Royale Energy, Inc.

Previous wording

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

Current wording

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

Previous wording

The Company’s Financial Statements include itspro rataownership of wells. The Company usually sells a portion of the working interest in each well it drills or participates in to third-party participants and retains a portion of the prospect for its own account. All results, successful or not, are included at its pro rata ownership amounts: revenue, expenses, assets, and liabilities as defined in FASB ASC 932-323-25 and 932-360.

Current wording

The Company’s Financial Statements include itspro rataownership of wells. The Company usually sells to third-party participants a portion of the working interest in each well it drills or participates in, and retains a portion of the prospect for its own account. All results, successful or not, are included at its pro-rata ownership amounts: revenue, expenses, assets, and liabilities as defined in FASB ASC 932-323-25 and 932-360.

Previous wording

Impairment analyses are generally based on proved reserves. An asset group would be impaired if the undiscounted cash flows were less than its’ carrying value. Impairments are measured by the amount the carrying value exceeds fair value. During 2023 and 2022, impairment losses of $ 1,599,001 and $0, respectively, were recorded on various capitalized lease and land costs where the carrying value exceeded the fair value or where the leases were no longer viable.

Current wording

Impairment analyses are generally based on proved reserves. An asset group would be impaired if the undiscounted cash flows were less than its’ carrying value. Impairments are measured by the amount the carrying value exceeds fair value. During 2024 and 2023, impairment losses of $400,719 and $1,599,001, respectively, were recorded on various capitalized lease and land costs where the carrying value exceeded the fair value or where the leases were no longer viable.

Previous wording

A certain portion of the turnkey drilling participant’s funds received are non-refundable. The Company records a liability for all funds invested as deferred drilling obligations until each individual well is complete. Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations. At December 31, 2023 and 2022, Royale had deferred drilling obligations of $9,761,927 and $8,129,965 respectively.

Current wording

A certain portion of the turnkey drilling participant’s funds received are non-refundable. The Company records a liability for all funds invested as deferred drilling obligations until each individual well is complete. Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations. At December 31, 2024 and 2023, Royale had deferred drilling obligations of $11,457,996 and $9,761,927 respectively.

Previous wording

At December 31, 2023, the Company has an accumulated deficit of $90,323,289, a working capital deficiency of $7,184,318 and a stockholders’ deficit of $35,633,489. As a result, our financial statements include a “going concern qualification” reflecting substantial doubt as to our ability to continue as a going concern. See Note 1 to our audited financial statements. We do not possess funds necessary to implement our 2024 budget. Royale is continuing its drilling efforts with its direct working interest owners. In addition, we are exploring commitments to provide additional financing, but there is no guarantee that we will be able to secure additional financing on acceptable terms, or at all, needed to fully fund our 2024 drilling budget and to support future operations.

Current wording

At December 31, 2024, the Company has an accumulated deficit of $93,504,469, a working capital deficiency of $10,010,933 and a stockholders’ deficit of $12,329,315. As a result, our financial statements include a “going concern qualification” reflecting substantial doubt as to our ability to continue as a going concern. See Note 1 to our audited financial statements. We do not possess funds necessary to implement our 2025 budget. Royale is continuing its drilling efforts with its direct working interest owners. In addition, we are exploring commitments to provide additional financing, but there is no guarantee that we will be able to secure additional financing on acceptable terms, or at all, needed to fully fund our 2025 drilling budget and to support future operations.

Previous wording

For the year ended December 31, 2023, we had a net loss of $1,832,187 compared to the net loss of $145,594 during the year in 2022. Total revenues from operations in 2023 were $ 2,160,594, a decrease of $ 481,943 or 18.2%, from the total revenues of $2,642,537 in 2022, due to lower oil and natural gas commodity prices during 2023. Total expenses for operations in 2023 were $6,211,039, an increase of $1,112,761 or 21.8%, from total expenses of $5,098,278 in 2022, mainly due to higher lease impairments during 2023.

Current wording

For the year ended December 31, 2024, we had a net loss of $2,159,016 compared to the net loss of $1,832,187 during the year in 2023. Total revenues from operations in 2024 were $2,227,035, an increase of $66,441 or 3.1%, from the total revenues of $2,160,594 in 2023, due to higher oil production volumes due to drilling activity during 2024. Total expenses for operations in 2024 were $5,706,355, a decrease of $504,684 or 8.1%, from total expenses of $6,211,039 in 2023, mainly due to lower lease impairments during 2024.

