Royale Energy, Inc. - FORM 8-K/A - EX-99.2 - May 17, 2018

Attached files

file filename
8-K/A - 8-K/A - Royale Energy, Inc.royaleinc8ka041018.htm
EX-99.1 - EX-99.1 - Royale Energy, Inc.ex99-1.htm
EX-23.1 - EX-23.1 - Royale Energy, Inc.ex23-1.htm

Exhibit 99.2

Royale Energy, Inc., and Subsidiaries
Unaudited Pro Forma Condensed Combined Financial Statements

The unaudited pro forma condensed consolidated combined financial statements are provided for illustrative purposes only and are not intended to represent or be indicative of the consolidated results of operations or consolidated financial position of the Company that would have been recorded had the Merger Transactions been completed as of the dates presented, and they should not be taken as representative of the expected future results of operations or financial position of the Company.  The unaudited pro forma condensed consolidated combined financial statements do not reflect the impacts of any potential operational efficiencies, asset dispositions, cost savings or economies of scale that Holdings may achieve with respect to the operations of the combined company.  Additionally, the unaudited pro forma statements of operations do not include non-recurring charges or credits, and the related tax effects, which result directly from the Merger Transactions.

The unaudited pro forma condensed consolidated combined financial statements have been derived from and should be read in conjunction with the historical audited financial statements and accompanying notes of Royale Energy, Inc., presented in its Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 23, 2018, and the audited consolidated financial statements and accompanying notes of Matrix Oil Management Corporation (“Matrix”) for the year ended December 31, 2017, which are filed as Exhibit 99.2 to the Current Report on Form 8-K to which these unaudited pro forma condensed consolidated combined financial statements are attached.

The audited consolidated financial statements and accompanying notes of Matrix for the year ended December 31, 2017, include results of operation and financial condition of Matrix Royalty, LP, a limited partnership which was formerly affiliated with Matrix but which was not acquired in the Merger Transactions. Accordingly, the historical information for Matrix which is presented in the pro forma statements differs from the audited consolidated financial statements of Matrix because the pro forma statements exclude the results of operations and financial condition of Matrix Royalty, LP.
1

Royale Energy, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
For the Year Ended December 31, 2017

 
  
Historical
  
Merger
      
Royale
  
 
  
Royale
    
Matrix
  
Pro Forma Adjustments
      
Pro Forma
 Combined
  
Assets
                        
Current Assets
                        
  Cash and cash equivalents
  
$
3,338,693
    
$
935,170
          
$
4,273,863
  
  Cash deposits
    
-
      
-
            
-
  
  Other receivables, net
    
764,015
      
85,904
            
849,919
  
  Revenue receivables
    
106,007
      
889,887
            
995,894
  
  Joint interest billings
    
-
      
2,296,318
            
2,296,318
  
  Prepaid expenses
    
149,367
      
120,707
            
270,074
  
  Deferred tax asset
    
-
      
-
            
-
  
    Inventory
    
-
      
76,421
            
76,421
  
  Available for sale securities
    
-
      
-
            
-
  
  Commodity derivatives
    
-
      
-
            
-
  
  Other current assets
    
-
      
-
            
-
  
     Total Current Assets
    
4,358,082
      
4,404,407
            
8,762,488
  
 
                              
Oil & Gas Properties, at Cost
 ( Successful Efforts Basis)
                              
  Proved properties
    
3,755,705
      
29,461,237
      
18,962,318
   (1)     
52,179,260
  
  Unproved properties
    
1,435
      
2,352,526
      
(2,352,526
)
 (1)     
1,435
  
  Lease and well equipment
    
4,119,802
      
-
                
4,119,802
  
    Total Property and Equipment
  
$
7,876,942
    
$
31,813,763
              
$
56,300,497
  
  Less: accumulated depletion,
      depreciation and amortization
    
(6,582,648
)
    
(8,990,671
)
    
8,990,671
   (1)     
(6,582,648
)
    Net Oil and Gas Properties
  
$
1,294,294
    
$
22,823,092
              
$
49,717,849
  
 
                                  
Other Property & Equipment, at cost
                                  
  Real estate, building improvements,
      including furniture & fixtures
  
$
-
    
$
-
              
$
-
  
  Land
    
-
      
678,168
      
324,582
   (1)     
1,002,750
  
  Vehicles
    
40,061
      
-
                
40,061
  
  Furniture and equipment
    
1,092,926
      
284,958
      
(284,958
)
 (1)     
1,092,926
  
    Total Property & Equipment
  
$
1,132,987
    
$
963,126
              
$
2,135,737
  
  Less:  accumulated depreciation
    
(1,125,039
)
    
