10-Q 1 royaleinc20240331_10q.htm FORM 10-Q royaleinc20240331_10q.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2024

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 000-55912

 

ROYALE ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

81-4596368

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1530 Hilton Head Rd, Suite 205

El Cajon, CA 92021

(Address of principal executive offices) (Zip Code)

 

(619) 383-6600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Check one:

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

At May 6, 2024, a total of 71,863,829 shares of registrant’s common stock were outstanding.

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements

3

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

19

 

 

Item 4. Controls and Procedures

19

 

 

PART II.  OTHER INFORMATION

21

 

 

Item 1. Legal Proceedings

21

 

 

Item 1A. Risk Factors

21

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

21

 

 

Item 3. Defaults Upon Senior Securities

21

 

 

Item 4. Mine Safety Disclosures

21

 

 

Item 5. Other Information

21

 

 

Item 6. Exhibits

21

 

 

Signatures

22

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ROYALE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

March 31, 2024

    December 31, 2023  
    (unaudited)          

ASSETS

 

 

         

Current Assets

               

Cash and Cash Equivalents

  $ 1,898,987     $ 2,202,521  

Restricted Cash

    2,407,800       3,325,000  

Other Receivables, net

    1,021,854       1,036,401  

Revenue Receivables

    547,006       878,378  

Prepaid Expenses

    604,510       558,169  

Deferred Drilling Costs

    2,670,773       1,669,149  

Total Current Assets

    9,150,930       9,669,618  
                 

Right of Use Assets - Leases

    232,214       254,008  

Other Assets

    589,865       589,865  

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

    5,286,533       2,401,902  

Total Assets

  $ 15,259,542     $ 12,915,393  

 

See notes to unaudited condensed consolidated financial statements.

 

 

ROYALE ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    March 31, 2024     December 31, 2023  
    (unaudited)          

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

               

Current Liabilities:

               

Accounts Payable and Accrued Expenses

  $ 6,038,704     $ 5,482,074  

Royalties Payable

    612,925       612,925  

Due to RMX Resources, LLC

    23,087       23,087  

Accrued Liabilities

    215,221       215,693  

Asset Retirement Obligation - Current

    675,000       675,000  

Deferred Drilling Obligation

    10,911,927       9,761,927  

Operating Leases - Current

    81,696       83,230  

Total Current Liabilities

    18,558,560       16,853,936  
                 

Noncurrent Liabilities:

               

Accrued Liabilities - Long Term

    1,306,605       1,306,605  

Accrued Unpaid Guaranteed Payments

    1,616,205       1,616,205  

Notes Payable

    1,400,000       -  

Operating Leases - Long-Term

    150,819       171,439  

Asset Retirement Obligation

    4,145,631       4,151,847  

Total Liabilities

    27,177,820       24,100,032  
                 

Mezzanine Equity:

               

Convertible Preferred Stock, Series B, $10 par value, 3.5% annual dividend, 2,466,455 and 2,444,885 shares issued and outstanding as of March 31, 2024 and December 31, 2023 respectively.

    24,664,543       24,448,850  
                 

Stockholders' Equity (Deficit):

               

Common Stock, .001 Par Value, 280,000,000 Shares Authorized, 71,863,829 and 70,564,188 shares issued and outstanding as of March 31, 2024 and December 31, 2023.

    71,863       70,564  

Additional Paid in Capital

    54,653,936       54,619,236  

Accumulated Deficit

    (91,308,620 )     (90,323,289 )

Total Stockholders' Equity (Deficit)

    (36,582,821 )     (35,633,489 )

Total Liabilities and Stockholders' Equity (Deficit)

  $ 15,259,542     $ 12,915,393  

 

See notes to unaudited condensed consolidated financial statements.

