EDGAR 10-K Filing

Company CIK: 1694617
Filing Year: 2021
Filename: 1694617_10-K_2021_0001185185-21-000424.json

---

ITEM 1. BUSINESS
Item 1 Description of Business
Royale Energy, Inc. (“Royale” or the “Company”) is an independent oil and natural gas producer incorporated under the laws of Delaware. 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. Royale was incorporated in Delaware in 2017 and is the successor by merger (as described below) to Royale Energy Funds, Inc., a California corporation formed in 1983. On December 31, 2020, Royale and its consolidated subsidiaries had 11 full time employees.
RMX Joint Venture
On April 4, 2018, RMX Resources, LLC (“RMX”), CIC RMX LP (“CIC”), and Royale Energy Funds, Inc., (“REF”), and Matrix Oil Management Corporation (“Matrix”), entered into a Subscription and Contribution Agreement (the “Contribution Agreement”) and certain other agreements contemplated therein (the “Transaction”). The Contribution Agreement provided that Royale, REF and Matrix would contribute certain assets to RMX Resources, LLC (“RMX”), a newly formed Texas limited liability company. In exchange for its contributed assets, Royale received a 20% equity interest in RMX, an equity performance incentive interest and $20.0 million to satisfy Matrix’s current senior lender, Arena Limited SPV, LLC, in full, and to pay REF, Matrix and Royale’s trade payables and other outstanding obligations. CIC contributed an aggregate of $25.0 million in cash to RMX in exchange for (i) an 80% equity interest in RMX, with preferred distributions until certain thresholds are met, (ii) a warrant (“Warrant”) to acquire up to 4,000,000 shares of Royale’s common stock at an exercise price of $0.01 per share and registration rights pursuant to a Registration Rights Agreement (“Registration Rights Agreement”).
Under the terms of a management services agreement (the “Management Services Agreement”), required by the Contribution Agreement, Royale provided RMX with accounting, financial reporting and analysis, and regulatory support services for a payment of $180,000 per month. This agreement ended on March 31, 2019.
Royale Business
In this Annual Report, “Royale” and the “Company” refer to Royale Energy, Inc., a Delaware corporation. Financial information is reported for Royale on a consolidated basis including the following subsidiaries:
◦ Royale Energy Funds, Inc.
◦ Matrix Permian Investment, L.P.
◦ Matrix Las Cienegas L.P.
◦ Matrix Investment, L.P.
◦ Matrix Oil Management, Corp.
Royale and its subsidiaries own wells and leases located mainly in the Sacramento Basin and San Joaquin Basin in California as well as in Texas, Utah, Oklahoma, Colorado and Louisiana, as well as an overriding royalty interest in Alaska. Royale 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. Selling part of the working interest to others allows Royale to reduce its drilling risk by owning a diversified inventory of properties with less of its own funds invested in each drilling prospect, than if Royale owned all the working interest and paid all drilling and development costs of each prospect itself. Royale generally sells working interests in its prospects to accredited investors in exempt securities offerings. The prospects are typically bundled into multi-well investments, which permit the third-party investors to diversify their investments by investing in several wells at once instead of investing in single well prospects.
During its fiscal year ended December 31, 2020, Royale continued to explore and develop oil and natural gas properties with concentration in California and Texas. Additionally, we own proved developed producing and non-producing reserves of oil and natural gas in Utah, Texas, Oklahoma, Colorado and Louisiana, as well as holding an overriding royalty interest in a discovery in Alaska. In 2020, Royale drilled five (5) wells, all five (5) of which were commercially productive. Royale’s estimated total reserves were approximately 11.9 and 17.33 BCFE (billion cubic feet equivalent) at December 31, 2020 and 2019, respectively. According to the reserve reports furnished by Netherland, Sewell & Associates, Inc., Royale’s independent petroleum engineers, the net reserve value of its proved developed and undeveloped reserves was approximately $20.8 million at December 31, 2020, based on the average Henry Hub natural gas price spot price of $1.985 per MCF and for oil volumes, the average West Texas Intermediate price of $39.54 per barrel as applied on a field-by-field basis. Netherland, Sewell & Associates, Inc. supplied reserve value estimates for the Company’s California, Texas, Oklahoma, Utah, Colorado and Louisiana properties.
Net reserve value does not represent the fair market value of our reserves on that date, and we cannot be sure what return we will eventually receive on our reserves. Net reserve value of proved developed and undeveloped reserves was calculated by subtracting estimated future development costs, future production costs and other operating expenses from estimated net future cash flows from our developed and undeveloped reserves.
Our standardized measure of discounted future net cash flows at December 31, 2020, was estimated to be $7,441,035. This figure was calculated by subtracting our estimated future income tax expense from the net reserve value of proved developed and undeveloped reserves, and by further applying a 10% annual discount for estimated timing of cash flows. A detailed calculation of our standardized measure of discounted future net cash flow is contained in Note 20 to our Financial Statements, Supplemental Information about Oil and Gas Producing Activities - Changes in Standardized Measure of Discounted Future Net Cash Flow from Proved Reserve Quantities.
Royale reported a gain on turnkey drilling in connection with the drilling of wells on a “turnkey contract” basis in the amount of $1,700,462 and $2,909,908 for the years ended December 31, 2020 and 2019, respectively.
In addition to Royale’s own staff, Royale hires independent contractors to drill, test, complete and equip the wells that it drills. Approximately 97.2% of Royale’s total revenue for the year ended December 31, 2020, came from sales of oil and natural gas from production of its wells in the amount of $1,542,803. In 2019, this amount was $2,329,275, which represented 78.5% of Royale’s total revenues for the respective periods presented. See Note 2 to our Financial Statements.
Plan of Business
Royale acquires interests in oil and natural gas reserves and sponsors private joint ventures. Royale believes that its stockholders are better served by diversification of its investments among individual drilling prospects. Through its sale of joint ventures, Royale can acquire interests and develop oil and natural gas properties with greater diversification of risk and still receive an interest in the revenues and reserves produced from these properties. By selling some of its working interest in most projects, Royale decreases the amount of its investment required in the projects and diversifies its oil and gas property holdings, to reduce the risk of concentrating a large amount of its capital in a few projects that may not be successful.
After acquiring the leases or lease participation, Royale drills or participates in the drilling of development and exploratory oil and natural gas wells on its property. Royale pays its proportionate share of the actual cost of drilling, testing, and completing the project to the extent that it retains all or any portion of the working interest.