Previous wording

During the year ended 2023, revenues from oil and gas production decreased $497,196 or 19.0% to $ 2,114,026 from the 2022 revenues of $2,611,222. This decrease was mainly due to lower commodity prices realized for the sale of oil and gas in 2023. The net sales volume of oil and condensate for the year ended December 31, 2023 was approximately 22,399 barrels of oil with an average price of $74.27 versus approximately 18,015 barrels with an average price of $91.86 per barrel, in 2022. This represents an increase in net sales volume of approximately 4,384 barrels or 24.3%, which was due to wells completed and put online in 2023 and the latter half of 2022. The net sales volume of natural gas for the year ended December 31, 2023, was approximately 128,160 Mcf with an average price of $3.47 per Mcf, versus 135,136 Mcf with an average price of $7.01 per Mcf for the year in 2022. This represents a decrease in net sales volume of approximately 6,976 Mcf or 5.2%. The decrease in natural gas production volume was due to lower production volumes on existing wells due to natural declines.

Current wording

During the year ended 2024, revenues from oil and gas production increased $50,215 or 2.4% to $2,164,241 from the 2023 revenues of $ 2,114,026. This increase was mainly due to higher oil production volumes due to 2024 drilling activity. The net sales volume of oil and condensate for the year ended December 31, 2024 was approximately 26,573 barrels of oil with an average price of $72.83 versus approximately 22,399 barrels with an average price of $74.27 per barrel, in 2023. This represents an increase in net sales volume of approximately 4,174 barrels or 18.6%, which was higher due to wells completed and put online in 2024 and at the end of 2023. The net sales volume of natural gas for the year ended December 31, 2024, was approximately 116,406 Mcf with an average price of $1.94 per Mcf, versus 128,160 Mcf with an average price of $3.47 per Mcf for the year in 2023. This represents a decrease in net sales volume of approximately 11,754 Mcf or 9.2%. The decrease in natural gas production volume was due to lower production volumes on existing wells due to natural declines.

Previous wording

Oil and natural gas lease operating expenses decreased by $196,851 or 10.2%, to $1,731,670 for the year ended December 31, 2023, from $1,928,521 for the year in 2022. This decrease was due to the receipt of water disposal recovery fees received in 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. When measuring lease operating costs on a production or lifting cost basis, in 2023, the $1,731,670 equates to a $6.60 per Mcfe lifting cost versus a $7.93 per Mcfe lifting cost in 2022, due to the receipt of the water disposal fees and higher oil production volumes in 2023.

Current wording

Oil and natural gas lease operating expenses increased by $251,503 or 14.5%, to $1,983,173 for the year ended December 31, 2024, from $1,731,670 for the year in 2023. This increase was mainly due to repairs and restoration of well equipment in our Texas Jameson field due to weather related damage. When measuring lease operating costs on a production or lifting cost basis, in 2024, the $1,983,173 equates to a $7.19 per Mcfe lifting cost versus a $6.60 per Mcfe lifting cost in 2023.

Previous wording

The aggregate of Supervisory Fees and Other Revenue was $46,568 for year ended December 31, 2023, an increase of $15,253 or 48.7% from $31,315 during the year in 2022. This increase was mainly due to higher interest income received in 2023 due to our higher cash balances.

Current wording

The aggregate of Supervisory Fees and Other Revenue was $62,794 for year ended December 31, 2024, an increase of $16,226 or 34.8% from $46,568 during the year in 2023. This increase was mainly due to higher interest income received in 2024 due to our higher cash balances.

Previous wording

Depreciation, depletion and amortization expense decreased to $346,866 from $575,909, a decrease of $229,043 or 39.8% for the year ended December 31, 2023, as compared to the year in 2022. The depletion rate is calculated using production by comparing capitalized cost to the recoverable reserves remaining. The decrease in depreciation expense was mainly due to a lower asset base due to impairments mainly on our California natural gas wells.

Current wording

Depreciation, depletion and amortization expense decreased to $308,523 from $346,866, a decrease of $38,343 or 11.1% for the year ended December 31, 2024, as compared to 2023. The depletion rate is calculated using production by comparing capitalized cost to the recoverable reserves remaining. The decrease in depreciation expense was due to a increase in expected recoverable reserves which decreased the depletion rate.

Previous wording

General and administrative expenses decreased by $83,182 or 4.6% from $1,808,197 for the year ended December 31, 2022, to $1,725,015 for the year in 2023. This decrease was due to lower employee related expenses due to cost reduction measures during 2023. Legal and accounting expense decreased to $435,372 for in 2023, compared to $526,550 in 2022, a $91,178 or 17.3% decrease. This decrease was primarily due to higher outside accounting fees in 2022, mainly related to conversion of our accounting software. Marketing expense for the year ended December 31, 2023, increased $91,324, or 35.3%, to $350,425, compared to $259,101 for the year in 2022. Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs.