 

 

ROYALE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   

For the three

months ended

   

For the three

months ended

 
    March 31, 2024     March 31, 2023  

Revenues:

               

Oil, NGL and Gas Sales

  $ 643,665     $ 558,451  

Supervisory Fees and Other

    16,269       13,374  

Total Revenues

    659,934       571,825  
                 

Costs and Expenses:

               

Oil and Gas Lease Operating

    432,754       575,797  

Depreciation, Depletion and Amortization

    87,026       59,432  

Impairment

    56,209       -  

Bad Debt Expense

    30,958       -  

Well Equipment Write Down

    -       9,840  

Legal and Accounting

    279,539       27,892  

Marketing

    59,992       88,819  

General and Administrative

    447,324       456,481  

Total Costs and Expenses

    1,393,802       1,218,261  
                 

Gain on Turnkey Drilling

    -       1,594,354  
                 

Gain (Loss) From Operations

    (733,868 )     947,918  
                 

Other Income (Expense):

               

Interest Expense

    (36,242 )     (549 )

Gain on Other

    -       54,975  
Total Other Income (Expense)     (36,242 )     54,426  

Income (Loss) Before Income Tax Expense

    (770,110 )     1,002,344  

Income Tax Provision

    -       -  

Net Income (Loss)

    (770,110 )     1,002,344  

Less: Preferred Stock Dividend

    -       205,556  

Less: Preferred Stock Dividend in Arrears

    215,221       -  

Net Income (Loss) available to common stock

  $ (985,331 )   $ 796,788  
                 

Shares used in computing Basic Net Income/Loss per share

    71,349,685       61,876,957  

Basic Income (Loss) per share

  $ (0.01 )   $ 0.01  

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

    71,349,685       88,990,264  

Diluted Income (Loss) per share

  $ (0.01 )   $ 0.01  

 

See notes to unaudited condensed consolidated financial statements.

 

 

ROYALE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023

 

   

For the Three Months Ended

 
   

March 31, 2024

   

March 31, 2023

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net Income (Loss)

  $ (770,110 )   $ 1,002,344  

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

               

Depreciation, Depletion and Amortization

    87,026       59,432  

Gain on Turnkey Drilling Programs

    -       (1,594,354 )

Impairment

    56,209       -  

Bad Debt Expense

    30,958       -  

Gain on Other

    -       (54,975 )

Well Equipment Write Down

    -       9,840  

Stock-Based Compensation

    35,999       -  

Right of use asset depreciation

    2,753       2,750  

Changes in assets and liabilities:

               

Other & Revenue Receivables

    314,961       105,232  

Prepaid Expenses and Other Assets

    (46,341 )     (455,202 )

Accounts Payable and Accrued Expenses

    (290,719 )     29,931  

Net Cash used in in Operating Activities

    (579,264 )     (895,002 )

CASH FLOWS FROM INVESTING ACTIVITIES

               

Expenditures for Oil and Gas Properties and Other Capital Expenditures

    (3,188,357 )     (618,251 )

Proceeds from Turnkey Drilling Programs

    1,150,000       1,272,500  

Net Cash Provided by (used in) Investing Activities

    (2,038,357 )     654,249  
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from Long Term Debt

    1,400,000       -  

Principal Payments on Long-Term Debt

    (3,113 )     (2,926 )

Net Cash Provided by (used in) Financing Activities

    1,396,887       (2,926 )
                 

Net Change in Cash and Cash Equivalents

    (1,220,734 )     (243,679 )
                 

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

    5,527,521       3,900,134  

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

  $ 4,306,787     $ 3,656,455  

Cash Paid for Interest

  $ 36,242     $ 549  

Cash Paid for Taxes

  $ 550     $ 2,850  
                 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:

               
Accounts Payable for Oil and Gas Properties     1,000,000       -  

Increase in Capital Accrued Balance

    (152,652 )     88,372  
                 

SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING & FINANCING ACTIVITIES:

               

Series B Paid-In-Kind Dividends

    215,221       205,556  

 

See notes to unaudited condensed consolidated financial statements.