Royale also may sell fractional working interests in undeveloped wells to finance part of the drilling cost. A drilling contract that calls for a company to drill a well, for a fixed price, to a specified depth or geological formation is called a “turnkey contract.” When Royale sells fractional working interests in undeveloped property to raise capital to drill oil and natural gas wells, generally it agrees to drill these wells on a turnkey contract basis, so that the holders of the fractional interests prepay a fixed amount for the drilling and completion of a specified number of wells. Under a turnkey contract, Royale may record a gain if total funds received to drill a well were more than the actual cost to drill those wells including costs incurred on behalf of the participants and costs incurred for its own account.
Although Royale’s operating agreements do not usually address whether investors have a right to participate in subsequent wells in the same area of interest as a proposed well, it is the Company’s policy to offer to investors in a successful well the right to participate in subsequent wells at the same percentage level as their working interest investment in the prior successful well.
Our policy for turnkey drilling agreements is to recognize a gain on turnkey drilling programs after our obligations have been fulfilled, and a gain is only recorded when funds received from participants are in excess of all costs Royale incurs during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account. See Note 1 to our Financial Statements, at page.
Once commenced, drilling is generally completed within 10-30 days. See Note 1 to Royale’s Financial Statements. Royale maintains internal records of the expenditure of each investor’s funds for drilling projects.
Royale generally operates the wells it completes. As operator, it receives fees set by industry standards from the owners of fractional interests in the wells and from expense reimbursements. For the year ended December 31, 2020, Royale charged overhead from operation of the wells in the amount of $305,900 for the year, which were an offset to general and administrative expenses. In 2019, the amount was $341,484. At December 31, 2020, Royale operated wells in California and Texas. Royale also has non-operating interests in wells in California, Utah, Texas, Oklahoma, Colorado and Louisiana.
Royale currently sells most of its California natural gas production through PG&E pipelines to independent customers on a monthly contract basis, while some gas is delivered through privately owned pipelines to independent customers. Since many users are willing to make such purchase arrangements, the loss of any one customer would not affect our overall sales operations.
All oil and natural gas properties are depleting assets in which production naturally decreases over time as the finite amount of existing reserves are produced and sold. It is Royale’s business as an oil and natural gas exploration and production company to continually search for new development properties. The Company’s success will ultimately depend on its ability to continue locating and developing new oil and natural gas resources. Oil demand is subject to global demand and prices can fluctuate widely. In early 2020, oil prices dropped precipitously, and have since returned to pre-covid-19 2020 levels. The future market is likely to be subject to continued similar price dynamics. Natural gas demand and the prices paid for gas are seasonal. In recent years, natural gas demand and prices in Northern California have fluctuated unpredictably throughout the year.
Competition, Markets and Regulation
Competition
The exploration and production of oil and natural gas is an intensely competitive industry. The sale of interests in oil and gas projects, like those Royale sells, is also very competitive. Royale encounters competition from other oil and natural gas producers, as well as from other entities that invest in oil and gas for their own account or for others, and many of these companies are substantially larger than Royale.
Markets
Market factors affect the quantities of oil and natural gas production and the price Royale can obtain for the production from its oil and natural gas properties. Such factors include: the extent of domestic production; the level of imports of foreign oil and natural gas; the general level of market demand on a regional, national and worldwide basis; domestic and foreign economic conditions that determine levels of industrial production; political events in foreign oil-producing regions; and variations in governmental regulations including environmental, energy conservation, and tax laws or the imposition of new regulatory requirements upon the oil and natural gas industry.
Regulation
Federal and state laws and regulations affect, to some degree, the production, transportation, and sale of oil and natural gas from Royale’s operations. States in which Royale operates have statutory provisions regulating the production and sale of oil and natural gas, including provisions regarding deliverability. These statutes, along with the regulations interpreting the statutes, generally are intended to prevent waste of oil and natural gas, and to protect correlative rights to produce oil and natural gas by assigning allowable rates of production to each well or proration unit.
The exploration, development, production and processing of oil and natural gas are subject to various federal and state laws and regulations to protect the environment. Various federal and state agencies are considering, and some have adopted, other laws and regulations regarding environmental controls that could increase the cost of doing business. These laws and regulations may require: the acquisition of permits by operators before drilling commences; the prohibition of drilling activities on certain lands lying within wilderness areas or where pollution arises; and the imposition of substantial liabilities for pollution resulting from drilling operations, particularly operations in offshore waters or on submerged lands. The cost of oil and natural gas development and production also may increase because of the cost of compliance with such legislation and regulations, together with any penalties resulting from failing to comply with the legislation and regulations. Ultimately, Royale may bear some of these costs.
Presently, Royale does not hold any undeveloped federal acreage on which it had plans to drill, and does not anticipate that compliance with federal, state and local environmental regulations will have a material adverse effect on capital expenditures, earnings, or its competitive position in the oil and natural gas industry; however, changes in the laws, rules or regulations, or the interpretation thereof, could have a materially adverse effect on Royale’s financial condition or results of operation.
You may obtain a copy of any materials filed by Royale with the Securities and Exchange Commission (“SEC”) at 100 F Street, N.W., Washington, D.C. 20549, by calling 1-800-SEC-0300. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Royale also provides access to its SEC reports and other public announcements on its website, http://www.royl.com.