(246,516
)
    
246,516
   (1)     
(1,125,039
)
    Net Property & Equipment
  
$
7,948
    
$
716,610
              
$
1,010,698
  
 
                                  
Other Assets
                                  
  Debt issue costs, net of amortization
    
-
      
-
                
-
  
  Investments
    
-
      
-
                
-
  
  Commodity derivatives
    
-
      
-
                
-
  
  Long term receivable
    
-
      
-
                
-
  
  Deposits and other
    
511,120
      
-
                
511,120
  
    Total Other Assets
  
$
511,120
    
$
-
              
$
511,120
  
 
                                  
Total Assets
  
$
6,171,444
    
$
27,944,109
              
$
60,002,155
  

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statement
2

Royale Energy Holdings, Inc., and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheet
For the Year Ended December 31, 2017 (Continued)
 
 
  
Historical
    
Merger
      
Royale
  
 
  
Royale
    
Matrix
    
Pro Forma Adjustments
      
Pro Forma
 Combined
  
Liabilities and Stockholders’ Equity
                          
Current Liabilities
                          
  Trade accounts payable and accrued expenses
  
$
4,638,879
    
$
5,095,020
      
620,000
   (5)    
$
9,113,899
  
  Current portion of long-term debt, net
    
-
      
-
                
-
  
  Cash advances on pending transactions
    
1,580,000
      
-
      
1,580,000
   (3,5)      
-
  
  Deferred drilling obligations
    
5,891,898
      
-
                
5,891,898
  
  Royalties payable
    
-
      
2,080,544
                
2,080,544
  
  Accrued liabilities
    
-
      
767,659
      
(1,900,000
)
 (5)      
2,667,659
  
  Other short term liabilities
    
-
      
-
                
-
  
  Senior secured note payable – Arena
    
-
      
11,504,736
                
11,504,736
  
  Commodity derivatives
    
-
      
244,543
                
244,543
  
    Total Current Liabilities
  
$
12,110,777
    
$
19,692,502
              
$
31,503,279
  
 
                                  
Long-Term Liabilities and Debt,
    net of current maturities
                                  
  Secured revolving line of credit
  
$
-
    
$
-
              
$
-
  
  Senior secured note payable – Arena
    
-
      
-
                
-
  
  Accrued unpaid guaranteed payments
    
-
      
1,464,960
                
1,464,960
  
  Deferred royalty revenue
            
-
                
-
  
  Commodity derivatives
    
-
      
112,102
                
112,102
  
  Asset retirement obligation
    
1,000,908
      
1,412,694
                
2,413,602
  
  Other accrued liabilities
    
-
      
1,478,385
                
1,478,385
  
    Total Long-Term Liabilities and Debt
    
1,000,908
      
4,468,141
                
5,469,049
  
Total Liabilities
  
$
13,111,685
    
$
24,160,643
              
$
36,972,328
  
 
                                  
Stockholders’ Equity
                                  
Convertible Preferred stock, Series AA, no par value, 147,500 shares authorized, 0 shares issued and outstanding
    
-
      
-
                
-
  
  Convertible preferred stock, Series B, par value $10.00, 3,000,000 shares authorized, 2,012,400 shares to be issued and outstanding
    
-
      
-
      
(20,124,000
)
 (2)      
20,124,000
  
  Convertible promissory notes (converting to common stock at time of merger)
    
-
       -           (3,4)      
-
  
  Common Stock, $0.001 par value, authorized 280,000,000 shares, 48,400,370 shares issued and outstanding
    
41,265,449
      
-
      
41,217,049
   (6)      
48,400
  
  Common Stock, $1.00 par value, authorized 500,000 shares, 5,000 shares issued and outstanding
    
-
      
5,000
      
5,000
   (1)      
-
  
  Paid in capital
    
-
      
-
      
(51,063,117
)
  (1,4,6)     
51,063,117
  
  Class B limited partnership interests
    
-
      
1,850,000
      
1,850,000
   (2)      
-
  
  Class C limited partnership interests
            
3,274,000
      
3,274,000
   (2)      
-
  
  Class D limited partnership interests
            
15,000,000
      
15,000,000
   (2)      
-
  
  Accumulated deficit
    
(48,205,690
)
    