 

 

ROYALE ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(UNAUDITED)

 

   

Common Stock

                         
   

Number of Shares

Issued and Outstanding

   

Amount

   

Additional

Paid in Capital

   

Accumulated

Comprehensive Deficit

   

Total

Stockholders' Deficit

 
   

Common Shares

   

Common Amount

   

APIC

   

ACD

   

Total

 

December 31, 2022 Balance

    61,876,957     $ 61,876     $ 54,447,923     $ (87,646,402 )   $ (33,136,603 )

Preferred Series B 3.5% Dividend

    -       -       -       (205,556 )     (205,556 )

Net Income

    -       -       -       1,002,344       1,002,344  

March 31, 2023 Balance

    61,876,957     $ 61,876     $ 54,447,923     $ (86,849,614 )   $ (32,339,815 )

 

   

Common Shares

   

Common Amount

   

APIC

   

ACD

   

Total

 

December 31, 2023 Balance

    70,564,188     $ 70,564     $ 54,619,236     $ (90,323,289 )   $ (35,633,489 )

Stock Issued in lieu of Compensation

    1,299,641       1,299       34,700       -       35,999  

Preferred Series B 3.5% Dividend

    -       -       -       (215,221 )     (215,221 )

Net Loss

    -       -       -       (770,110 )     (770,110 )

March 31, 2024 Balance

    71,863,829     $ 71,863     $ 54,653,936     $ (91,308,620 )   $ (36,582,821 )

 

See notes to unaudited condensed consolidated financial statements.

 

 

ROYALE ENERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 BASIS OF PRESENTATION: ACCOUNTING STANDARDS

 

Consolidation

 

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

 

The 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 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 our opinion, all adjustments considered necessary for a fair presentation have been included.

 

The consolidated balance sheet as of December 31, 2023 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, 2023 as filed with the SEC. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, 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 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, 2024, our consolidated financial statements reflect a working capital deficiency of $9,407,630, and an accumulated deficit of $91,308,620. We had a net loss of $770,110 for the three months ended March 31, 2024. These factors indicate 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 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 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 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.

 

Material estimates that are particularly susceptible to significant change relate to the estimate of Company oil and gas reserves prepared by an independent engineering consultant. Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proven reserves. Estimated reserves are used in the calculation of depletion, depreciation and amortization, unevaluated property costs, impairment of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.

 

 

Revenue Recognition

 

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

 
   

2024

   

2023

 

Oil & Condensate Sales

  $ 559,358       347,658  

Natural Gas Sales

    83,735       208,883  

NGL Sales

    572       1,910  

Total

  $ 643,665       558,451  

 

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

 

In limited cases, we may also collect advance payments from customers as stipulated in our agreements; payments in excess of recognized revenue are recorded as contract liabilities on our consolidated balance 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. As part of this role, we perform activities to explore, develop and produce oil and gas properties in accordance with the joint operating arrangement and collective decisions of the joint parties. Other working interest owners reimburse us for costs incurred based on our agreements. We determined that these activities are not performed as part of customer relationships, and such reimbursements are recorded as cost reimbursements.

 

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

 

Crude oil and condensate

 

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

 

 

Natural gas and NGLs

 

When selling natural gas and NGLs, we engage midstream entities to process our production stream by separating natural gas from the NGLs. Frequently, these midstream entities also purchase our natural gas and NGLs under the same agreements. In these situations, we determined the performance obligation is complete and satisfied at the tailgate of the processing plant when the natural gas and NGLs become identifiable and measurable products. We determined the plant tailgate is the point in time where control 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 where transportation is netted directly against revenue. Under some of our natural gas processing agreements, we have an option to take the processed natural gas and NGLs in-kind and sell to customers other than the processing company. In those circumstances, our performance obligations are complete after delivering the processed hydrocarbons to the customer at the designated delivery points, which may be the tailgate of the processing plant, or an alternative delivery point requested by the customer.

 

Turnkey Drilling

 

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 (“Drilling Funds”). If something changes, we may designate the Drilling Funds to drill 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.

 

We manage these Turnkey Agreements for the participants of the well. We segregate the collections of pre-drilling Authorization for Expenditure (“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 record revenue or expense at the time the performance obligation of the Turnkey Agreement has been satisfied.

 

Restricted Cash

 

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.