---

ITEM 1A. RISK FACTORS

---

ITEM 1B. UNRESOLVED STAFF COMMENTS

---

ITEM 2. PROPERTIES
Item 2 Description of Property
Since 1993, Royale has concentrated on development of properties in the Sacramento Basin and the San Joaquin Basin of Northern and Central California. In 2020, Royale drilled two developmental oil wells in Texas and participated in the drilling of three developmental oil wells in California.
Following industry standards, Royale generally acquires oil and natural gas acreage without warranty of title except as to claims made by, though, or under the transferor. In these cases, Royale attempts to conduct due diligence as to title before the acquisition, but it cannot assure that there will be no losses resulting from title defects or from defects in the assignment of leasehold rights. Title to property most often carries encumbrances, such as royalties, overriding royalties, carried and other similar interests, and contractual obligations, all of which are customary within the oil and natural gas industry.
Following is a discussion of Royale’s significant oil and natural gas properties. Reserves at December 31, 2020, for each property discussed below, have been determined by Netherland, Sewell & Associates, Inc., registered professional petroleum engineers, in accordance with reports submitted to Royale on February 3, 2021.
California
Royale owns interests in nine gas fields with locations ranging throughout the Sacramento Basin in California. At December 31, 2020, Royale operated 12 wells and owns interests in 21 non-operated wells in Northern California and 6 non-operated wells in Southern and Central California. Our California estimated total proven, developed, and undeveloped net reserves are approximately 9.303 BCFE, according to Royale’s independently prepared reserve report as of December 31, 2020.
Texas
At December 31, 2020, Royale owned and operated interests in 46 wells in its Jameson field. Our Texas estimated total proven, developed, and undeveloped net reserves are approximately 216.6 MBOE, according to Royale’s independently prepared reserve report as of December 31, 2020.
Developed
Undeveloped
Gross Acres
Net Acres
Gross Acres
Net Acres
California
5,092.76
3,890.17
11,431.00
3,308.42
Texas
7,865.00
7,575.22
640.00
128.00
All Other States
2,347.89
1,439.91
6,481.00
6,481.00
Total
15,305.65
12,905.30
18,552.00
9,917.42
Developed and Undeveloped Leasehold Acreage
As of December 31, 2020, and 2019, Royale owned leasehold interests in the following developed and undeveloped properties in both gross and net acreage.
Gross and Net Productive Wells
As of December 31, 2020 and 2019, Royale owned interests in the following oil and gas wells in both gross and net acreage:
Gross Wells
Net Wells
Gross Wells
Net Wells
Natural Gas
12.3241
13.0576
Oil
19.0597
24.0716
Total
31.3838
37.1292
Drilling Activities
The following table sets forth Royale’s drilling activities during the years ended December 31, 2020 and 2019. All wells are located in the Continental U.S., in California, Texas, Louisiana, Colorado and Utah.
Year
Type of Well(a)
Gross Wells(b)
Net Wells(e)
Total
Producing(c)
Dry(d)
Producing(c)
Dry(d)
Exploratory
Developmental
1.7859
Exploratory
Developmental
1.2718
a) An exploratory well is one that is drilled in search of new oil and natural gas reservoirs, or to test the boundary limits of a previously discovered reservoir. A developmental well is one drilled on a previously known productive area of an oil and natural gas reservoir with the objective of completing that reservoir.
b) Gross wells represent the number of actual wells in which Royale owns an interest. Royale’s interest in these wells may range from 1% to 100%.
c) A producing well is one that produces oil and/or natural gas that is being purchased on the market.
d) A dry well is a well that is not deemed capable of producing hydrocarbons in paying, marketable, quantities.
e) One “net well” is deemed to exist when the sum of fractional ownership working interests in gross wells or acres equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as a whole number or a fraction.
Production
The following table summarizes, for the periods indicated, Royale’s net share of oil and natural gas production, average sales price per barrel (BBL), per thousand cubic feet (MCF) of natural gas, and the MCF equivalent (MCFE) for the barrels of oil based on a 6 to 1 ratio of the price per barrel of oil to the price per MCF of natural gas. “Net” production is production that Royale owns either directly or indirectly through partnership or joint venture interests produced to its interest after deducting royalty, limited partner or other similar interests. Royale generally sells its oil and natural gas at prices then prevailing on the “spot market” and does not have any material long term contracts for the sale of natural gas at a fixed price.
Net volume
Oil (BBL)
31,210
27,663
Gas (MCF)
160,406
292,472
MCFE
347,666
458,450
Average sales price
Oil (BBL)
$ 37.96
$ 54.40
Gas (MCF)
$ 2.23
$ 2.82
Net production costs and taxes
$ 1,397,673
$ 1,764,538
Lifting costs (per MCFE)
$ 4.02
$ 3.85
Reserve Estimates
Management has established, and is responsible for, internal controls designed to provide reasonable assurance that the estimates of Proved Reserves are computed and reported in accordance with rules and regulations promulgated by the SEC as well as established industry practices used by independent engineering firms and our peers. These internal controls include documented process workflows and qualified professional engineering and geological personnel with specific reservoir experience. Our internal processes and controls surrounding this process are routinely tested. We also retain outside independent engineering firms to prepare estimates of our Proved Reserves. Management reviews and approves our reserve estimates, whether prepared internally or by third parties. Our Chief Executive Officer oversaw our outside independent engineering firm, Netherland, Sewell & Associates, Inc. ("NSAI"), in connection with the preparation of their estimates of our Proved Reserves as of December 31, 2020. We also regularly communicate with NSAI throughout the year regarding technical and operational matters critical to our reserve estimations. Our Chief Executive Officer, with input from other members of management, is responsible for the selection of our third-party engineering firms and review of the reports generated. Our Chief Executive Officer has over 36 years of experience in the oil and natural gas industry and is a graduate of the University of Oklahoma with a degree in Chemical Engineering. During his career, he has had various relevant responsibilities in technical and leadership roles including asset management, drilling and completions, production engineering, reservoir engineering and reserves management, economic evaluations and field development in U.S. onshore projects. The third-party engineering reports are also provided to the Audit Committee.
Net Proved Oil and Natural Gas Reserves
As of December 31, 2020, Royale had proved developed reserves of 691,831 MCF and total proved reserves of 2,660,456 MCF of natural gas. For the same period, Royale also had proved developed oil and natural gas liquid combined reserves of 224,893 BBL and total proved oil and natural gas liquid combined reserves of 1,540,968 BBL.
As of December 31, 2019, Royale had proved developed reserves of 2,790,300 MCF and total proved reserves of 4,306,900 MCF of natural gas. For the same period, Royale also had proved developed oil and natural gas liquid combined reserves of 232,200 BBL and total proved oil and natural gas liquid combined reserves of 2,171,000 BBL.
Oil and gas reserve estimates and the discounted present value estimates associated with the reserve estimates are based on numerous engineering, geological and operational assumptions that generally are derived from limited data.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3 Legal Proceedings
None.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4 Mine Safety Disclosures
Not Applicable
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5 Market for Common Equity and Related Stockholder Matters
Royale’s Common Stock is traded on the OTC QB Market under the symbol “ROYL.” As of December 31, 2020, 54,605,488 shares of Common Stock were held by approximately 5,018 stockholders. As of December 31, 2019, 51,854,136 shares of Royale’s Common Stock were held by approximately 4,160 stockholders. The following table reflects the high and low quarterly closing sales prices on the Nasdaq Stock Market and OTC QB Market from January 2019 through December 2020:
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
High
Low
High
Low
High
Low
High
Low
$ 0.35
$ 0.15
$ 0.33
$ 0.23
$ 0.26
$ 0.17
$ 0.19
$ 0.10
$ 0.24
$ 0.07
$ 0.18
$ 0.08
$ 0.18
$ 0.10
$ 0.13
$ 0.08
Transfer Agent
The Company utilizes the independent transfer agent services of American Stock Transfer & Trust Company as its transfer agent.
Dividends
The Board of Directors did not issue cash dividends in either 2020 or 2019. The Board of Directors did declare dividends during 2020 and 2019 on the preferred stock to be Paid In Kind (“PIK”) of 76,290 and 73,473 shares with a respective par value of $762,900 and $734,725, as more fully set forth in Note 7 to our Financial Statements.
Recent Sales of Unregistered Securities
None.

