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EX-31.1 - EX-31.1 - ROYALE ENERGY FUNDS, INCex31-1.htm
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EX-31.2 - EX-31.2 - ROYALE ENERGY FUNDS, INCex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549  
 

 
FORM 10-Q   


 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2015
Commission File No. 000-22750
 
ROYALE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
California
33-0224120
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

3777 Willow Glen Drive
El Cajon, CA 92019
(Address of principal executive offices) (Zip Code)
 
619-383-6600
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer  (as defined in Rule 12b-2 of the Exchange Act).  Check one:
 
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  x

Indicate by check mark whether the registrant is a blank check company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No x
 
At June 30, 2015, a total of 15,034,401 shares of registrant’s common stock were outstanding.
 
 
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
1
Item 1.
1
Item 2.
10
Item 3.
12
Item 4.
12
     
PART II
OTHER INFORMATION
13
Item 1.
13
Item 1A.
13
Item 6.
13
 
14
 
 
PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements
 
ROYALE ENERGY, INC.
BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
   
(Unaudited)
   
(Audited)
 
             
ASSETS
           
             
Current Assets
           
    Cash and Cash Equivalents
  $ 1,732,820     $ 3,061,841  
    Other Receivables
    1,986,227       1,760,181  
    Revenue Receivables
    252,839       493,295  
    Prepaid Expenses
    251,988       158,404  
                 
      Total Current Assets
    4,223,874       5,473,721  
                 
Other Assets
    580,844       510,821  
                 
Oil and Gas Properties, at cost, (successful efforts basis),
    Equipment and Fixtures
    7,026,933       7,594,666  
                 
Total Assets
  $ 11,831,651     $ 13,579,208  

See notes to unaudited financial statements.
 
 
ROYALE ENERGY, INC.
BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
   
(Unaudited)
   
(Audited)
 
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
           
             
Current Liabilities:
           
    Accounts Payable and Accrued Expenses
  $ 3,433,401     $ 4,502,559  
    Current Portion of Long-Term Debt, Net
    29,651       29,031  
    Deferred Turnkey Drilling Obligation
    9,146,033       7,937,786  
                 
      Total Current Liabilities
    12,609,085       12,469,376  
                 
Noncurrent Liabilities:
               
    Asset Retirement Obligation
    835,207       804,206  
    Note Payable
    1,431,811       1,446,853  
                 
      Total Noncurrent Liabilities
    2,267,018       2,251,059  
                 
Total Liabilities
    14,876,103       14,720,435  
                 
Stockholders' (Deficit):
               
    Common Stock, no par value, authorized 20,000,000 shares,
       15,034,401 and 14,945,789 shares issued and outstanding.
    38,152,484       38,014,730  
    Convertible preferred stock, Series AA, no par value,
       147,500 shares authorized; 46,662 and 46,662 shares issued
       and outstanding
    136,149       136,149  
    Accumulated (Deficit)
    (41,682,808 )     (39,623,243 )
    Additional Paid in Capital
    356,226       337,640  
    Accumulated Other Comprehensive (Loss)
    (6,503 )     (6,503 )
                 
      Total Stockholders' (Deficit)
    (3,044,452 )     (1,141,227 )
                 
Total Liabilities and Stockholders' (Deficit)
  $ 11,831,651     $ 13,579,208  

See notes to unaudited financial statements.
 
 
ROYALE ENERGY, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2015 AND 2014
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues:
                       
    Sale of Oil and Gas
  $ 281,984     $ 744,410     $ 576,293     $ 1,569,966  
    Supervisory Fees and Other
    166,706       174,429       342,466       327,904  
                                 
      Total Revenues
    448,690       918,839       918,759       1,897,870  
                                 
Costs and Expenses:
                               
    General and Administrative
    858,251       587,070       1,687,195       1,422,131  
    Lease Operating
    269,804       267,826       584,596       721,362  
    Delay Rentals
    20,437       12,298       49,565       31,792  
    Lease Impairment
    -       -       12,681       -  
    Well Equipment Write Down
    -       -       19,000       -  
    Legal and Accounting
    99,422       49,751       323,898       268,403  
    Marketing
    68,759       35,122       145,747       130,318  
    Depreciation, Depletion and Amortization
    64,429       88,309       139,220       178,135  
                                 
        Total Costs and Expenses
    1,381,102       1,040,376       2,961,902       2,752,141  
                                 
