of $260,375 from the accounts payable at December 31, 2022 of $5,528,829 which was mainly due to higher lease operating costs during the first quarter in 2023.

We have had recurring operating and net losses and cash used in operations and the financial statements reflect a working capital deficiency of $5,548,678 and an accumulated deficit of $86,849,614.

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.

Although, in recent months oil and gas revenues have increased due to higher commodity prices, drilling and lease operating expenses have also increased due to higher transportation costs, manpower costs and manpower shortages.

During the third and continuing into the fourth quarter of 2022, the Company completed several successful workovers on existing and new wells in its Texas Jameson field.

The Company has commitments to continue to drill and workover wells in the Texas Jameson field and is participating in the redrill and completing of a Southern California well.

If we are 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 our business, results of operations, financial position and liquidity.

Management has plans to continue to increase revenues by making commitments to participate with industry partners in the drilling of wells in the Permian Basin and in southern California.

Although in recent months oil and gas lease expenses have increased due to work performed in our Jameson field, we believe these efforts will ultimately improve production.

Operating Activities.

Net cash used in operating activities totaled $1,331,314 and $2,336,587 for the nine months ended September 30, 2022 and 2021, respectively.

This difference in cash used was mainly due to higher drilling prepayments made during the period in 2021 when compared to the period in 2022.

Net cash used in operating activities totaled $895,002 and $337,470 for the three months ended March 31, 2023 and 2022, respectively.

This difference in cash used was mainly due to lower rate of increases in accounts payable and accrued expenses during the period in 2023 when compared to the period in 2022.

Investing Activities.

Net cash provided by investing activities totaled $1,598,227 and $2,160,234 for the nine months ended September 30, 2022, and 2021, respectively.

During the nine-month period in 2022, we received approximately $5.4 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $3.8 million as we drilled and completed one Texas well and participated in the drilling and completing of two southern California oil wells, we also have drilling and workovers in progress in our Texas Jameson field.

During the nine-month period in 2021, we received approximately $3.6 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.5 million in the drilling and completing of two Texas oil wells.

During the period in 2021, we also received approximately $1.0 million for the sale of non-operated properties in Texas and California.

Net cash provided by investing activities totaled $654,249 and $927,761 for the three months ended March 31, 2023, and 2022, respectively.

During the three-month period in 2023, we received approximately $1.3 million in direct working interest investor turnkey drilling investments while our drilling expenditures were $618,251 as we drilled and completed one Texas oil well and participated in the drilling and completion of a Texas Permian basin oil well.

During the three-month period in 2022, we received approximately $2.5 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $1.6 million as we participated in the drilling and completion of two southern California wells.

Financing Activities.

Net cash used in financing activities totaled $99,173 and $27,884 for the nine months ended September 30, 2022, and 2021, respectively.

During the periods in 2022 and 2021, the totals were used for principal payments on our notes payable and financing lease payments.

Net cash used in financing activities totaled $2,926 and $45,845 for the three months ended March 31, 2023, and 2022, respectively.

During the periods in 2023 and 2022, cash used in financing activities consisted of principal payments on our notes payable and financing lease payments.

Critical Accounting Estimates

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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