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Item 1. Financial Statements

2023-08-14 compared with 2023-06-26 · 177 added, 131 removed, 332 unchanged (48% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023

June 30, 2023

December 31, 2022

14 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023

June 30, 2023

December 31, 2022

16 unchanged sentences

Mezzanine Equity:

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

Convertible Preferred Stock, Series B, $ 10 par value, 3,000,000 Shares Authorized, 2,402,541 , and 2,361,154 shares issued and outstanding at June 30, 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

Common Stock, .001 Par Value, 280,000,000 Shares Authorized, 67,684,188 and 61,876,957 shares issued and outstanding at June 30, 2023 and December 31, 2022 respectively

Additional Paid in Capital

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For the three months ended

March 31, 2023

March 31, 2022

For the six months ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Oil, NGL and Gas Sales

8 unchanged sentences

Total Costs and Expenses

Gain on Turnkey Drilling

Gain (Loss) From Operations

Gain (Loss) on Turnkey Drilling

Loss From Operations

Other Income (Expense):

Interest Expense

Gain on Other

Gain on Settlement of Accounts Payable

Income (Loss) Before Income Tax Expense

Loss Before Income Tax Expense

Income Tax Provision

Net Income (Loss)

Preferred Stock Dividend

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

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

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

For the Three Months Ended

March 31, 2023

March 31, 2022

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

For the Six Months Ended

June 30, 2023

June 30, 2022

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

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

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

Depreciation, Depletion and Amortization

1 unchanged sentence

Gain on Settlement of Accounts Payable

Gain on Other

Well Equipment Write Down

Stock Based Compensation

Gain on Other

Right of use asset depreciation

Changes in assets and liabilities:

(Increase) Decrease in:

Other & Revenue Receivables

Prepaid Expenses and Other Assets

Increase (Decrease) in:

Accounts Payable and Accrued Expenses

3 unchanged sentences

Proceeds from Turnkey Drilling Programs

Net Cash Provided by Investing Activities

Net Cash Provided (Used) by Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Principal Payments on Long-Term Debt

Net Cash Used in Financing Activities

Net Change in Cash and Cash Equivalents

Net Cash Used by Financing Activities

Net Decrease 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

Cash Paid for Taxes

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:

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 MONTHS ENDED MARCH 31, 2023 AND 2022

Number of Shares Issued and Outstanding

Additional Paid in Capital

Accumulated Comprehensive Deficit

Stockholders' Deficit

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022

Number of Shares

Issued and Outstanding

Paid in Capital

Common Shares

Common Amount

Preferred Shares

Preferred Amount

December 31, 2021 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

March 31, 2022 Balance

June 30, 2022 Balance

Common Shares

Common Amount

Preferred Shares

Preferred Amount

December 31, 2022 Balance

Cashless Warrant Exercise Issuance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2023 Balance

Common Shares

Common Amount

Preferred Shares

Preferred Amount

March 31, 2022 Balance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2022 Balance

Common Shares

Common Amount

Preferred Shares

Preferred Amount

March 31, 2023 Balance

Cashless Warrant Exercise Issuance

Stock Issued in lieu of Compensation

Preferred Series B 3.5% Dividend

June 30, 2023 Balance

See notes to unaudited condensed consolidated financial statements.

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(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.

(“REF”), and Matrix Oil Management Corporation and its subsidiaries, have been prepared in accordance with U.S.

Generally Accepted Accounting Principles (“GAAP”) for interim consolidated financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“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.

In our 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.

Operating results for the three and six months ended June 30, 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

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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.

At June 30, 2023, our consolidated financial statements reflect a working capital deficiency of $ 6,984,331 .

We had net losses of $ 1,035,375 and $ 33,031 for the three and six months ended June 30, 2023, respectively.

This indicates that 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.

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

If we are unable to raise sufficient additional funds, we 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.

Use of Estimates

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

The accompanying financial statements have been prepared in conformity GAAP and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

4 unchanged sentences

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

For the three months ended

For the six months ended

Oil & Condensate Sales

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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.

If something changes, we may designate the Drilling Funds a substitute well.

Under certain conditions, a portion of the Drilling Funds may be required to be returned to a participant.

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

7 unchanged sentences

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.

March 31, 2023

June 30, 2023

December 31, 2022

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

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.

At June 30, 2023, and December 31, 2022, we maintained an allowance for uncollectable accounts of $ 2,748,626 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

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

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

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

In determining fair value, 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.

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 considering counterparty credit risk in our 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.

7 unchanged sentences

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

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.

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

At June 30, 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 (AROs) pursuant to the provisions of ASC 410, “ Asset Retirement and Environmental Obligations ”.

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

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

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

7 unchanged sentences

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

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

We accrued $ 209,644 and $ 202,464 for dividends related to the Preferred Stock for the second 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.

3 unchanged sentences

ASU 2016-13, Credit Impairment

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

In 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.

47 unchanged sentences

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

During the three months ended March 31, 2023, and 2022, no impairment losses were incurred.