 

   

March 31, 2024

 
 
 
 
 

December 31, 2023

 

Cash and Cash Equivalents

  $ 1,898,987     $ 2,202,521  

Restricted Cash

    2,407,800       3,325,000  

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

  $ 4,306,787     $ 5,527,521  

 

Equity Method Investments

 

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

 

 

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

 

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. Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected. The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable. All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance. At March 31, 2024, and December 31, 2023, we maintained an allowance for uncollectable accounts of $1,809,485 and $1,837,551, 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 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 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.

 

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

 

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

 

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

 

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

 

At March 31, 2024 and December 31, 2023, 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 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.

 

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

 

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.

 

Dividends on Series B Convertible Preferred Stock

 

The Series B Convertible Preferred Stock, (“Preferred Stock”) has an obligation to pay a 3.5% cumulative dividend, in kind or cash, on a quarterly basis. The Board of Directors authorized the issuance of the Preferred Stock, for the settlement of dividends accumulated through December 31, 2023. We accrued $215,221 and $205,556 for dividends related to the Preferred Stock for the first quarters of 2024 and 2023, 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

 

Recently Adopted

 

None

 

NOTE 2 OIL AND GAS PROPERTY AND EQUIPMENT AND FIXTURES

 

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

 

   

March 31,

   

December 31,

 
   

2024

   

2023

 
   

(Unaudited)

         

Oil and Gas

               

Producing properties, including drilling costs

  $ 5,700,221     $ 5,763,892  

Undeveloped properties

    3,812,920       778,839  

Lease and well equipment

    3,295,028       3,295,028  
      12,808,169       9,837,759  
                 

Accumulated depletion, depreciation & amortization

    (7,528,946 )     (7,443,661 )

Net capitalized costs Total

    5,279,223       2,394,098  
                 

Commercial and Other

               

Vehicles

    40,061       40,061  

Furniture and equipment

    1,103,362       1,103,362  
      1,143,423       1,143,423  

Accumulated depreciation

    (1,136,113 )     (1,135,619 )
      7,310       7,804  

Net capitalized costs Total

  $ 5,286,533     $ 2,401,902  

 

 

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

 

Depreciation, depletion, and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration. Maintenance and repairs are expensed as incurred. Major renewals and improvements are capitalized, and the assets replaced are retired.

 

The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use. Interest costs, to the extent they are incurred to finance expenditures during the construction phase, are included in property, plant and equipment and are depreciated over the service life of the related assets.

 

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. Other exploratory expenditures, including geophysical costs and annual lease rentals, are expensed as incurred.

 

Acquisition costs of proved oil and gas properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves.

 

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

 

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

 

Impairment analyses are generally based on proved reserves. An asset group would be further assessed if the undiscounted cash flows were less than its’ carrying value. Impairments are measured by the amount the carrying value exceeds fair value. During the three months ended March 31, 2024, we incurred an impairment loss of $56,209. No impairment losses were incurred during the three months ended March 31, 2023.

 

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 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 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.

 

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 their proportionate share of operating costs. We retain legal title to the lease. The participants purchase a working interest directly in the well bore.

 

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

 

A certain portion of the turnkey drilling participant’s funds received are non-refundable. We record 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 March 31, 2024, and December 31, 2023, we had Deferred Drilling Obligations of $10,911,927 and $9,761,927, 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 in progress.

 

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

 

NOTE 3 SERIES B PREFERRED STOCK

 

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 Securities Exchange Act of 1934, as amended, (“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 under the Securities Exchange Act of 1934, as amended, and the trading volume of shares of our common stock exceed 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 June 30, 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, 2024, we accrued a value of $215,221. During 2023 and 2022 no cash was used to pay dividends on shares of the Preferred Stock.

 

 

NOTE 4 INCOME (LOSS) PER SHARE

 

Basic and diluted loss per share are calculated as follows:

 

   

Three Months Ended

 
   

March 31, 2024

   

March 31, 2023

 
   

Basic

   

Diluted

   

Basic

   

Diluted

 

Net Income (Loss)