---

ITEM 6. SELECTED FINANCIAL DATA

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
2020 Challenges
In December 2019, a novel strain of coronavirus (which triggers a respiratory disease called COVID-19) was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” The COVID-19 outbreak has caused a major reduction in the consumption of hydrocarbon-based transportation fuels as airlines have grounded flights worldwide and countries around the world have asked residents to suspend automobile travel. In addition to a substantial loss of demand for crude oil, in March 2020, Saudi Arabia entered into a price war with Russia and added additional supplies of crude oil to an already over supplied market. The result has been a precipitous decline in the price of crude oil received by the Company. As a result, the Company has seen a reduction in its oil and natural gas revenues and resulting cash flows for the year 2020.
General
The following discussion should be read in conjunction with Royale’s Financial Statements and Notes thereto and other financial information relating to Royale included elsewhere in this document.
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.
Critical Accounting Policies
Revenue Recognition
Royale’s primary business is oil and gas production. Natural gas flows from the wells into gathering line systems, which are equipped occasionally with compressor systems, which in turn flow into metered transportation and customer pipelines. Monthly, price data and daily production are used to invoice customers for amounts due to Royale and other working interest owners. Royale operates most of its own wells and receives industry standard operator fees (“Supervisory Fees”). Supervisory Fees are recognized as a reduction to the Company’s General and Administrative Expenses.
Royale generally sells crude oil and natural gas under short-term agreements at prevailing market prices. Revenues are recognized when the products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.
Revenues from the production of oil and natural gas properties in which the Royale has an interest with other producers are recognized on the basis of Royale’s net working interest. Differences between actual production and net working interest volumes are not significant.
The Company’s Financial Statements include its pro rata ownership 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.
The Company recorded amounts received from the Master Service Agreement (“MSA”) with RMX for providing land, engineering, accounting and back-office support as part of revenues. Revenues earned under the MSA were recorded at the end of each month that services were performed in conformity with the Agreement with an offsetting receivable from the RMX joint venture. The service fee income was treated as earned at the end of each month that services were performed.
Equity Method Investments
Investments in entities over which the Company has significant influence, but not control, are accounted for using the equity method of accounting. Income from equity method investments represents Royale’s proportionate share of net income generated by the equity method. 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. 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.
Business Combinations
From time-to-time, the Company acquires businesses in the oil and gas industry. Businesses are included in the Company’s consolidated financial statements from the date of acquisition. We recognize, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition-date fair values. We measure and recognize goodwill as of the acquisition date as the excess of: (1) the aggregate of the fair value of consideration transferred, the fair value of any noncontrolling interest in the acquiree (if any) and the acquisition date fair value of our previously held equity interest in the acquiree (if any), over (2) the fair value of assets acquired and liabilities assumed. If information about facts and circumstances existing as of the acquisition date is incomplete by the end of the reporting period in which a business combination occurs, we report provisional amounts for the items for which the accounting is incomplete. The measurement or allocation period ends once we receive the information we are seeking; however, this period will generally not exceed one year from the acquisition date. Any material adjustments recognized during the measurement period will be reflected retrospectively in the consolidated financial statements of the subsequent period. We recognize third-party transaction-related costs as expense currently in the period in which they are incurred.
Oil and Gas Property and Equipment
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, including planned major maintenance, 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.
Royale uses the “successful efforts” method to account for its exploration and production activities. Under this method, Royale accumulates its proportionate share of costs on a well-by-well basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred, and capitalizes expenditures for productive wells. Royale amortizes the costs of productive wells under the unit-of-production method.
Royale carries, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where Royale is 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 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 Royale’s 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 by Royale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Royale estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts. Cash flows used in impairment evaluations are developed using annually updated evaluation assumptions for crude oil commodity prices. Annual volumes are based on field production profiles, which are also updated annually. Prices for natural gas and other products are based on assumptions developed annually for evaluation purposes.
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 2020 and 2019, impairment losses of $0 and $977,682, 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.
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 expects to hold the properties. The valuation allowances are reviewed at least annually.
Upon the sale or retirement of a complete field of a proved property, Royale eliminates the cost from its books, and the resultant gain or loss is recorded to Royale’s Statement of Operations. Upon the sale of an entire interest in an unproved property where the property has been assessed for impairment individually, a gain or loss is recognized in Royale’s Statement of Operations. If a partial interest in an unproved property is sold, any funds received are accounted for as a recovery of the cost in the interest retained with any excess funds recognized as a gain. Should Royale’s turnkey drilling agreements include unproved property, total drilling costs incurred to satisfy its obligations are recovered by the total funds received under the agreements. 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.
The Company sponsors turnkey drilling agreement arrangements in properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest. Gains on Turnkey Drilling Programs represent funds received from turnkey drilling participants in excess of all costs Royale incurs during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account; and are recognized only upon making this determination after Royale’s obligations have been fulfilled.
The contracts require the participants to pay Royale the full contract price upon execution of the agreement. Royale completes the drilling activities typically between 10 and 30 days after drilling begins. The participant retains an undivided or proportional beneficial interest in the property, and is also responsible for their proportionate share of operating costs. Royale retains 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.
Since the participant’s interest in the prospect is limited to the well, and not the lease, the participant does not have a legal right to participate in additional wells drilled within the same lease. However, it is the Company’s policy to offer to participants in a successful well the right to participate in subsequent wells at the same percentage level as their working interest investment in the prior successful well with similar turnkey drilling agreement terms.
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, 2020 and 2019, Royale had deferred drilling obligations of $3,127,500 and $5,232,675 respectively.
If Royale is unable to drill the wells, and a suitable replacement well is not found, Royale would retain the non-refundable portion of the contract and return the remaining funds to the participant. Included in cash and cash equivalents are amounts for use in completion of turnkey drilling programs 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.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil, plant products and gas reserve volumes and the future development costs. Actual results could differ from those estimates.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carry forwards. All available evidence, both positive and negative, must be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. The Company uses information about the Company’s financial position and its results of operations for the current and preceding years.
The Company must use its judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.
Future realization of a tax benefit sometimes will be expected for a portion, but not all, of a deferred tax asset, and the dividing line between the two portions may be unclear. In those circumstances, application of judgment based on a careful assessment of all available evidence is required to determine the portion of a deferred tax asset for which it is more-likely-than-not a tax benefit will not be realized.
Going Concern
At December 31, 2020, the Company has an accumulated deficit of $82,298,785, a working capital deficiency of $4,044,437 and a stockholders’ deficit of $28,360,701. 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 2021 budget. Royale is in the process of selling two property groups and has recorded a current asset of $1.5 million as Long-Term Assets Held for Sale. 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, if needed to fully fund our 2021 drilling budget and to support future operations.
Results of Operations for the Year Ended December 31, 2020, as Compared to the Year Ended December 31, 2019
For the year ended December 31, 2020, we had a net loss of $8,148,147 compared to the net loss of $348,383 during the year in 2019. The table below reflects the major components of other income and expense.
Year Ended December 31,
Loss from Operations
$ (2,674,329 )
$ (845,071 )
Other Income (Expense):
Interest Expense
(12,949 )
(20,559 )
Gain (Loss) on Investment in Joint Venture
(6,185,995 )
(397,936 )
Gain on Settlement of Payables
166,300
897,708
Other Gain
551,906
172,523
Gain (Loss) on Sale of Assets, net
6,920
(155,048 )
Loss Before Income Tax Expense
$ (8,148,147 )
$ (348,383 )
In 2020, the majority of the net loss resulted from a $6,185,995 write down of our investment in RMX Resources, LLC, due to year end 2020 reserve valuations and other considerations, see Note 2 - RMX Joint Venture. In 2019, the majority of the loss resulted from a loss from Operations of $845,071.
During the year ended 2020, revenues from oil and gas production decreased $786,472 or 33.8% to $1,542,803 from the 2019 revenue of $2,329,275. This decrease was due to lower prices realized for the sale of oil and gas in 2020. The net sales volume of oil for the year ended December 31, 2020 was 31,210 barrels of oil with an average price of $37.96 versus approximately 27,663 barrels with an average price of $54.40 per barrel, for the year in 2019. This represents an increase in net sales volume of 3,547 barrels or 12.8%. The net sales volume of natural gas for the year ended December 31, 2020, was approximately 160,406 Mcf with an average price of $2.23 per Mcf, versus 292,472 Mcf with an average price of $2.82 per Mcf for the year in 2019. This represents a decrease in net sales volume of 132,066 Mcf or 45.2%. The decrease in natural gas production volume was due to certain wells that were offline and waiting on workovers and to lower volumes on existing wells due to natural declines.
Oil and natural gas lease operating expenses decreased by $366.865 or 20.8%, to $1,397,673 for the year ended December 31, 2020, from $1,764,538 for the year in 2019. This was lower in 2020 due to decreases in workover costs and outside operated lease operating costs as certain non-operated wells were offline and waiting on workovers. When measuring lease operating costs on a production or lifting cost basis, in 2020, the $1,397,673 equates to a $4.02 per Mcfe lifting cost versus a $3.85 per Mcfe lifting cost in 2019, mainly due to lower production volumes in 2020.