Gain on Turnkey Drilling Programs
    16,237       415,487       16,237       396,454  
Gain (Loss) on Sale of assets
    10,070       (34,601 )     10,070       (34,601 )
                                 
Income (Loss) From Operations
    (906,105 )     259,349       (2,016,836 )     (492,418 )
Other Income (Expense):
                               
    Interest Expense
    (21,544 )     (21,955 )     (42,729 )     (37,293 )
                                 
Income (Loss) Before Income Tax Expense
    (927,649 )     237,394       (2,059,565 )     (529,711 )
                                 
Net Income (Loss)
  $ (927,649 )   $ 237,394     $ (2,059,565 )   $ (529,711 )
                                 
Basic Earnings (Loss) Per Share
  $ (0.06 )   $ 0.02     $ (0.14 )   $ (0.04 )
                                 
Diluted Earnings (Loss) Per Share
  $ (0.06 )   $ 0.02     $ (0.14 )   $ (0.04 )

See notes to unaudited financial statements.
 
 
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
     Net (Loss)
  $ (2,059,565 )   $ (529,711 )
     Adjustments to Reconcile Net Income (Loss) to Net
       Cash (Used) by Operating Activities:
               
         Depreciation, Depletion and Amortization
    139,220       178,135  
         Lease Impairment
    12,681       -  
         (Gain) Loss on Sale of Assets
    (10,070 )     34,601  
         (Gain) on Turnkey Drilling Programs
    (16,237 )     (396,454 )
         Well Equipment Write Down
    19,000       -  
         Stock-Based Compensation, net of adjustments
    62,745       -  
      (Increase) Decrease in:
               
         Other & Revenue Receivables
    14,410       (840,416 )
         Prepaid Expenses and Other Assets
    (182,607 )     101,399  
      Increase (Decrease) in:
               
         Accounts Payable and Accrued expenses
    (1,038,157 )     265,992  
         Deferred Drilling Obligations
    1,208,247       (518,982 )
                 
    Net Cash (Used) in Operating Activities
    (1,850,333 )     (1,705,436 )
                 
 CASH FLOWS FROM INVESTING ACTIVITIES
               
     Expenditures for Oil and Gas Properties
          and Other Capital Expenditures
    (1,229,152 )     (2,495,777 )
     Proceeds from Turnkey Drilling Programs
    1,164,754       2,300,831  
     Proceeds from Sale of Assets
    506,537       -  
                 
    Net Cash Provided (Used) by Investing Activities
    442,139       (194,946 )
                 
 CASH FLOWS FROM FINANCING ACTIVITIES
               
     Principal Payments on Long-Term Debt
    (14,422 )     (10,342 )
     Proceeds from Sale of Common Stock, net of adjustments
    93,595       -  
                 
    Net Cash Provided (Used) by Financing Activities
    79,173       (10,342 )
                 
 Net (Decrease) in Cash and Cash Equivalents
    (1,329,021 )     (1,910,724 )
                 
 Cash at Beginning of Year
    3,061,841       4,878,233  
                 
 Cash at End of Period
    1,732,820       2,967,509  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
         
   Cash Paid for Interest
    42,729       37,293  
                 
   Cash Paid for Taxes
    2,900       1,900  

See notes to unaudited financial statements.
 
 
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 – In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normally recurring adjustments, necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented.  The results of operations for the six month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations.  It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report.

Use of Estimates

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 

Material estimates that are particularly susceptible to significant change relate to the estimate of Company oil and gas reserves prepared by an independent engineering consultant.  Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proven reserves. Estimated reserves are used in the calculation of depletion, depreciation and amortization, unevaluated property costs, impairment of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.
 
Liquidity
 
The Company has negative working capital, losses from operations and negative cash flows from operations. The primary sources of liquidity have historically been issuances of common stock and operations. Until we become cash flow positive, we anticipate that our primary sources of liquidity will be from the issuance of debt and/or equity, and the sale of oil and natural gas property participation interests.  Assuming there are no changes in expected sales and expense trends subsequent to August 4, 2015, the Company believes that its cash position and traditional methods will be sufficient to continue operations for the foreseeable future.
 
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.
 
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.
 