  $ (770,110 )     (770,110 )   $ 1,002,344       1,002,344  

Less: Preferred Stock Dividend

    -       -       205,556       205,556  

Less: Preferred Stock Dividend In Arrears

    215,221       215,221       -       -  

Net Income (Loss) Attributable to Common Shareholders

  $ (985,331 )     (985,331 )   $ 796,788       796,788  

Weighted average common shares outstanding

    71,349,685       71,349,685       61,876,957       61,876,957  

Effect of dilutive securities

    -       -       -       27,113,307  

Weighted average common shares, including Dilutive effect

    71,349,685       71,349,685       61,876,957       88,990,264  

Per share basic and fully diluted:

                               

Basic Income (Loss) per share

  $ (0.01 )     (0.01 )   $ 0.01       0.01  

Fully diluted Income (Loss) per share

  $ (0.01 )     (0.01 )   $ 0.01       0.01  

 

For the three months ended March 31, 2024 and 2023, we had dilutive securities of 24,664,550 and 27,113,307, respectively. During the period in 2024, these securities were not included in the dilutive loss per share, due to their antidilutive nature.

 

NOTE 5 INCOME TAXES

 

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 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 2024.

 

NOTE 6 ISSUANCE OF COMMON STOCK

 

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 three months ended March 31, 2024, in lieu of cash payments for board fees, we issued 1,299,641 shares of common stock valued at approximately $36,000 to board members. During the three months ended March 31, 2023, no common stock was issued in lieu of cash payments for salaries and board fees.

 

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

  $ 2,757,549  

Provision for credit loss

    -  

Write-offs charged against the allowance

    8,104  

Balance at March 31, 2023

  $ 2,749,445  
         

Balance at December 31, 2023

  $ 1,837,551  

Provision for credit loss

    30,958  

Write-offs charged against the allowance

    59,024  

Balance at March 31, 2024

  $ 1,809,485  

 

 

NOTE 8 RELATED PARTY NOTES PAYABLE

 

On February 7, 2024 the board of directors approved a debt facility of up to $3 million. On February 9, 2024, Royale Energy, Inc. entered into a Secured Term Loan Note with Walou Investments, LP, a Texas limited partnership, which is under the direct and indirect control of Johnny Jordan, the Company’s Chief Executive Officer and a member of the Company’s Board of Directors. In addition, Mr. Jordan is the beneficial owner of approximately 14.8% of the Company’s issued and outstanding common stock. The initial loan to the Company was $1,400,000 which was received on February 9, 2024. The outstanding principal balance of the loan has an interest rate of 18.0%. The Company began making monthly interest payments on March 1, 2024, and will continue until the maturity date, August 1, 2025, when the unpaid principal balance becomes due. The loan is secured by a deed of trust, which was recorded in Ector County, Texas and covers, among other things, certain oil and gas assets in Ector County, Texas.

 

 

Item 2. Managements 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 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” elsewhere in this Quarterly Report on Form 10-Q, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and those described from time to time in our future reports filed with the SEC.

 

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

 

OVERVIEW

 

Royale is an independent oil and natural gas producer. Royale’s principal lines of business are the production and sale of oil and natural gas, acquisition of oil and gas lease interests and proved reserves, drilling of both exploratory and development wells, and sales of fractional working interests in wells to be drilled by Royale. 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 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, 2024, and 2023, we had a net loss of $770,110 and net income of $1,002,344, respectively. The difference was primarily due to the gain on turnkey drilling recognized during the three months ended March 31, 2023, where we recognized a gain of $1,594,354 upon the completion of one oil well in Texas and participating in the drilling and completion of an oil well in the Texas Permian basin.

 

During the first three months of 2024, revenues from oil and gas production increased $85,214 or 15.3%, to $643,665 from revenues of $558,451 during the first three months of 2023. This increase was mainly due to higher oil and gas production volumes during the quarter in 2024. The net sales volume of oil and condensate for the three months ended March 31, 2024, was approximately 7,804 barrels with an average price of $71.68 per barrel, versus 4,761 barrels with an average price of $73.03 per barrel for the first three months of 2023. This represents an increase in net sales volume of 3,043 barrels or 63.9%, which was due to higher production volumes due to drilling efforts during 2023. The net sales volume of natural gas for the three months ended March 31, 2024, was approximately 32,659 Mcf with an average price of $2.56 per Mcf, versus 30,119 Mcf with an average price of $6.94 per Mcf for the same period in 2023. This represents an increase in net sales volume of 2,540 Mcf or 8.4%. The increase in natural gas production volume was also due to wells that were drilled and began production in 2023.