The aggregate of Supervisory Fees and other income was $45,052 for year ended December 31, 2020, a decrease of $592,856 or 92.9% from $637,908 during the year in 2019. This decrease was mainly due to the loss of service agreement fees through an arrangement with RMX Resources, LLC.
Depreciation, depletion and amortization expense increased to $473,647 from $468,143, an increase of $5,504 or 1.2% for the year ended December 31, 2020, as compared to the year in 2019. The depletion rate is calculated using production by comparing capitalized cost to the recoverable reserves remaining. This increase in depreciation expense was due to the decrease in reserves owned by the Company as compared to the estimated reserves in the prior year, due to the decrease in oil and gas prices in 2020.
General and administrative expenses increased by $117,413 or 5.9% from $1,991,819 for the year ended December 31, 2019, to $2,109,232 for the year ended 2020. This increase was primarily driven by our absorption of a greater percentage of drilling management costs. Overhead and drilling overhead offset general and administrative costs. Legal and accounting expense decreased to $279,227 for the year in 2020, compared to $751,935 for the year in 2019, a $472,708 or 62.9% decrease. This decrease was primarily due to higher legal and accounting fees in 2019 as we transitioned to new auditors and to the Matrix post-merger reporting incurred during the year in 2019. Marketing expense for the year ended December 31, 2020, decreased $301,357, or 72.6%, to $113,614, compared to $414,971 for the year in 2019. Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs. During 2020 fewer marketing events were attended as the governmental mandate against large gatherings was implemented.
At December 31, 2020, Royale had a Deferred Drilling Obligation of $3,127,500. During 2020, we disposed of $6,432,675 of drilling obligations upon completing the drilling of five oil wells, three in California and two in Texas, while incurring expenses of $4,732,213, resulting in a gain of $1,700,462. At December 31, 2019, Royale had a deferred drilling obligation of $5,232,675. During 2019, we disposed of $11,961,767 of drilling obligations upon completing the drilling of eight natural gas wells and participating in the drilling of two oil wells in California, while incurring expenses of $9,051,859, resulting in a gain of $2,909,908.
During the year in 2020, as disclosed above, we recorded a loss of $6,185,995, on the write down of our investment in joint venture of RMX Resources, LLC, compared to a loss of $397,936 for our 20% share of the RMX Resources net loss of $1,989,680 in 2019. During the fourth quarter we recorded a loss on assets held for sale of $566,858, in anticipation of the sale of certain oil and gas assets during the year in 2021. During the third quarter in 2020, we recorded a gain on other of $271,310 based on the contract agreement with an industry partner in the drilling of two wells. During the year in 2020, we also recorded a gain on other of $280,596 on the receipt of a pre-Matrix merger prepayment refunds. During the year in 2020, we recorded a gain on settlement of $197,800 on the forgiveness of our Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan and a loss on settlement of $31,500 related to a 2018 seismic sales agreement. During the year in 2019, we recorded geological and geophysical expense of $264,219 related mainly to the acquisition of a seismic survey of a Northern California field, while during the year in 2020, we recorded $14,392 in geological and geophysical expenses. During the year in 2019, we recorded a gain of $897,708, mainly on the reconciliation and settlement of royalties payable. During the first quarter in 2019, we recorded a loss on the sale of assets of $1,237,126 related a settlement agreement with RMX Resources, LLC. During the fourth quarter of 2019, we recorded a gain on the sale of assets of $1,254,204 on the settlement of contingent liabilities related to the merger with Matrix. During 2019, we also recorded a $172,126 loss on the sale of leases obtained in the merger. During 2019, we recorded a gain on settlement of $834,736 on the reconciliation and settlement of royalties payable. During year in 2019, we recorded a gain of $62,972 on the settlement of accounts payable. During the year in 2019, we recorded a gain of $172,523 on the receipt of tax property tax refunds due to adjusted assessments on certain leases from prior years. We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense. During 2019, we recorded lease impairments of $977,682, respectively on various lease and land costs that were no longer viable, no lease impairments were recorded in 2020. During the year in 2019, we recorded write downs of $28,343 on certain well equipment that was either written down to their current market value or were no longer useable, no equipment write-downs occurred in 2020.
Bad debt expense for 2020 and 2019 were $1,008,003 and $60,512, respectively. During the year in 2020, approximately $203,000 was related to revenue receivable from an industry partner whose collectability was in doubt. The other bad debt expenses in 2020 and 2019 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 year-end oil and natural gas reserve values. We periodically review our accounts receivable from working interest owners to determine whether collection of any of these charges appears doubtful. By contract, the Company may not collect some charges from its Direct Working Interest owners for certain wells that ceased production or had been sold during the year, to the extent that these charges exceed production revenue.
Interest expense decreased to $12,949 for the year ended December 31, 2020, from $20,559 in 2019, a $7,610 decrease. This decrease was mainly due to lower principal balances on notes payable during the year in 2020.
In 2020 and 2019, we did not have an income tax expense due to the use of a percentage depletion carryover valuation allowance created from the current and past operations resulting in an effective tax rate less than the new federal rate of 21% plus the relevant state rates (mostly California, 8.8%).
Capital Resources and Liquidity
At December 31, 2020, Royale had current assets totaling $5,070,555 and current liabilities totaling $9,114,992, a $4,044,437 working capital deficit. We had cash and cash equivalents at December 31, 2020 of $255,112 and restricted cash of $2,146,571 compared to cash and cash equivalents of $1,031,014 and restricted cash of $2,845,515 at December 31, 2019.
Ordinarily, we fund our operations and cash needs from our available credit and cash flows generated from operations. We believe there is some doubt that the Company has the ability to meet liquidity demands through cash-flow from operations. In that event, the Company will seek alternative capital sources through additional sales of equity or debt securities, or the sale of property, which may not be available at all, or on terms we deem reasonable.
At December 31, 2020, our other receivables, which consist of joint interest billing receivables from direct working interest participants and industry partners, totaled $462,777, compared to $1,189,892 at December 31, 2019, a $727,115 decrease. This decrease was mainly due to increases in accounts receivable allowances in 2020. At December 31, 2020, revenue receivable was $204,149, a decrease of $385,002, compared to $589,151 at December 31, 2019, due to lower commodity prices and lower oil and gas production volumes on existing wells. At December 31, 2020, our accounts payable and accrued expenses totaled $4,161,109, a decrease of $1,869,925 from the accounts payable at December 31, 2019 of $6,031,034, mainly related to payments made on account and lower drilling accruals at year end 2020.
We have not engaged in hedging activities nor do we use derivative instruments to manage market risks.
Operating Activities. For the years ended December 31, 2020 and 2019, cash used by operating activities totaled $381,116 and $3,489,482, respectively. This $3,108,336 or 89.1% decrease in cash used was primarily due to decreases in prepaid expenses and accounts payable during the period in 2020 due to the drilling and account payments in 2020.
Investing Activities. Net cash used by investing activities totaled $1,235,485 for the year ended December 31, 2020 versus net cash provided by investing activities of $1,587,821 for the year ended December 31, 2019. During 2020, our turnkey drilling expenditures were lower as we drilled five oil wells, while in 2019, we drilled eight natural gas wells and participated in the drilling of two oil wells. Additionally, during 2020 and 2019 we received approximately $4.3 million and $11 million, respectively, in direct working interest turnkey drilling investments.
Financing Activities. For the year ended December 31, 2020, net cash provided by financing activities totaled $141,755 versus net cash used by financing activities of $576,852 for the year ended December 31, 2019. During the year in 2020, we received $207,800 in a PPP loan, of which 197,800 was forgiven. We also had principal payments of approximately $66,000 on our notes payable. During 2019, a financing agreement for a seismic survey was recognized when the terms were finalized, on which there were principal payments of approximately $186,000. Additionally, in 2019, there were principal payments of approximately $391,000 on our note with Forza Operating.
Changes in Reserve Estimates
During 2020, our overall proved developed and undeveloped natural gas reserves decreased by 38.2% and our previously estimated proved developed and undeveloped natural gas reserve quantities were revised downward by approximately 1.5 million cubic feet of natural gas. This downward revision was mainly the result of a decrease in proved developed natural gas reserves from a decrease in economic life of wells related to a decrease in future expected product price. See Supplemental Information about Oil and Gas Producing Activities (Unaudited), page.
During 2019, our overall proved developed and undeveloped reserves increased by 44.2% and our previously estimated proved developed and undeveloped natural gas reserve quantities were revised downward by approximately 0.89 million cubic feet of natural gas. This downward revision was mainly the result of a decrease in proved undeveloped natural gas reserves from drilling locations which the Company had contracted. See Supplemental Information about Oil and Gas Producing Activities (Unaudited), page.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A Qualitative and Quantitative Disclosures About Market Risk
Royale is exposed to market risk from changes in commodity prices and interest rates. In 2020, we sold a portion of our natural gas at the daily market rate through the Pacific Gas & Electric pipeline. In 2020, our natural gas revenues were approximately $357,587 with an average price of $2.23 per MCF. At current production levels, a 10% per MCF increase or decrease in our average price received could potentially increase or decrease our natural gas revenues by approximately $36,000. We currently do not sell any of our natural gas or oil through hedging contracts.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 Financial Statements and Supplementary Data
See pages, et seq., included herein.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective to give reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis as of the end of the period covered by this annual report. Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Based on our evaluation under the framework in Internal Control-Integrated Framework, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective as of December 31, 2020 due to the material weakness that is described below.
Material Weakness and Remediation
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.
In connection with the audit of our 2019 consolidated financial statements, management had identified a material weakness that existed because we did not maintain effective controls over our financial close and reporting process, and concluded that the financial close and reporting process needed additional formal procedures to ensure there are appropriate reviews over all financial reporting analysis. Updated procedures have been implemented through the close process for the year ended December 31, 2019, but the material weakness on our financial close and reporting process was not alleviated. We will continue to monitor these throughout 2021 to be able to fully assess whether the procedures and controls are effective.
Attestation Report of the Independent Registered Public Accounting Firm.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
Other than the remedial activities described above, no changes in our internal control over financial reporting occurred during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III