Proved oil and gas properties held and used by Royale Energy are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
 
Royale Energy 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 the six months ended June 30, 2015 and 2014, impairment losses of $12,681 and $0, respectively, were recorded on various capitalized lease and land costs that 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 Energy expects to hold the properties.  The valuation allowances are reviewed at least annually.
 
 
Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resultant gain or loss is recorded to Royale Energy’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 Energy’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 Energy’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. 
 
Royale Energy sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete 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 pay Royale Energy the full contract price upon execution of the agreement.   Royale Energy 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 its proportionate share of operating costs.  Royale Energy 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 and the interest is conveyed to the participant.
 
A certain portion of the turnkey drilling participant’s funds received are non-refundable.    The company holds all funds invested as Deferred Drilling Obligations until drilling is complete.  Occasionally, drilling is delayed due to the permitting process or drilling rig availability.  At June 30, 2015 and December 31, 2014, Royale Energy had Deferred Drilling Obligations of $9,146,033 and $7,937,786 respectively.
 
If Royale Energy is unable to drill the wells, and a suitable replacement well is not found, Royale would retain the non-refundable portion of the contact 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.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash on hand and on deposit, and highly liquid debt instruments with original maturities of three months or less.
Other Receivables
 
Our other receivables consist of receivables from direct working interest investors and industry partners. We provide for uncollectible accounts receivable using the allowance method of accounting for bad debts.  Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected.  The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable.  All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance.    At June 30, 2015 and December 31, 2014, the Company had an allowance for uncollectable accounts of $1,734,713 and $1,734,713, respectively, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.
 
Revenue Receivables
 
Our revenue receivables consist of receivables related to the sale of our natural gas and oil.  Once a production month is completed we receive payment approximately 15 to 30 days later.
 
 
Equipment and Fixtures
 
Equipment and fixtures are stated at cost and depreciated over the estimated useful lives of the assets, which range from three to seven years, using the straight-line method. Repairs and maintenance are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment, other than oil and gas, are reflected in operations.
 
Fair Value Measurements
 
According to Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities.
 
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
 
   
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
 
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
 
Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions
 
At June 30, 2015, Royale Energy reported the fair value of $0 in available for sale securities.  The fair value was determined using the number of shares owned as of June 30, 2015, multiplied by the market price of those securities on June 30, 2015
 
Reclassifications
 
Certain items in the financial statements have been reclassified to maintain consistency and comparability for all periods presented herein.
 
Recently Issued Accounting Pronouncements
 
The Company has reviewed the updates issued by the Financial Accounting Standards Board (FASB) during the six months ended June 30, 2015, and have determined that the updates are not applicable to the Company.

 
NOTE 2 – EARNINGS (LOSS) PER SHARE
 
Basic and diluted earnings (loss) per share are calculated as follows:
 
   
Three Months Ended June 30,
 
   
2015
   
2014
 
   
Basic
   
Diluted
   
Basic
   
Diluted
 
Net Income (Loss)
 
$
(927,649
 
$
(927,649
 
$
237,394
   
$
237,394
 
                                 
Weighted average common shares outstanding 
   
14,953,645
     
14,953,645
     
14,942,728
     
14,942,728
 
Effect of dilutive securities
   
--
     
23,331
     
--
     
167,477
 
Weighted average common shares, including
     Dilutive effect
   
14,953,645
     
14,976,976
     
14,942,728
     
15,110,205
 
Per share:
                               
     Net income (Loss)
 
$
(0.06
)  
$
(0.06
 
$
0.02
   
$
0.02
 
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
   
Basic
   
Diluted
   
Basic
   
Diluted
 
Net Income (Loss)
 
$
(2,059,565
 
$
(2,059,565
)
 
$
(529,711
 
$
(529,711
                                 
Weighted average common shares outstanding 
   
14,953,645
     
14,953,645
     
14,942,728
     
14,942,728
 
Effect of dilutive securities
   
--
     
23,331
     
--
     
157,472
 
Weighted average common shares, including
     Dilutive effect
   
14,953,645
     
14,976,976
     
14,942,728
     
15,100,200
 
Per share:
                               
     Net Income (Loss)
 
$
(0.14
)
 
$
(0.14
)
 
$
(0.04
 
$
(0.04
 
For the six months ended June 30, 2015 and 2014, Royale Energy had dilutive securities of 23,331 and 157,472, respectively.  These securities were not included in the dilutive loss per share due to their antidilutive nature.

NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

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

   
June 30, 2015
(Unaudited)
   
December 31, 2014
(Audited)
 
Oil and Gas
           
Producing properties, including drilling costs
 
$
5,020,841
   
$
4,920,521
 
Undeveloped properties
   
2,823,037
     
2,773,422
 
Lease and well equipment
   
4,321,132
     
4,410,120
 
     
12,165,010
     
12,104,063
 
                 
Accumulated depletion, depreciation & amortization
   
(7,418,147
   
(7,318,510
     
4,746,863
     
4,785,553
 
Commercial and Other
               
Real estate, including furniture and fixtures
 
$
2,266,050
   
$
2,768,394
 
Vehicles
   
118,061
     
116,830
 
Furniture and equipment
   
1,117,984
     
1,114,086
 
     
3,502,095
     
3,999,310
 
Accumulated depreciation
   
(1,222,025
   
(1,190,197
     
2,280,070
     
2,809,113
 
                 
   
$
7,026,933
   
$
7,594,666
 
 
The guidance set forth in the Continued Capitalization of Exploratory Well Costs paragraph of the Extractive Activities Topic of the FASB Accounting Standards Codification requires that we evaluate all existing capitalized exploratory well costs and disclose the extent to which any such capitalized costs have become impaired and are expensed or reclassified during a fiscal period. We did not make any additions to capitalized exploratory well costs pending a determination of proved reserves during the periods in 2015 or 2014. 
 
 
NOTE 4 – STOCK COMPENSATION PLAN
 
During the October 10, 2014 Board of Directors meeting, directors and executive offices of Royale Energy were granted 20,000 options each, 140,000 total, to purchase common stock at an exercise price of $5.00 per share. These options were granted for a period of 3 years and will expire after December 31, 2017.  These options become exercisable at 5,000 shares per period beginning October 13, 2014, January 1, 2015, April 1, 2015 and July 1 2015. During the six months ended June 30, 2015, Royale recognized compensation costs of $62,745 relating to this option grant.  There were no stock compensation costs recognized during the same quarter in 2014.
 
NOTE 5 – INCOME TAXES
 
Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  At the end of 2014, management reviewed the reliability of the Company’s net deferred tax assets, and due to the Company’s continued cumulative losses in recent years, Royale and it management concluded it is not “more-likely-than-not” its deferred tax assets will be realized.  As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2015.
 
A reconciliation of Royale Energy's provision for income taxes and the amount computed by applying the statutory income tax rates at June 30, 2015 and 2014, respectively, to pretax income is as follows: 

   
Six Months 
Ended
June 30, 2015
   
Six Months
 Ended
June 30, 2014
 
             
Tax (benefit) computed at statutory rate of 34%
 
$
(700,252
 
$
(180,102
                 
Increase (decrease) in taxes resulting from:
               
                 
State tax / percentage depletion / other
               
Other non-deductible expenses
   
306
     
631
 
Change in valuation allowance
   
699,946
     
179,471
 
Provision (benefit)
 
$
-
   
$
-
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

In addition to historical information contained herein, this discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, subject to various risks and uncertainties that could cause our actual results to differ materially from those in the "forward-looking" statements. While we believe our forward looking statements are based upon reasonable assumptions, there are factors that are difficult to predict and that are influenced by economic and other conditions beyond our control. Investors are directed to consider such risks and other uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission.

Results of Operations

For the six months ended June 30, 2015, we had a net loss of $2,059,565 compared to net loss of $529,711 during the six months ended June 30, 2014, a $1,529,854 difference.  Total revenues for the six months ended June 30, 2015 were $918,759, a decrease of $979,111 or 51.6% from the total revenues of $1,897,870 during the same period in 2014.  The lower net income and revenues in 2015 were primarily due to decreased production levels and the decrease of natural gas & oil commodity prices, when compared to the first six months of 2014.

During the first six months of 2015, revenues from oil and gas production decreased $993,673 or 63.3% to $576,293 from the 2014 six month revenues of $1,569,966.  This decrease was due to lower natural gas production and commodity prices.  The net sales volume of natural gas for the six months ended June 30, 2015, was approximately 202,477 Mcf with an average price of $2.80 per Mcf, versus 305,978 Mcf with an average price of $5.03 per Mcf for the period in 2014.  This represents a decrease in net sales volume of 103,501 Mcf or 33.8%.  The net sales volume for oil and condensate (natural gas liquids) production was 197 barrels at an average price of $47.36 per barrel for the first six months of 2015, compared to 332 barrels with an average price of $93.40 per barrel for the same period in 2014.  This represents a decrease in net sales volume of 135 barrels or 40.7%.
 