 

Oil and natural gas lease operating expenses decreased by $143,043 or 24.8%, to $432,754 for the three months ended March 31, 2024, from $575,797 for the same period in 2023. This decrease was due to the receipt of water disposal recovery fees of $52,090 received during the quarter in 2024 which began in April 2023 as we converted an existing non-producing oil well into a water injection well to reduce water disposal hauling costs paid to outside vendors.

 

The aggregate of supervisory fees and other income was $16,269 and $13,374 for the three months ended March 31, 2024 and 2023, respectively, an increase of $2,895 mainly due to higher interest income during the period in 2024.

 

 

Depreciation, depletion and amortization expense increased to $87,026 from $59,432, an increase of $27,594 or 46.4% for the three months ended March 31, 2024, as compared to the same period in 2023. The depletion rate is calculated using production as a percentage of reserves. The increase in depletion expense was due to a decrease in expected recoverable reserves which increased the depletion rate.

 

At March 31, 2024, Royale Energy had a Deferred Drilling Obligation of $10,911,927. During the first three months of 2024, although we participated in the drilling and completion of a well in the Texas Permian basin, we did not book turnkey gains or losses as we waited for final costs to come through. 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.

 

General and administrative expenses decreased by $9,157 or 2.0% from $456,481 for the three months ended March 31, 2023, to $447,324 for the same period in 2024. For the first three months of 2024, marketing expenses decreased $28,827 or 32.5% to $59,992, compared to $88,819 for the first three months of 2023. Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated exhibition and travel costs.

 

Legal and accounting expense increased to $279,539 for the three-month period in 2024, compared to $27,892 for the same period in 2023, a $251,647 or 902% increase. This increase was primarily due to the audit fees completed and expensed in the first quarter in 2024, but in 2023 was recognized during the 2nd quarter of 2023 when the audit was performed.

 

During the three months ended March 31, 2024, we recorded lease impairments of $56,209 on various lease and land costs in our California natural gas fields where the carrying value exceeded the fair value, no lease impairments were recorded in the first three months of 2023. During the period in 2024, we also recorded Bad Debts expense of $30,958 which arose from identified uncollectable receivables relating to our oil and natural gas properties either plugged and abandoned or scheduled for plugging and abandonment (“P&A”) 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. During the three months ended March 31, 2023, we recorded a Gain on Other of $54,975 as we reconciled employee related items previously recorded as liabilities. During the period in 2023, we recorded a write down of $9,840 on certain well equipment that was either written down to its current market value or written off as it was no longer usable.

 

Interest expense for the three months ended March 31, 2024, and 2023, were $36,242 and $549, respectively. The higher 2024 interest expense was due to the $1.4 million note payable obtained in February 2024, discussed in Note 8.

 

CAPITAL RESOURCES AND LIQUIDITY

 

At March 31, 2024, we had current assets totaling $9,150,930 and current liabilities totaling $18,558,560, a $9,407,630 working capital deficit. We had $1,898,987 in cash and $2,407,800 in restricted cash at March 31, 2024, compared to $2,202,521 in cash and $3,325,000 in restricted cash at December 31, 2023.

 

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, 2024, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $1,021,854 compared to $1,036,401 at December 31, 2023, a $14,547 or 1.4% decrease. At March 31, 2024, revenue receivable was $547,006, a decrease of $331,372, compared to $878,378 at December 31, 2023, due to commodity prices during the first quarter in 2024. At March 31, 2024, our accounts payable and accrued expenses totaled $6,038,704 an increase of $556,630 from the accounts payable at December 31, 2023 of $5,482,074, which was mainly due to higher trade payables due mainly to drilling costs during the first quarter 2024.

 

 

We have had recurring operating and net losses and cash used in operations and the financial statements reflect a working capital deficiency of $9,407,630 and an accumulated deficit of $91,308,620. 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 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 drilling wells in the Permian basin and will also continue to drill and workover wells in our Texas Jameson field. Although there are no assurances, Management believes that expected increases in revenue together with reduced capital expenditures for drilling will allow the company to meet its liquidity needs through the remainder of the year.