---

ITEM 9B. OTHER INFORMATION

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10 Directors and Executive Officers of the Registrant
All of our directors serve one-year terms from the time of their election to the time their successor is elected and qualified. The following information is furnished with respect to each director and executive officer who served as such during the fiscal year ended December 31, 2020:
Name
Age
First Became Director
or Executive Officer
Positions
Held
Robert Vogel (4)
Chairman of the Board
Mel G. Riggs (1)(2)(3)(4)
Director
Jonathan Gregory
Vice-Chair of the
			Board of Directors
Johnny Jordan
Chief Executive and
			Operating officer
			and Director
Thomas M. Gladney (1) (2)(3)(4)
Director
Karen Kerns (1) (2)(3)(4)
Director
(1)
Members of the Audit Committee
(2)
Members of the compensation committee
(3)
Members of the nominations committee
(4)
Members identified as independent
The board has determined that directors Mel G. Riggs, Thomas M. Gladney, Karen Kerns and Robert Vogel qualify as independent directors.
The following summarizes the business experience of each director and executive officer for the past six years.
Robert Vogel - Chairman of the Board
Robert Vogel has been Senior managing Director at Peapack-Gladstone Bank since December 2020. In 2020, Peapack-Gladstone Bank merged the business of Lucas Capital Management, a NJ wealth management firm at which Mr. Vogel was a Principal since 2016. He has started working at Lucas Capital Management in March 2008. He is a seasoned executive with an extensive background in the energy industry. Mr. Vogel previously was Vice President and Treasurer of Hess Corporation. He serves as the Chairman of BlinkNow Foundation, an organization that supports women and children in Nepal. Mr. Vogel holds a BS in Chemical Engineering from the University of Colorado and an MBA from New York University.
Mel G. Riggs - Director
Mr. Riggs has served on the board of directors of NexTier Oilfield Solutions, Inc. (NEX:NYSE) since October 2019. Since July 2018, Mr. Riggs has served on the board of directors of Royale Energy, Inc. (ROYL:OTC). In addition, Mr. Riggs has served on the board of directors of privately held Community National Bank of Midland, Texas since August 2000. Previously, Mr. Riggs served on the board of directors of TransAtlantic Petroleum, Ltd. (TAT:NYSE) from July 2009 until June 2020.
From March 2015 to April 2017, Mr. Riggs served as the President and director of Clayton Williams Energy Inc. (CWEI:NYSE), which was acquired by Noble Energy Inc. (NBL:NYSE) in April 2017 for $2.7 billion. During his tenure with Clayton Williams Energy, Inc., Mr. Riggs also served as the Executive Vice President and Chief Operating Officer of the Company from December 2010 to March 2015 and prior to that position, served as Senior Vice President and Chief Financial Officer of the Company beginning in September 1991.
Since April 2017 Mr. Riggs has served as an officer and director of the Clayton Williams Family Office group of companies. These companies are primarily active in the management of oil and gas minerals and royalties, real estate, agriculture, water, and investments.
Mr. Riggs has served on the boards of the Permian Basin Petroleum Association (PBPA), The Petroleum Club of Midland, and The Texas Business Hall of Fame. Mr. Riggs has extensive knowledge in strategic planning, is an expert in financial matters and is highly qualified to make strategic and operational decisions in the companies with which he is affiliated. Mr. Riggs is a certified public accountant and received a BBA from Texas Tech University in 1977.
Jonathan Gregory - Vice-Chair of the Board of Directors
Mr. Gregory became director of Royale in March 2014 and served as Royale's chief executive officer from September 10, 2015, until June 1, 2018. From _xx 2018 to present, Mr Gregory has served as the CEO of RMX Resources LLC. Prior to becoming Royale's CEO, Mr. Gregory, from March 2014 to July 2015, served as Chief Financial Officer and Chief Business Development Strategist for Americo Energy Resources, a private exploration and production company located in Houston, Texas, Prior to serving as CFO of Americo Energy, Mr. Gregory was CFO of J&S Oil & Gas, LLC, from April 2012 to February 2014. From December 2004 to April 2012, Mr. Gregory was head of the energy lending group in Houston, Texas for Texas Capital Bank, N.A. Mr. Gregory is presently CEO of RMX Resources, LLC, a private Texas based oil and gas company with oil and gas properties primarily located in California. Mr. Gregory is also a Credit Committee Advisor to Anvil Capital Partners, a private debt capital provider to upstream energy companies. Mr. Gregory graduated from Lamar University in 1986 with a Bachelor's degree in Finance.
Johnny Jordan - Chief Executive Officer, President, Chief Operating Officer and Director
Mr. Jordan is a petroleum engineer with expertise in acquisitions, field economics and reserves analysis, bank negotiations, reservoir and field operations, and multi-team interaction. He was appointed as the Company’s CEO in January 2019, having served on the Board of Directors from the closing of the merger with Matrix in 2018. He previously was the President and served on the Board of Directors of Matrix since its inception in 1999. Mr. Jordan has been active in the oil and gas industry since 1980 beginning as a floor hand on a well service rig. He has held various staff and supervisory positions for Exxon, Mack Energy, Enron Oil and Gas and Venoco Corporation. He was the team leader of a multi-discipline team from 1992 to 1996 that added 455 BCF and 79 MMCFD through acquisitions (71 BCF) and field development (365 wells) in the Val Verde Basin in West Texas. Mr. Jordan has managed acquisition evaluations in many of the oil and gas producing basins in the US. He has coordinated field development for various recovery mechanisms that include waterflood, tertiary flood, water drive oil and gas reservoirs, and pressure depletion fields with gas cap expansion or gravity drainage. Mr. Jordan received a B.S. in Chemical Engineering from the University of Oklahoma in 1983 and is currently a member of the Society of Petroleum Engineers and the American Petroleum Institute.
Thomas M. Gladney - Director
Thomas M. Gladney is now and has been continuously since 2006 President of Bodog Resources LLC, a wholly owned private entity which currently invests in oil and gas assets and he also serves as Executive Vice President and managing partner of Foothill Energy LLC, a private partnership which operates oil and gas wells in California. Mr. Gladney previously served as Executive Vice President of Plains Exploration and Production Company and prior to that worked for Sun Company/Oryx Energy Company as Manager of Offshore Operations, Manager of Gulf Coast Development, and Director of Acquisitions among other positions. He has a BS in Petroleum Engineering from Mississippi State University.
Karen Kerns - Director
Karen Kerns is an attorney with expertise in business contracts, real estate and real estate negotiations and investments. Ms. Kerns held various staff and partner positions with law firms prior to serving as General Counsel for a private REIT with over $400 million in private investor funds from 1998-2010. From 2010 to present, Ms. Kerns operates a private legal practice representing real estate investors and small private REITs in formation, private syndication and business oversight. Ms. Kerns is currently Vice Chair of the Santa Barbara Bowl Foundation, a multimillion-dollar outdoor concert venue located in Santa Barbara, CA and has previously served on the board of directors for numerous nonprofit organizations, as well as a four-year term as an elected member of the Montecito Union School District Board of Education, where she spent one year as president. Ms. Kerns has a BA in education from the University of Wyoming and a Juris Doctor from the University of Denver Sturm College of Law.