Current wording

General and administrative expenses decreased by $91,275 or 5.3% from $1,725,015 for the year ended December 31, 2023, to $1,633,740 in 2024. This decrease was due to lower board related expenses due to cost reduction measures and higher overhead offsets in 2024 when compared to 2023. Legal and accounting expense increased to $582,413 in 2024, compared to $435,372 in 2023, a $147,041 or 33.8% increase. This increase was primarily due to higher legal fees related to our debt facility entered into during the first quarter of 2024, and preparation of the transaction documents related to the conversion of the Series B Convertible Preferred shares described in Note 14. Marketing expense for the year ended December 31, 2024, decreased $3,381, or 1.0%, to $347,044, compared to $350,425 for the year in 2023. Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs.

Previous wording

At December 31, 2023, Royale had a Deferred Drilling Obligation of $9,761,927. During 2023, we removed $6,228,038 of drilling obligations as we completed one oil well in our Texas Jameson field and participated in drilling and completion of two successful oil wells in the Texas Permian basin and one dry well in southern California, while incurring expenses of $4,120,538, resulting in a gain of $2,107,500. At December 31, 2022, Royale had a Deferred Drilling Obligation of $8,129,965. During 2022, we removed $7,027,474 of drilling obligations as we completed five oil wells in Texas and participated in the drilling and completion of two wells in southern California, while incurring expenses of $5,301,060, resulting in a gain of $1,726,414.

Current wording

At December 31, 2024, Royale had a Deferred Drilling Obligation of $11,457,996. During 2024, we removed $6,562,721 of drilling obligations as we participated in drilling and completion of four gross (0.0722 net) successful oil wells in the Texas Permian basin, while incurring expenses of $4,955,045, resulting in a gain of $1,607,677. At December 31, 2023, Royale had a Deferred Drilling Obligation of $9,761,927. During 2023, we removed $6,228,038 of drilling obligations as we completed one gross (0.3176 net) oil well in our Texas Jameson field and participated in drilling and completion of two gross (0.0145 net) successful oil wells in the Texas Permian basin and one dry well in southern California, while incurring expenses of $4,120,538, resulting in a gain of $2,107,500.

Previous wording

During 2023, we recorded lease impairments of approximately $1.6 million on lease and land costs in our California natural gas fields where the carrying value exceeded the fair value. No lease impairments were recorded in 2022. During 2023, we recorded a gain on other of $54,975 as we reconciled employee related items previously recorded as liabilities. In 2023, 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 2023, we recorded a write down of $22,690 on certain well equipment that were either written down to their current market value or written off as they were no longer useable. During the year in 2022, we recorded a gain of $422,614 on settlement of accounts payable for a reduced amount. During 2022, we also recorded a gain on other of $163,571, mainly due to the receipt of Employee Retention Credit (ERC) payroll tax refunds from the Internal Revenue Service. During the year in 2022, we recorded a gain of $422,614 on settlement of accounts payable for a reduced amount.

Current wording

During 2024, we recorded Credit Loss expense of $450,743 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 period in 2024, we also recorded lease impairments of $400,719 on various lease and land costs in our California fields where the carrying value exceeded the fair value. During 2024, we also recorded a gain on sale of assets of $17,500 as we received a credit for well equipment sold during a 2021 sales transaction. During 2023, we recorded lease impairments of $1.6 million on lease and land costs in our California fields where the carrying value exceeded the fair value. In 2023, we recorded a gain on other of $54,975 as we reconciled employee related items previously recorded as liabilities. In 2023, 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 2023, we recorded a write down of $22,690 on certain well equipment that were either written down to their current market value or written off as they were no longer useable.

Previous wording

At December 31, 2023, Royale had current assets totaling $9,669,618 and current liabilities totaling $16,853,936, a $7,184,318 working capital deficit. We had cash and cash equivalents at December 31, 2023 of $2,202,521 and restricted cash of $3,325,000 compared to cash and cash equivalents of $1,650,507 and restricted cash of $2,249,627 at December 31, 2022.

Current wording

At December 31, 2024, Royale had current assets totaling $10,155,158 and current liabilities totaling $20,166,091, a $10,010,933 working capital deficit. We had cash and cash equivalents at December 31, 2024 of $1,877,163 and restricted cash of $6,025,000 compared to cash and cash equivalents of $2,202,521 and restricted cash of $3,325,000 at December 31, 2023.