 

Operating Activities. Net cash used by operating activities totaled $579,264 and $895,002 for the three months ended March 31, 2024 and 2023, respectively. This difference in cash was mainly due to an increase in accounts payable and accrued expenses during the period in 2024 mainly due to drilling and lease costs when compared to a decrease in accounts payables during the period in 2023.

 

Investing Activities. Net cash used by investing activities totaled $2,038,357 for the three months ended March 31, 2024, while Net cash provided by investing activities totaled $654,249 for the three months ended March 31, 2023. During the three-month period in 2024, we received approximately $1.2 million in Drilling Funds while our drilling and lease expenditures were approximately $3.2 million as we continue to participate in drilling and obtain lease interests in the Permian basin. During the three-month period in 2023, we received approximately $1.3 million in Drilling Funds 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.

 

Financing Activities. Net cash provided by financing activities totaled $1,396,877 for the three months ended March 31, 2024. Net cash used in financing activities totaled $2,926 for the three months ended March 31, 2023. The difference in cash was due to receipt of $1.4 million from the note payable discussed in Note 8. During the three-month periods in 2024 and 2023, the totals were also used for principal payments on our financing lease payments.

 

Critical Accounting Estimates

 

Our critical accounting policies are further disclosed in Note 1 to the consolidated financial statements included in our 2023 Annual Report on Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

As of December 31, 2023, our management, including our Chief Executive and Chief Financial Officers evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, the company concluded that there was a material weakness in our disclosure controls and procedures. These controls and procedures are based on the definition of disclosure controls and procedures in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

 

As a result of the review by the CFO and CEO, the material weakness was identified as listed below.

 

 

In connection with the audit of our 2023 and 2022 consolidated financial statements, management has identified a material weakness that exists because we did not maintain effective controls over our financial close and reporting process, and has concluded that the financial close and reporting process needs additional formal procedures to ensure that appropriate reviews occur on all financial reporting analysis. Management has designed and implemented updated control procedures that we believe will mitigate this material weakness and is monitoring these procedures for effectiveness.

 

Because of the material weaknesses described above, our management was unable to conclude that our internal control over financial reporting was effective as of the end of period to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.

 

Notwithstanding the material weaknesses described above, our management, including our Chief Executive Officer and Chief Financial Officer, believes that the consolidated financial statements contained in this Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal periods presented in conformity with U.S. generally accepted accounting principles. In addition, the material weakness described did not result in the restatements of any of our audited or unaudited consolidated financial statements or disclosures for any previously reported periods.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Except for the actions described above, that were taken to address the material weaknesses, there were no changes in our internal controls during the period ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company may be involved in various legal proceedings or may be subject to claims that arise in the ordinary course of business. The outcome of any such claims or proceedings cannot be predicted with certainty. As of the date of this filing, management is not aware of any such claims against the Company.

 

Item 1A. Risk Factors

 

Not applicable to smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the period covered by this report, we have not issued any unregistered shares.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

10.1

Secured Term Loan dated as of February 9, 2024 among Royale Energy, Inc., as borrower, Walou Investments, LP as administrative agent for the lenders, and Walou Investments, LP, as lender. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 15, 2024.

10.2

Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Production dated as of February 15, 2024, executed by Royale Energy Funds, Inc., as mortgagor, to Johnny Jordan, as Trustee, for the benefit of Agent, as mortgagee. Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 15, 2024.

31.1

Rule 13a-14(a)/15d-14(a) Certification

31.2

Rule 13a-14(a)/15d-14(a) Certification

32.1

18 U.S.C. § 1350 Certification

32.2

18 U.S.C. § 1350 Certification

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ROYALE ENERGY, INC.

 

 

 

 

Date: May 15, 2024

/s/ Johnny Jordan

 

 

Johnny Jordan, Chief Executive Officer

 

 

 

 

Date: May 15, 2024

/s/ Ronald Lipnick

 

 

Ronald Lipnick, Chief Financial Officer

 

 

 

22
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