(5,056,560
 )    
(5,056,560
)
 (1)      
(48,205,690
)
    Cumulative dividends in arrears on limited partnership interests
    
-
      
-
           (1)      
-
  
  Partner equity`
    
-
      
-
                
-
  
  Non-controlling interest – subsidiaries
    
-
      
(12,584,240
 )    
(12,584,240
)
 (1)      
-
  
  Non-controlling interest – affiliates
    
-
      
1,295,266
      
1,295,266
   (1)      
-
  
  Accumulated other comprehensive loss
    
-
      
-
                
-
  
    Total Stockholders’ Equity (Deficit)
    
(6,940,241
)
    
3,783,466
                
23,029,827
  
Total Liabilities and Stockholders’ Equity
  
$
6,177,444
    
$
29,944,109
              
$
60,002,155
  
 
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statement
3

Royale Energy, Inc., and Subsidiaries
Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 2017

 
  
Historical
  
Merger
      
Royale
  
 
  
Royale
    
Matrix Combined
  
Pro Forma
Adjustments
      
Pro Forma Combined
  
 
                        
Revenues:
                        
  Sale of oil and gas, net
  
$
554,235
    
$
4,870,341
          
$
5,424,576
  
  Supervisory fees and other
    
453,144
      
-
            
453,144
  
    Total Revenues
    
1,007,379
      
4,870,341
            
5,877,720
  
 
                              
Costs and Expenses
                              
  General and administrative
    
2,005,630
      
2,245,585
            
4,251,215
  
  Exploratory expense
    
-
      
-
            
-
  
  Lease operating
    
435,637
      
2,244,827
            
2,680,464
  
  Accretion of asset retirement obligation
    
-
      
123,260
            
123,260
  
  Impairment of oil and gas properties
    
289,775
      
872,777
            
1,162,552
  
  Delay rentals
    
-
      
-
            
-
  
  Well equipment write down
    
16,375
      
-
            
16,375
  
  Bad debt expense
    
164,145
      
-
            
164,145
  
  Legal and accounting
    
1,540,190
      
-
            
1,540,190
  
  Marketing
    
268,660
      
-
            
268,660
  
  Depreciation, depletion and amortization
    
116,017
      
703,408
      
272,912
   (7)      
1,092,337
  
    Total Costs and Expenses
    
4,836,429
      
6,189,857
                
11,299,198
  
Gain (loss) on turnkey drilling programs
    
1,487,824
      
-
                
1,487,824
  
Gain (loss) on sale of assets
    
-
      
-
                
-
  
     Income from Operations
    
(2,341,226
)
    
(1,319,516
)
              
(3,933,654
)
Other Income (Expense):
                                  
  Interest income
    
-
      
2,177
                
2,177
  
  Interest expense
    
(159,268
)
    
(2,626,355
)
              
(2,785,623
)
  Gain (loss) on sale of oil and gas properties
    
-
      
-
                
-
  
  Gain on settlement of accounts payable
    
73,325
      
-
                
73,325
  
  Gain on sale of assets
    
-
      
61,248
                
61,248
  
  Loss on disposal of assets
    
-
      
-
                
-
  
  Unrealized gain (loss) on derivative instruments
    
-
      
40,069
                
40,069
  
  Other income – management/overhead fees
    
-
      
(55,063
)
              
(55,063
)
Income Before Income Tax Expense
    
(2,427,169
)
    
(3,897,440
)
              
(6,597,521
)
  Income tax provision (benefit)
    
-
      
4,000
                
4,000
  
Net Income (Loss)
    
(2,427,169
)
    
(3,901,440
)
              
(6,601,521
)
  Less net loss attributable to noncontrolling interest
    
-
      
(781,987
)
    
781,987
        
-
  
Net Income (Loss)
    
(2,427,169
)
    
(3,119,453
)
              
(6,601,521
)
 
                                  
Other Comprehensive Income (Loss) Before Tax
                                  
Income tax expense (benefit) related to items of other comprehensive income
    
-
      
-
                
-
  
Comprehensive Income (Loss)
  
$
(2,427,169
)
  
$
(3,119,453
)
            
$
(6,601,521
)
 
                                  
 
                                  
Loss Per Common Share:
                                  
   Basic
                            
$
(0.14
)
   Diluted
                            
$
(0.14
)
 
                                  
Weighted Average Common Shares Outstanding:
                                  
   Basic
                              
48,400,370
  
   Diluted
                              
48,400,370
  

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statement
4

Royale Energy, Inc., and Subsidiaries
Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

(a)
Since both companies use the “successful efforts” method to account for exploration and production activities, no adjustments to Oil and Gas Properties are necessary to adjust to a common accounting method.

