Royale Energy, Inc.

Previous wording

In addition to historical information contained herein, certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the SEC, press releases, conferences or otherwise, may be deemed to be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 (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 be 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, 2024, and those described from time to time in our future reports filed with the SEC.

Current wording

In addition to historical information contained herein, certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the SEC, press releases, conferences or otherwise, may be deemed to be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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. 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. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, and those described from time to time in our future reports filed with the SEC.

Previous wording

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, 2024.

Current wording

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 in our Annual Report on Form 10-K for the year ended December 31, 2025.

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. Prior to 2019, Royale primarily acquired and developed producing and non-producing natural gas properties in California. In December 2018, Royale became the operator of an 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.

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 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.

Previous wording

During the first nine months of 2025, revenues from oil and gas production decreased $376,201 or 21.5%, to $1,372,919 during the period in 2025 from revenues of $1,749,120 during the first nine months of 2024. This decrease was mainly due to lower oil and natural gas production volumes and lower oil commodity prices. The net sales volume of oil and condensate for the nine months ended September 30, 2025, was approximately 18,592 barrels with an average price of $63.86 per barrel, versus 21,079 barrels with an average price of $74.88 per barrel for the nine months of 2024. This represents a decrease in net sales volume of 2,487 barrels or 11.8%, which was mainly due to wells being offline during the period in 2025 due to weather related issues in our Texas Jameson field. The net sales volume of natural gas for the nine months ended September 30, 2025, was approximately 84,898 Mcf with an average price of $2.15 per Mcf, versus 91,255 Mcf with an average price of $1.84 per Mcf for the same period in 2024. This represents a decrease in net sales volume of 6,357 Mcf or 7.0%. The decrease in natural gas production volume was also due to the weather related issues in our Jameson field and to some of our California natural gas wells being offline for approximately a month due to mandatory pipeline inspections by Pacific Gas and Electric. For the quarter ended September 30, 2025, revenues from oil and gas production increased $24,867 or 4.4% to $584,576 from the 2024 third quarter revenues of $559,709. This increase was due to higher oil and natural gas production volumes during the period in 2025. The net sales volume of oil and condensate for the quarter ended September 30, 2025, was approximately 8,092 barrels with an average price of $63.29 per barrel, versus 6,800 barrels with an average price of $74.25 per barrel for the third quarter of 2024. This represents an increase in net sales volume of 1,292 barrels or 19.0% for the quarter in 2025. The net sales volume of natural gas for the quarter ended September 30, 2025, was approximately 34,096 Mcf with an average price of $2.11 per Mcf, versus 30,182 Mcf with an average price of $1.79 per Mcf for the third quarter of 2024. This represents an increase in net sales volume of 3,914 Mcf or 13.0% for the quarter in 2025.

Current wording

During the first six months of 2026, revenues from oil and gas production increased $414,272 or 50.6%, to $1,232,774 from revenues of $818,502 during the first six months of 2025. This increase was mainly due to higher oil production volumes and higher oil commodity prices, partially offset by lower realized natural gas prices. The net sales volume of oil and condensate for the six months ended June 30, 2026 was approximately 13,832 barrels with an average price of $84.44 per barrel, versus 10,500 barrels with an average price of $66.80 per barrel for the first six months of 2025. The net sales volume of natural gas for the six months ended June 30, 2026 was approximately 61,036 Mcf with an average price of $0.66 per Mcf, versus 50,801 Mcf with an average price of $2.26 per Mcf for the same period in 2025. For the quarter ended June 30, 2026, revenues from oil and gas production increased $325,301 or 94.5% to $669,655 from the 2025 second quarter revenues of $344,354, mainly due to higher oil production volumes and commodity prices. The net sales volume of oil and condensate for the quarter ended June 30, 2026 was approximately 6,632 barrels with an average price of $97.78 per barrel, versus 4,812 barrels with an average price of $60.67 per barrel for the second quarter of 2025. The net sales volume of natural gas for the quarter ended June 30, 2026 was approximately 26,710 Mcf with an average price of $0.19 per Mcf, versus 28,035 Mcf with an average price of $1.83 per Mcf for the second quarter of 2025.