During the six months ended June 30, 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.

10 unchanged sentences

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.

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

We retain legal title to the lease.

4 unchanged sentences

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

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

At June 30, 2023, and December 31, 2022, we had Deferred Drilling Obligations of $ 8,190,855 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.

3 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 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.

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

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 .

For the quarter ending June 30, 2023, we accrued 20,964 shares with a value of $ 209,644 .

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

1 unchanged sentence

Basic and diluted loss per share are calculated as follows:

Three Months Ended March 31,

March 31, 2023

March 31, 2022

Net Income (Loss)

Three Months Ended June 30,

Preferred Stock Dividend

Net Income (Loss) Attributable to Common Shareholders

Net Loss Attributable to Common Shareholders

Weighted average common shares outstanding

1 unchanged sentence

Weighted average common shares, including Dilutive effect

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.

Six Months Ended June 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

For the six months ended June 30, 2023 and 2022, we had dilutive securities of 24,025,410 and 26,683,208 , respectively.

For the three months ended June 30, 2023 and 2022, we had dilutive securities of 24,025,410 and 26,698,515 , respectively.

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

NOTE 5 – INCOME TAXES

4 unchanged sentences

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

A reconciliation of our provision for income taxes and the amount computed by applying the statutory income tax rates at June 30, 2023 and 2022, respectively, to pretax income is as follows:

For the six months ended

June 30, 2023

June 30, 2022

Tax benefit computed at statutory rate of 21 % at June 30, 2023 and 2022, respectively

Increase (decrease) in taxes resulting from:

State tax / percentage depletion / other

Other non-deductible expenses

2 unchanged sentences

NOTE 6 – ISSUANCE OF COMMON STOCK

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.

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

CIC elected to make a cashless exercise of the warrant and as a result we issued 3,266,055 shares of our common stock to CIC.

During the six months ended June 30, 2023, in lieu of cash payments for board fees, we issued 2,541,176 shares of common stock valued at approximately $ 108,001 to board members.

During the six months ended June 30, 2022, in lieu of cash payments for salaries and board fees, we issued 1,929,078 shares of common stock valued at approximately $ 136,000 to an executive officer and board members.

NOTE 7 – ALLOWANCE FOR CREDIT LOSSES

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Write-offs charged against the allowance

Balance at March 31, 2023

Balance at June 30, 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 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.

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 Exchange Act.

This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, sources and availability of financing, 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.

While we believe our forward-looking statements are based upon reasonable assumptions, we can give no assurance that such expectations will prove to have been correct.

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Since 1993, Royale has primarily acquired and developed producing and non-producing natural gas properties in California.

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

In December 2018, Royale became the operator of a newly acquired oil and gas property in Texas.

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 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.

For the six months ended June 30, 2023 and 2022, we had net losses of $33,031 and $312,853, respectively.

The decrease in net losses were 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 $1,339,382.

During the three months ended June 30, 2023 and 2022, we had net losses of $1,035,375 and $260,502, respectively.

The difference was due to higher turnkey drilling costs incurred in the second quarter of 2023 in the Texas well in which we participated and lower oil and gas revenues due to lower oil and gas commodity prices during the second quarter 2023.

During the first six months of 2023, revenues from oil and gas production decreased $197,875 or 16.7%, to $988,744 in 2023 from revenues of $1,186,619 during the first six months of 2022.

This decrease was mainly due to lower oil and natural gas commodity prices.

The net sales volume of oil and condensate for the six months ended June 30, 2023, was approximately 9,864 barrels with an average price of $71.69 per barrel, versus 8,186 barrels with an average price of $99.58 per barrel for the six months of 2022.

This represents an increase in net sales volume of 1,678 barrels or 20.5%, which was due to wells completed and put online during the latter half of 2022 and first half of 2023.

The net sales volume of natural gas for the six months ended June 30, 2023, was approximately 68,081 Mcf with an average price of $4.10 per Mcf, versus 65,308 Mcf with an average price of $5.61 per Mcf for the same period in 2022.

This represents an increase in net sales volume of 2,773 Mcf or 4.2%.

The increase in natural gas production volume was also due to new wells being brought online.

For the quarter ended June 30, 2023, revenues from oil and gas production decreased $249,112 or 36.7% to $430,293 from the 2022 second quarter revenues of $679,405.

This decrease was also due to lower oil and natural gas commodity prices.

The net sales volume of oil and condensate for the quarter ended June 30, 2022, was approximately 5,104 barrels with an average price of $70.45 per barrel, versus 4,297 barrels with an average price of $106.05 per barrel for the second quarter of 2022.

This represents an increase in net sales volume of 807 barrels or 18.8% for the quarter in 2023.

The net sales volume of natural gas for the quarter ended June 30, 2023, was approximately 37,962 Mcf with an average price of $1.84 per Mcf, versus 31,781 Mcf with an average price of $6.92 per Mcf for the second quarter of 2022.

This represents an increase in net sales volume of 6,181 Mcf or 19.4% for the quarter in 2023.