For the quarter ended June 30, 2015, revenues from oil and gas production decreased $462,426 or 62.1% to $281,984 from the 2014 second quarter revenues of $744,410.  This decrease was also due to lower natural gas commodity prices and decreased production.  The net sales volume of natural gas for the quarter ended June 30, 2015, was approximately 94,444 Mcf with an average price of $2.78 per Mcf, versus 157,655 Mcf with an average price of $4.69 per Mcf for the second quarter of 2014.  This represents a decrease in net sales volume of 63,211 Mcf or 40% for the quarter in 2015.  The net sales volume for oil and condensate (natural gas liquids) production was 100 barrels with an average price of $51.60 per barrel for the second quarter of 2015, compared to 52 barrels at an average price of $96.66 per barrel for the second quarter of 2014.

Oil and natural gas lease operating expenses decreased by $136,766 or 19%, to $584,596 for the six months ended June 30, 2015, from $721,362 for the same period in 2014.  This decrease was mainly due to lower plugging and abandonment expenses during the period in 2015.  For the second quarter in 2015, lease operating expenses increased $1,978 or .7% from the same period in 2014.  Delay rental costs increased by $17,773 or 55.9%, to $49,565 for the six months ended June 30, 2015 from $31,792 for the same period in 2014.

The aggregate of supervisory fees and other income was $342,466 for six months ended June 30, 2015, an increase of $14,562 or 4.4% from $327,904 during the period in 2014.  This increase was the result of higher overhead rates during the period in 2015.  During the second quarter 2015, supervisory fees and other income decreased $7,723, mainly due to lower drilling overhead during the period in 2015.

Depreciation, depletion and amortization expense decreased to $139,220 from $178,135, a decrease of $38,915 or 21.9% for the six months ended June 30, 2015, as compared to the same period in 2014.  During the second quarter 2015, depreciation, depletion and amortization expenses also decreased $23,880 or 27%.   The depletion rate is calculated using production as a percentage of reserves.  This decreases in depreciation expense was mainly due to lower production volumes during the period.
 
General and administrative expenses increased by $265,064 or 18.6% from $1,422,131 for the six months ended June 30, 2014, to $1,687,195, for the period in 2015. For the second quarter 2015, general and administrative expenses increased $271,181 or 46.2% when compared to the same period in 2014. These increases were primarily due to employee related expenses and stock based compensation costs.  Marketing expense for the six months ended June 30, 2015, increased $15,429, or 11.8%, to $145,747, compared to $130,318 for the same period in 2014.  For the second quarter 2015, marketing expenses increased $33,637 or 95.8% when compared to the second quarter in 2014.   Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs.
 

Legal and accounting expense increased to $323,898 for the six months ended June 30, 2015, compared to $268,403 for the same period in 2014, a $55,495 or 20.7% increase.  For the second quarter 2015, legal and accounting expenses increased $49,671 or 99.8%, when compared to the same period in 2014.  These increases were mainly a result of higher legal fees paid during the period in 2015.  

We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense. During the period ended June 30, 2015, we recorded a Lease Impairment of $12,681 on various lease and land costs that were no longer viable.  Also, during the period in 2015, we recorded a write down of $19,000 on certain well equipment to its estimated fair value.
 
At June 30, 2015, Royale Energy had a Deferred Drilling Obligation of $9,146,033.  During the six month period in 2015, we disposed of $1,164,754 of deferred drilling obligations upon completing the drilling of one well, while incurring expenses of $1,247,009, resulting in a capitalization of $82,255 in drilling costs.  During the period in 2015, we had a gain of $16,237, due to an over accrual of drilling costs.  In the same period in 2014, we disposed of $2,300,831 of deferred drilling obligations upon completing three wells, while incurring expenses of $1,904,377, resulting in a gain of $396,454.  During the third quarter 2015, Royale expects to drill three wells in the period.

During the period in 2015, we recorded a gain of $10,070 on the sale of a company owned condominium located in San Diego, California.  In the second quarter of 2014 we recorded a loss of $34,601 on previously capitalized office leasehold improvements due to our office relocation.