Previous wording

Depreciation, depletion and amortization expense decreased to $198,976 from $253,726, a decrease of $54,750 or 21.6% for the nine months ended September 30, 2025, compared to the same period in 2024. This decrease in depletion expense was due to an increase in expected recoverable reserves which decreased the depletion rate. The depreciation rate is calculated using production as a percentage of reserves. During the third quarter 2025, depreciation, depletion and amortization expenses increased $26,949 or 47.7% due to an increase in our oil and gas assets during the quarter due to our purchase of additional interests in existing wells.

Current wording

Depreciation, depletion and amortization expense was $210,141 for the six months ended June 30, 2026, compared to $115,480 for the same period in 2025, and $110,580 for the second quarter of 2026 compared to $42,262 for the second quarter of 2025. The depletion rate is calculated using production as a percentage of reserves. This increase in depletion expense was due to an increase in oil and gas assets during the third quarter of 2025 due to our purchase of additional interests in existing wells.

Previous wording

At September 30, 2025, Royale Energy had a Deferred Drilling Obligation of $13,982,996. During the first nine months of 2025, although we participated in the drilling of a well in the Texas Permian basin, we did not book turnkey gains or losses as we waited for the well to be completed and the final costs to be determined. At December 31, 2024, Royale Energy had a Deferred Drilling Obligation of $11,328,332. During the first nine months of 2024, we removed $3,371,095 of drilling obligations as we participated in the drilling and completion of two oil wells in the Texas Permian basin, while incurring expenses of $2,843,380, resulting in a gain of $527,715.

Current wording

At June 30, 2026, Royale Energy had a Deferred Drilling Obligation of $17,549,496, compared to $14,277,496 at December 31, 2025 and $14,799,496 at March 31, 2026. During the first six months of 2026, although we participated in the drilling of two wells in the Texas Permian basin, and we did not book turnkey gains or losses as we waited for the wells to be completed and the final costs to be determined. At June 30, 2025, Royale Energy had a Deferred Drilling Obligation of $13,282,996. During the first six months of 2025, although we participated in the drilling of a well in the Texas Permian basin, we did not book turnkey gains or losses as we waited for the well to be completed and the final costs to be determined.

Previous wording

General and administrative expenses increased by $37,326 or 3.1% from $1,197,677 for the nine months ended September 30, 2024 to $1,235,003 for the same period in 2025. For the third quarter 2025, general and administrative expenses increased $13,311 or 3.6% when compared to the same period in 2024. These increases were mainly due to higher employee related expenses during the periods in 2025. For the first nine months of 2025, marketing expenses decreased $41,252 or 15.3% to $228,732, compared to $269,984 for the first nine months of 2024. For the third quarter 2025, marketing expenses decreased $66,007 or 51.5% when compared to the third quarter in 2024. Marketing expense varies from period to period according to the number of marketing events attended by our personnel and their associated costs.

Current wording

General and administrative expenses were $1,001,350 for the six months ended June 30, 2026, compared to $852,046 for the same period in 2025, a change of $149,304 or 17.5%. For the second quarter of 2026, general and administrative expenses were $527,295 compared to $385,628 for the second quarter of 2025, an increase of $141,667 or 36.7%. These increases were mainly due to higher employee related compensation expenses. For the first six months of 2026, marketing expenses were $193,882, compared to $166,528 for the first six months of 2025, and $89,228 for the second quarter of 2026 compared to $97,493 for the same quarter in 2025. Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated exhibition and travel costs.

Previous wording

During the nine months ended September 30, 2025, we recorded a $230,681 gain on settlement of asset retirement obligation liability due mainly to finalizing the plugging and abandonment of three natural gas sites in California. During the nine months ended September 30, 2025 and 2024, we recorded impairments of $27,250 and $400,554, respectively, on various lease and land costs in our California natural gas fields where the carrying value exceeded the fair value. During the nine months ended September 30, 2025 and 2024, we also recorded Credit Loss expenses of $111,558 and $279,491, respectively, which arose from identified uncollectable receivables relating to our oil and natural gas properties either plugged and abandoned or scheduled for plugging and abandonment and our period end oil and natural gas reserve values. We periodically review our accounts receivable from working interest owners to determine whether collection of any of these charges appears doubtful.