Previous wording

At December 31, 2023, our other receivables net, which consists of joint interest billing receivables from direct working interest participants and industry partners, totaled $1,036,401, compared to $943,633 at December 31, 2022, a $92,768 increase. This increase was mainly due higher accounts receivables from direct working interest owners for lease operating expenses to increase production volumes mainly in our Texas Jameson field. At December 31, 2023, revenue receivable was $878,378, an increase of $176,441, compared to $701,937 at December 31, 2022, due to higher production volumes as two new non-operated wells came online at year end 2023. At December 31, 2023, our accounts payable and accrued expenses totaled $5,482,074, a decrease of $46,755 from the accounts payable at December 31, 2022 of $5,528,829, mainly due to payments on accounts payable at year end 2023.

Current wording

At December 31, 2024, our other receivables net, which consists of joint interest billing receivables from direct working interest participants and industry partners, totaled $868,429, compared to $1,036,401 at December 31, 2023, a $167,972 decrease. This decrease was mainly due to lower accounts receivables from payment of Joint Interest Bills by direct working interest owners for lease operating expenses of our Texas Jameson wells. At December 31, 2024, revenue receivable was $764,653, a decrease of $113,725, compared to $878,378 at December 31, 2023, due to lower uncollected production volumes and commodity prices at year end 2024 when compared to year end 2023. At December 31, 2024, our accounts payable and accrued expenses totaled $6,966,605, an increase of $1,484,531 from the accounts payable at December 31, 2023 of $5,482,074, mainly due to mainly due to higher trade payables primarily related to drilling costs during 2024.

Previous wording

Operating Activities. For the years ended December 31, 2023 and 2022, cash used in operating activities totaled $769,919 and $2,809,788, respectively. This $2,039,869 decrease in cash used was primarily due to a decrease in prepaid drilling costs during the period in 2023 due to participating in the drilling of four non-operated Texas oil wells which were prepaid in 2022 and drilled and completed in 2023.

Current wording

Operating Activities. For the years ended December 31, 2024 and 2023, cash used in operating activities totaled $2,210,999 and $769,919, respectively. This $1,441,080 difference in cash used was mainly due to the difference in non-cash expenses especially lease impairments, and the difference in prepayments mainly for drilling costs, when comparing 2024 and 2023.

Previous wording

Investing Activities. Net cash provided by investing activities totaled $2,409,291 and $2,608,871 for the years ended December 31, 2023 and 2022, respectively. The difference was due to cash receipts of approximately $7.9 million in 2023 and $7.3 million in 2022 in direct working interest turnkey investments. During 2023, our turnkey drilling expenditures were approximately $5.5 million as we drilled and completed one oil well in our Texas Jameson field and participated in the drilling and completion of two Texas oil wells in the Permian basin and the drilling one California oil well. During 2022, our turnkey drilling expenditures were approximately $4.7 million as we drilled and completed five oil wells in Texas and participated in the drilling of two California oil wells.

Current wording

Investing Activities. Net cash provided by investing activities totaled $3,192,264 and $2,409,291 for the years ended December 31, 2024 and 2023, respectively. The difference was due to cash receipts of approximately $8.3 million in 2024 and $7.9 million in 2023 in direct working interest turnkey investments. During 2024, our turnkey drilling expenditures were approximately $5.1 million as we participated in the drilling and completion of four gross (0.0722 net) Texas oil wells in the Permian basin. During 2023, our turnkey drilling expenditures were approximately $5.5 million as we drilled and completed one gross (0.3176 net) oil well in our Texas Jameson field and participated in the drilling and completion of two gross (0.0145 net) Texas oil wells in the Permian basin and the drilling one gross (0.5679 net) California oil well.

Previous wording

During 2022, our overall proved developed and undeveloped natural gas reserves decreased by 76.4% and our previously estimated proved developed and undeveloped natural gas reserve quantities were revised downward by approximately 1.3 million cubic feet of natural gas. This downward revision was mainly the result of a decrease in proved undeveloped oil reserves from drilling locations which the Company had previously estimated. See Note 15 – Supplemental Information About Oil and Gas Producing Activities (Unaudited)to our Financial Statements.

Current wording

During 2024, our overall proved developed and undeveloped oil reserves increased by 9.6% and our previously estimated proved developed and undeveloped oil reserve quantities were revised upward by approximately 32 thousand barrels. This upward revision was mainly the result of an increase in proved undeveloped oil reserves from drilling locations which the Company had previously estimated. Our overall proved developed and undeveloped natural gas reserves decreased by 17.1% mainly due to production and our previously estimated proved developed and undeveloped natural gas reserve quantities were revised upward by approximately 4 thousand cubic feet of natural gas. This upward revision was mainly the result of an increase in proved undeveloped natural gas reserves from drilling locations which the Company had previously estimated. See Note 17 – Supplemental Information About Oil and Gas Producing Activities (Unaudited), to our Financial Statements.