Audit Committee
The board has appointed an audit committee to assist the board of directors in carrying out its responsibility as to the independence and competence of the Company’s independent public accountants. All members of the audit committee are independent members of the board of directors. The audit committee operates pursuant to an audit committee charter, which has been adopted by the board of directors to define the committee’s responsibilities. A copy of the audit committee charter is posted on our website, www.royl.com. The board has determined that Robert Vogel qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of the Securities and Exchange Commission.
At the end of 2020, the members of the audit committee were Mel Riggs (Chair), Karen Kerns, and Thomas M. Gladney.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics for our directors and executive officers. The code is posted on our website, www.royl.com.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission regulations require that Royale’s directors, certain officers, and greater than 10 percent shareholders file reports of ownership and changes in ownership with the SEC and the NASD and furnish Royale with copies of all such reports they file. Based solely upon a review of the copies of the forms furnished to Royale, or representations from certain reporting persons that no reports were required, Royale believes that no persons failed to file required reports on a timely basis for 2020.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11 Executive Compensation
The following table summarizes the compensation of the chief executive officer, chief financial officer and the one other most highly compensated non-executive employee of Royale and its subsidiaries during the past three years.
SUMMARY COMPENSATION TABLE
Year
Year
Salary (3)
Bonus
Option Awards
(1)
All Other
Compensation (2)
Total
Johnny Jordan (5)
$ 255,769
$ 7,500
$ 263,269
(CEO)
$ 255,769
$ -
$ 255,769
$ 213,141
$ -
$ 213,141
Jonathan Gregory (4)
$ -
$ -
$ -
(Vice-Chair)
$ -
$ -
$ -
$ 72,909
$ 9,583
$ 82,492
Donald Hosmer
$ 185,177
$ 49,554
$ 18,930
$ 253,661
(Business Development)
$ 189,344
$ 95,193
$ 18,930
$ 303,467
$ 236,331
$ 18,930
$ 255,261
Stephen Hosmer
$ 230,192
$ 18,906
$ 249,098
(CFO)
$ 230,192
$ 18,906
$ 249,098
$ 230,192
$ 64,954
$ 18,750
$ 313,896
(1) On October 10, 2018, the Company entered into an agreement to issue Mr. Hosmer 250,000 options to purchase common stock previously approved by the Board of Directors with an exercise price of $0.31. These options were granted for a period of ten years with a maturity date of October 9, 2028.
(2) All other compensation consists of matching contributions to the Company’s simple IRA plan, except for Donald H. Hosmer and Stephen M. Hosmer, who also received a $12,000 car allowance. This category also includes Board fees for Mr. Gregory.
(3) Salary represents either direct payroll or common stock paid in lieu of taking a cash salary.
(4) Mr. Gregory served as CEO of the Company during 2016, 2017 and part of 2018. Mr. Gregory resigned from the CEO position with the execution of the RMX joint venture.
(5) Mr. Jordan became CEO of the Company in January 2019. Mr. Jordan joined the Company upon the merger with the Matrix entities on March 7, 2018.
Stock Options and Equity Compensation; Outstanding Equity Awards at Fiscal Year End
No unvested stock awards were outstanding at the end of 2020.
Compensation Committee Report
Our executive compensation committee has reviewed and discussed the following Compensation Discussion and Analysis with management and, based on its discussion and review, has recommended that the Compensation Discussion and Analysis be included in this annual report.
Members of the Compensation Committee:
Thomas M. Gladney, Karen Kerns (Chair), and Mel Riggs
All members of the compensation committee are independent members of the Board of Directors.
Compensation Discussion and Analysis
Our executive compensation policy is designed to motivate, reward and retain the key executive talent necessary to achieve our business objectives and contribute to our long-term success. Our compensation policy for our executive officers focuses primarily on determining appropriate salary levels and performance-based cash bonuses.
The elements of executive compensation at Royale consist mainly of cash salary and, if appropriate, a cash bonus at yearend. The compensation committee makes recommendations to the board of directors annually on the compensation of the three top executives: Johnny Jordan, Chief Executive Officer, Donald H. Hosmer, Business Development, and Stephen M. Hosmer, Chief Financial Officer.
Royale also does not provide extensive personal benefits to its executives beyond those benefits, such as health insurance, that are provided to all employees. Donald Hosmer and Stephen Hosmer each receive an annual car allowance.
Policy
The compensation committee’s primary responsibility is making recommendations to the board of directors relating to compensation of our officers. The committee also makes recommendations to the board of directors regarding employee benefits, our defined benefit plans, defined contribution plans, and stock-based plans.
Determination
To determine executive compensation, the committee, in December each year, meets with our officers to review our compensation programs, discuss the performance of the Company, the duties and responsibilities of each of the officers pay levels and business results compared to others similarly situated within the industry. The committee then makes recommendations to the board of directors for any adjustment to the officers’ compensation levels. The committee does not employ compensation consultants to make recommendations on executive compensation.
Compensation Elements
Base. Base salaries for our executive officers are established based on the scope of their responsibilities, taking into account competitive market compensation paid by our peers. Base salaries are reviewed annually. The salaries we paid to our most highly paid executive officers and next most highly compensated non-executive officer for the last three years are set forth in the Summary Compensation Table included under Executive Compensation.
Bonus. The compensation committee meets annually to determine the quantity, if any, of the cash bonuses of executive officers. The amount granted is based, subjectively, upon the Company’s stock price performance, earnings, revenue, reserves and production. The committee does not use quantifiable metrics for these criteria; but rather uses each in balance to assess the strength of the Company’s performance. The committee believes that formulaic approaches to cash incentives can foster an unhealthy balance between short-term and long-term goals. No cash bonuses were paid to executive officers in 2020 or 2019, other than those listed for Donald Hosmer in the table above.
Compensation of Directors
In 2020, board members or committee member accrued or received fees for attendance at board meetings or committee meetings during the year. In addition to cash payments, Common Stock was issued in lieu of compensation or reimbursements. Royale also reimbursed directors for the expenses incurred for their services.
The following table describes the compensation paid to our directors who are not also named executives for their services in 2020.
Name
Fees paid in Cash or Common Stock
Stock awards
Option awards
All Other Compensation
Total
Mel G. Riggs
$ 44,000
$ -
$ -
$ -
$ 44,000
Thomas M. Gladney
$ 44,000
$ -
$ -
$ -
$ 44,000
Karen Kerns
$ 44,000
$ -
$ -
$ -
$ 44,000
Robert Vogel
$ 44,000
$ -
$ -
$ -
$ 44,000
Jonathan Gregory
$ 33,000
$ -
$ -
$ -
$ 33,000