Oil and natural gas lease operating expenses increased by $289,117 or 35.6%, to $1,102,095 for the six months ended June 30, 2023, from $812,978 for the same period in 2022.

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

For the second quarter in 2023, lease operating expenses increased $127,788 or 32.1% from the same quarter in 2022, mainly due to increases in workovers and water disposal fees in our Texas Jameson field during the quarter in 2023.

The aggregate of supervisory fees and other income was $111,966 for the six months ended June 30, 2023, an increase of $94,925 from $17,041 during the same period in 2022.

During the second quarter 2023, supervisory fees and other income increased $90,842 when compared to the quarter in 2022.

These increases were mainly due to increases in water disposal recovery income as we converted an existing non-producing oil well into a water injection well in order to reduce water disposal hauling costs paid to outside vendors.

Depreciation, depletion and amortization expense decreased to $173,907 from $244,208, a decrease of $70,301 or 28.8% for the six months ended June 30, 2023, as compared to the same period in 2022.

During the second quarter 2023, depreciation, depletion and amortization expenses also decreased $5,057 or 4.2%.

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.

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.

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

At June 30, 2023, Royale Energy had a Deferred Drilling Obligation of $8,190,855.

During the first six 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 an oil well in the Texas Permian basin, while incurring expenses of $1,222,228, resulting in a gain of $1,339,382.

At June 30, 2022, Royale Energy had a Deferred Drilling Obligation of $8,359,011.

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

General and administrative expenses decreased by $145,648 or 14.2% from $1,023,817 for the six months ended June 30, 2022 to $878,169 for the same period in 2023.

For the second quarter 2023, general and administrative expenses decreased $64,662 or 13.3% when compared to the same period in 2022.

These decreases were mainly due to lower employee related expenses due to cost reduction measures during the periods in 2023.

For the first six months of 2023, marketing expenses increased $12,572 or 9.4% to $146,891, compared to $134,319 for the first six months of 2022.

For the second quarter 2023, marketing expenses decreased $20,301 or 25.9% when compared to the second quarter in 2022.

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 decreased to $273,143 for the six-month period in 2023, compared to $346,410 for the same period in 2022, a $73,267 or 21.2%.

This decrease during the period in 2023 was primarily due to higher fees related to the conversion of our accounting software during the period in 2022.

For the second quarter 2023, legal and accounting expenses increased $87,112 or 55.1%, when compared to the second quarter in 2022, primarily due to the delay in our 2022 audit and its related fees, which occurred during the second quarter 2023.

During the six months ended June 30, 2023, we recorded a gain on other of $54,975 as we reconciled employee related items previously recorded as liabilities.

We also recorded a gain on other of approximately $57,000 on our share of prior years property tax refunds received by RMX Resources, LLC during the period in 2023.

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

CAPITAL RESOURCES AND LIQUIDITY

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.

At June 30, 2023, we had current assets totaling $8,155,268 and current liabilities totaling $15,139,599, a $6,984,331 working capital deficit.

We had $974,496 in cash and $1,236,665 in restricted cash at June 30, 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 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.

At June 30, 2023, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $999,030 compared to $943,633 at December 31, 2022, a $55,397 increase.

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

At June 30, 2023, revenue receivable was $381,821, a decrease of $320,116, compared to $701,937 at December 31, 2022, due to lower commodity prices during the second quarter in 2023.

At June 30, 2023, our accounts payable and accrued expenses totaled $5,342,800 a decrease of $186,029 from the accounts payable at December 31, 2022 of $5,528,829, which was mainly due to lower revenue payables due to the lower commodity prices during the period 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 $6,984,331 and an accumulated deficit of $88,094,633.

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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.

Management has plans to continue to increase revenues by making commitments to participate with industry partners in drilling wells in the Permian basin and will also continue to drill and workover wells in our Texas Jameson field.

We are also looking for possible ways to increase production on some of our California natural gas wells.

Operating Activities.

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.

Net cash used in operating activities totaled $1,658,304 and $1,078,217 for the six months ended June 30, 2023 and 2022, respectively.

This difference in cash used was mainly due to lower accounts payable during the period in 2023 when compared to the period in 2022 where we increased our accounts payable.

Investing Activities.

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.

Net cash provided by investing activities totaled $24,774 and $1,100,610 for the six months ended June 30, 2023, and 2022, respectively.

During the six-month period in 2023, we received approximately $2.6 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.6 million as we drilled and completed one Texas well and participated in the drilling and completing of another Texas well in the Permian basin.

During the six month period in 2022, we received approximately $3.7 million in direct working interest investor turnkey drilling investments while our drilling expenditures were approximately $2.6 million as we drilled and completed one Texas well and participated in the drilling and completing of two southern California oil wells.

Financing Activities.

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.

Net cash used in financing activities totaled $5,895 and $76,333 for the six months ended June 30, 2023, and 2022, respectively.

During the periods in 2023 and 2022, the totals were used for 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