Current wording

During the six months ended June 30, 2026 and 2025, we recorded Credit Loss expenses of $32,906 and $13,126, respectively, which arose from identified uncollectable receivables relating to our oil and natural gas properties either plugged and abandoned or scheduled for plugging and abandonment and our period end oil and natural gas reserve values. We periodically review our accounts receivable from working interest owners to determine whether collection of any of these charges appears doubtful. During the six months ended June 30, 2026 and 2025, we recorded gains on settlement of asset retirement obligations of $8,132 and $30,912, respectively, due to quarterly reconciliations of our asset retirement obligation and, in 2025, the finalization of the plugging and abandonment of three natural gas sites in California. During the six months ended June 30, 2025, we recorded lease impairments of $27,250 on various lease and land costs in our California natural gas fields where the carrying value exceeded the fair value.

Previous wording

At September 30, 2025, we had current assets totaling $8,765,809 and current liabilities totaling $20,992,223, resulting in a $12,226,414 working capital deficit. We had $796,979 in cash and $5,476,900 in restricted cash at September 30, 2025, compared to $1,877,163 in cash and $6,025,000 in restricted cash at December 31, 2024.

Current wording

At June 30, 2026, we had current assets totaling $13,642,559 and current liabilities totaling $26,570,390, resulting in a $12,927,831 working capital deficit. We had $2,832,913 in cash and $6,711,325 in restricted cash at June 30, 2026, compared to $1,099,044 in cash and $7,175,950 in restricted cash at December 31, 2025.

Previous wording

At September 30, 2025, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $663,775 compared to $868,429 at December 31, 2024, a $204,654 or 23.6% decrease, mainly due to lower joint interest billing receivables. At September 30, 2025, revenue receivable was $573,638, a decrease of $191,015, compared to $764,653 at December 31, 2024, due to lower production volumes and commodity prices during the period in 2025 when compared to the fourth quarter of 2024. At September 30, 2025, our accounts payable and accrued expenses totaled $5,261,628, a decrease of $1,704,977 from the accounts payable at December 31, 2024 of $6,966,605, which was mainly due to lower revenue payables at the end of the third quarter 2025 and accounts payable payments and accrued liability settlements during the period in 2025.

Current wording

At June 30, 2026, our other receivables, which consist of joint interest billing receivables from direct working interest investors and industry partners, totaled $803,398 compared to $793,608 at December 31, 2025. At June 30, 2026, revenue receivable was $777,590, compared to $694,729 at December 31, 2025, due to higher commodity prices in the second quarter of 2026. At June 30, 2026, our accounts payable and accrued expenses totaled $7,315,027, compared to $6,033,878 at December 31, 2025, higher due to our participation in the drilling of two Permian basin wells during the period in 2026.

Previous wording

We have had recurring operating and net losses and cash used in operations and the condensed consolidated financial statements reflect a working capital deficiency of $12,226,414 and an accumulated deficit of $95,155,483. These factors raise substantial doubt about our ability to continue as a going concern, and 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 properties, sales of participation interests in oil and gas wells 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 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 should allow the Company to meet its liquidity needs through the remainder of 2025.

Current wording

We have had recurring operating and net losses and cash used in operations, and the financial statements reflect a working capital deficiency of $12,927,831 and an accumulated deficit of $96,199,116. 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 interests, and the possible issuance of debt and/or equity. 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 improve the Company’s liquidity position; however, these plans have not alleviated the substantial doubt about our ability to continue as a going concern for the twelve months following the date these financial statements are issued.

Previous wording

Investing Activities. Net cash provided by investing activities totaled $555,994 and $231,089 for the nine months ended September 30, 2025 and 2024, respectively, a $324,905 or 140.6% difference. During the nine month period in 2025, we received approximately $2.5 million in drilling funds while our drilling and lease expenditures were approximately $2.0 million, mainly due to our purchase of additional interests in our existing Permian basin wells. During the nine-month period in 2024, we received approximately $4.9 million in drilling funds while our drilling and lease expenditures were approximately $4.7 million as we participated in drilling and obtained lease interests in the Permian basin.

Current wording

Investing Activities. Net cash provided by investing activities totaled $1,449,650 and $1,808,069 for the six months ended June 30, 2026 and 2025, respectively. During the six-month period in 2026, we received approximately $3.3 million in drilling funds, and our drilling and lease expenditures were approximately $1.6 million, we also used $200,000 in the acquisition of direct working interests. During the six-month period in 2025, we received approximately $1.8 million in drilling funds while our drilling and lease expenditures were approximately $16,900.