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Common Stock
At February 17, 2021, 55,192,846 shares of registrant’s Common Stock were outstanding.
The following table contains information regarding the ownership of Royale’s Common Stock as March 6, 2021, by each director and executive officer of Royale, and all directors and officers of Royale as a group.
Except pursuant to applicable community property laws and except as otherwise indicated, each shareholder identified in the table below possesses sole voting and investment power with respect to her or his shares. The holdings reported are based on reports filed with the Securities and Exchange Commission and the Company by the officers and directors.
Insider Holdings
Stockholder (1)
Number
Percent
Stephen M. Hosmer (2)
1,140,229
2.07 %
Johnny Jordan (3)
21,195,747
38.40 %
Jonathan Gregory (4)
758,409
1.37 %
Mel G. Riggs
459,396
*
Karen Kerns
-
*
Thomas M. Gladney
532,203
*
Robert Vogel
471,831
*
All officers and directors as a group
24,557,815
44.49 %
* Less than 1%.
(1)
The mailing address of each listed stockholder is 1870 Cordell Court, Suite 210, El Cajon, California 92020.
(2)
Includes 6,000 shares owned by Stephen M. Hosmer's minor children.
(3)
Includes 9,858,160 shares issuable upon conversion of Series B Convertible Preferred Stock.
(4)
Includes 35,000 shares owned by Mr. Gregory's son.
The following table contains information regarding the ownership of Royale’s Common Stock as March 6, 2020, by each person who is known by Royale to own beneficially more than 5% of the outstanding shares of each class of equity securities. Except pursuant to applicable community property laws and except as otherwise indicated, each shareholder identified in the table possesses sole voting and investment power with respect to its or his shares. The holdings reported are based on reports filed with the Securities and Exchange Commission and the Company by the 5% shareholders.
Ownership
Stockholder (1)
Number
Percent
Johnny Jordan (2)
21,195,747
38.40 %
Jeff Kerns (3)
18,139,303
32.87 %
(1)
The mailing address of each listed stockholder is 1870 Cordell Court, Suite 210, El Cajon, California 92020.
(2)
Includes 9,858,160 shares issuable upon conversion of Series B Convertible Preferred Stock.
(3)
Includes 8,917,540 shares issuable upon conversion of Series B Convertible Preferred Stock.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 Certain Relationships and Related Transactions
Our Chief Executive, Johnny Jordan, has accrued certain unpaid salaries, which were assumed by the Company. At December 31, 2019 Mr. Jordan was owed $14,648 in accrued unpaid guaranteed payments.
In 2018 the board of directors terminated the policy allowing employees and directors to participate, at cost, in wells drilled by the Company. Under the prior policy our Chief Financial Officer, Stephen Hosmer, had participated individually in 179 wells under the 1989 policy. At December 31, 2020, the Company had a receivable balance of $17,101 due from Stephen Hosmer and $5,385 from Donald Hosmer for normal drilling and lease operating expenses.
At December 31, 2020, we had a total payable of $23,087 due to RMX Resources, LLC and its subsidiary, Matrix Oil Corporation, related to certain lease operating expenses for wells operated by RMX Resources, LLC. For the same period, the Company also had prepaid expenses and other current assets of $239,036 primarily for the drilling of two wells, expected to commence in 2021.
Royale had outstanding accrued unpaid guaranteed payments for unpaid salaries for periods predating their joining the Company due to certain former Matrix employees. At December 31, 2020, the balance due was $1,306,605.
Michael McCaskey and Jeffery Kerns, each former directors of Royale, have consulting agreements to provide services as directed and at the discretion of the Company. Mr. Kerns wife is a director of Royale.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14 Principal Accountant Fees and Services
Moss Adams LLP served as the independent registered accounting firm to audit the Company’s financial statements for the fiscal year ended December 31, 2020 and 2019. The aggregate fees billed for the years ended December 31, 2020 and 2019 are as follows:
Audit fees (1)
270,375
381,075
Tax fees (2)
-
-
All other fees (3)
-
-
Total
270,375
381,075
(1)
Audit fees are fees for professional services rendered for the audit of Royale Energy's annual financial statements, reviews of financial statements included in the Company's Forms 10-Q, and reviews of documents filed with the U.S. Securities and Exchange Commission.
(2)
Tax fees consist of tax planning, consulting and tax return reviews.
(3)
Other fees consist of work on registration statements under the Securities Act of 1933.
The Company’s audit committee has adopted policies for the pre-approval of all audit and non-audit services provided by the Company’s independent auditor. The policy requires pre-approval by the audit committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the audit committee must approve the permitted service before the independent auditor is engaged to perform it.
No representatives of Moss Adams LLP are expected to be present at the annual meeting. Although the audit committee has the sole responsibility to appoint the auditors as required under the Securities Exchange Act of 1934, the committee welcomes any comments from the Company’s shareholders on auditor selection or performance. Comments may be sent to the audit committee chair, Mel Riggs, care of the Company’s executive office, 1870 Cordell Court, Suite 210, El Cajon, California 92020.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15 Exhibits and Financial Statement Schedules
The agreements included as exhibits to this report are included to provide information about their terms and not to provide any other factual or disclosure information about Royale or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that were made solely for the benefit of the other agreement parties and:
●
should not be treated as categorical statements of fact, but rather as a way of allocating the risk among the parties if those statements prove to be inaccurate;
●
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
●
may apply standards of materiality in a way that is different from the way investors may view materiality; and
●
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
1. Financial Statements. See Index to Financial Statements, page
2. Schedules. None.
3. Exhibits. Certain of the exhibits listed in the following index are incorporated by reference.
3.2 Amended and Restated Bylaws of Royale Energy, Inc., incorporated by reference to Exhibit 3.3 of Royale Energy’s Form 10-K filed March 27, 2009
3.3
Amendment to the Certificate of Incorporation of Royale Energy, Inc., a California corporation (March 7, 2018), filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K dated March 7, 2018, filed March 12, 2018
4.1
Royale Energy Holdings, Inc., Certificate of Designation of Series B 3.5% Redeemable Convertible Preferred Stock, filed with the Delaware Secretary of State on February 27, 2018, filed as Exhibit 2.5 to the Company’s Form 8-A, filed March 8, 2018
10.11
Company Agreement of RMX (April 4, 2018), filed as Exhibit 10.1 to the Company’s Form 8-K filed April 10, 2018
10.13
Conveyance of Term Overriding Royalty Interest between Sunny Frog Oil, LLC, and Royale (April 4, 2018), filed as Exhibit 10.3 to the Company’s Form 8-K filed April 10, 2018
10.17
Royale Energy, Inc., 2018 Equity Incentive Plan, filed as Exhibit 99.1 to the Company’s Form S-8 filed October 29, 2018
10.19
Employment Agreement between the Company and Thomas M. Gladney, filed as Exhibit 10.3 to the Company’s Form S-8 filed October 29, 2018
10.20
Employment Agreement between the Company and Jonathan Gregory, filed as Exhibit 10.4 to the Company’s Form S-8 filed October 29, 2018
10.21
Employment Agreement between the Company and Harry E. Hosmer, filed as Exhibit 10.5 to the Company’s Form S-8 filed October 29, 2018
10.22
Employment Agreement between the Company and Barry Lasker, filed as Exhibit 10.6 to the Company’s Form S-8 filed October 29, 2018
10.23
Employment Agreement between the Company and Mel. G. Riggs, filed as Exhibit 10.7 to the Company’s Form S-8 filed October 29, 2018
10.24
Employment Agreement between the Company and Robert Vogel, filed as Exhibit 10.8 to the Company’s Form S-8 filed October 29, 2018
10.25
Employment Agreement between the Company and Michael McCaskey, filed as Exhibit 10.9 to the Company’s Form S-8 filed October 29, 2018
10.26
Employment Agreement between the Company and Jeffrey Kerns, filed as Exhibit 10.10 to the Company’s Form S-8 filed October 29, 2018
10.27
Incentive Stock Option Agreement between the Company and Stephen M. Hosmer, filed as Exhibit 10.11 to the Company’s Form S-8 filed October 29, 2018
21.1
Subsidiaries, filed herewith.
23.2 Consent of Netherland, Sewel & Associates, Inc., filed herewith
31.1
Rule 13a-14(a), 115d-14(a) Certification, filed herewith.
31.2
Rule 13a-14(a), 115d-14(a) Certification, filed herewith.
32.1
Section 1350 Certification, filed herewith.
32.2
Section 1350 Certification, filed herewith.
99.1
Report of Netherland, Sewell & Associates, Inc., filed herewith.
99.2
Consolidated Financial Statements of RMX Resources, LLC, filed herewith
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.