(b)
The following table sets forth the pro forma weighted average shares calculation:
 
At March 1, 2018
 
      
Royale Weighted Shares Outstanding as of February 27, 2018
    
21,850,185
  
Holdings Shares issued in exchange of Matrix common stock, Matrix LP interests, Matrix Operator common stock
    
25,800,185
  
Conversion of Royale Promissory Note
    
750,000
  
Basic Pro Forma Weighted Average Shares Outstanding
    
48,400,370
  

Pro Forma Adjustments

The following adjustments were made in the preparation of the unaudited pro forma consolidated condensed combined balance sheet and unaudited pro forma consolidated condensed combined statement of operations.

(1)
To record merger balance sheet adjustments including additions to paid in capital.
 
The estimated fair value of the consideration to be transferred, assets acquired and liabilities assumed is described below.  The purchase price estimate is calculated using the closing price of Royale’s common stock on March 1, 2018.

Purchase Price
      
Shares of Holdings common stock to be issued to Matrix owners
    
25,800,185
  
Royale common stock price
  
$
0.37
  
Fair value of Holdings common stock issued
  
$
9,546,068
  
 
        
Convertible Preferred Stock, Series B, par value $10.00 per share
  
$
20,124,000
  
Total Purchase Price
  
$
29,670,068
  
 
        
Estimated Fair Value of Liabilities Assumed
        
Current liabilities of Matrix
  
$
19,692,502
  
Matrix asset retirement obligations
    
1,412,694
  
Other accrued liabilities
    
1,478,385
  
Deferred royalty revenue
    
-
  
Commodity derivatives
    
112,102
  
Accrued unpaid guaranteed payments
    
1,464,960
  
Matrix senior secured notes payable, net of unamortized debt issuance costs
    
-
  
Amount attributable to liabilities assumed
  
$
24,160,643
  
Total Purchase Price Plus Liabilities Assumed
  
$
53,830,711
  
 
        
Estimated Fair Value of Assets Acquired
        
Matrix current assets
  
$
4,404,407
  
Proved and unproved properties
    
48,423,554
  
Net other property and equipment
    
-
  
Land
    
1,002,750
  
Long term receivable
    
-
  
Deposits and other
    
-
  
Commodity derivatives
    
-
  
Total  attributable to assets acquired
  
$
53,830,711
  
5

 
      
Fair value of Royale common stock to be issued net of par value
    
9,546,068
  
Pro forma adjustments to additional paid-in capital
  
$
9,546,068
  
Fair value of Royale Convertible Preferred Stock, Series B, par value $10.00 per share
  
$
20,124,000
  
Pro forma adjustments to Royale Convertible Preferred Stock, Series B, par value $10.00 per share
  
$
20,124,000
  

(2)
Adjustments to record conversion of Matrix Investments LP Class B, C and D partnership interests to Series B convertible preferred stock.

(3)
Cash advance from investor of $300,000 that was converted to Royale convertible promissory note on February 28, 2018.

(4)
Conversion of Royale’s $300,000 convertible promissory note to common stock on February 28, 2018.

(5)
Royale settled a dispute over an unpaid convertible promissory note in the principal amount of $1,280,000 plus interest and other accrued liabilities for an agreed settlement amount of $1,900,000 on February 28, 2018.

(6)
Adjustments to record cancellation of Royale Energy Funds common stock, no par value per share, and issuance of Royale common stock, par value $0.001 per share.

Cancellation of Royale Energy Funds common stock, no par value
  
$
(41,217,049
)
Additional paid in capital
    
41,217,049
  


(7)
The depletion, depreciation and amortization (DD&A) total was calculated for the combination of Royale and Matrix using the assets of Royale at cost together with the Matrix assets based on the fair market value of the oil and gas properties estimated at the time of the merger. The estimated increase in DD&A was determined by dividing the incremental increase in value of the Matrix assets over the reserve base at the beginning of the period on a BOE basis and then multiplying that by the production for the period on a BOE basis.  This resulted in an increase to DD&A of $272,912 for the twelve months ended December 31, 2017.



6

Royale Energy, Inc. Reports