Interest expense increased to $42,729 for the six months ended June 30, 2014, from $37,293 for the same period in 2014, a $5,436, or 14.6% increase. This increase resulted from interest paid on the outstanding loan for the corporate headquarters.  

Capital Resources and Liquidity

At June 30, 2015, Royale Energy had current assets totaling $4,223,874 and current liabilities totaling $12,609,085, an $8,385,211 working capital deficit.  We had cash and cash equivalents at June 30, 2015, of $1,732,820 compared to $3,061,841 at December 31, 2014.

In December of 2013, Royale purchased an office building valued at $2,000,000, of which $500,000 was paid in cash on the date of purchase, and $1,500,000 was borrowed from AmericanWest Bank, with a note secured by the property being purchased.  The note carries an interest rate of 5.75% until paid in full. Royale will pay this loan in 119 regular payments of $9,525 each and one balloon payment estimated at $1,150,435. Royale’s first payment was due February 1, 2014, and all subsequent payments are due on the same day of each month after that. Royale’s final payment will be due on January 1, 2024, and will be for all principal and all accrued interest not yet paid. Payments include principal and interest.  At June 30, 2015, the outstanding balance of this note was $1,461,462.  

At June 30, 2015, our other receivables totaled $1,986,227, compared to $1,760,181 at December 31, 2014, a $226,046 or 12.8% increase.  This increase was due to receivables due to workovers in the current period in addition to receivables from an industry partner.  At June 30, 2015, our revenue receivables totaled $252,839, compared to $493,295 at December 31, 2014, a $240,456 or 48.7% decrease.  This was primarily due to lower oil and gas revenue receivables, reflecting lower commodity prices and decreased production during the period.  At June 30, 2015, our accounts payable and accrued expenses totaled $3,433,401, a decrease of $1,069,158 or 23.8% from the accounts payable at December 31, 2014, of $4,502,559 mainly due to lower accrued drilling costs at the end of the period. Assuming there are no changes in expected sales and expense trends subsequent to August 4, 2015, the Company believes that its cash position and traditional methods will be sufficient to continue operations for the foreseeable future.

Ordinarily, we fund our operations and cash needs from cash flows generated from operations and issuances of common stock.  We do not foresee any liquidity demands that cannot be met from cash flow or financing activities, including ongoing operations as the Company continues to increase its well inventory or additional sales of equity or debt securities pursuant to a Registration Statement on Form S-3 filed with the SEC.  Assuming there are no changes in expected sales and expense trends subsequent to August 4, 2015, the Company believes that its cash position and traditional methods will be sufficient to continue operations for the foreseeable future.
 
Operating Activities.  Net cash used by operating activities totaled $1,850,333 and $1,705,436 for the six month periods ended June 30, 2015 and 2014, respectively.  This $144,897 or 8.5% increase in cash used was mainly due to increased payments on accounts payable and lower accrued drilling costs for the period in 2015.
 
 
Investing Activities.  Net cash provided by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $442,139 provided by investing activities and $194,946 net cash used by investing activities for the six month periods ended June 30, 2015 and 2014, respectively.  This difference was primarily due to the proceeds of approximately $500,000 received from the sale of a condominium located in San Diego, California.  During the six month periods in 2015 and 2014, the Company drilled one well and three wells, respectively.
 
Financing Activities.  Net cash provided by financing activities totaled $79,173 in the second quarter of 2015, which was due to the sale of common stock and principal payments on the Company’s long-term debt; while $10,342 was used by financing activities for the six month period ended June 30, 2014.  During the six months ended June 30, 2015, Royale issued 88,612 shares of its common stock and received net proceeds of $137,754, which were offset by costs of approximately $44,159 relating to its market equity offering program.  These proceeds were added to working capital and used for ordinary operating expenses.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
Our major market risk exposure relates to pricing of oil and gas production.  The prices we receive for oil and gas are closely related to worldwide market prices for crude oil and local spot prices paid for natural gas production.  Prices have been volatile for the last several years, and we expect that volatility to continue.  Monthly average natural gas prices ranged from a low of $2.86 per Mcf to a high of $3.25 per Mcf for the first six months of 2015.  We have not entered into any hedging or derivative agreements to limit our exposure to changes in oil and gas prices or interest rates.
 
Item 4.  Controls and Procedures
 
As of June 30, 2015, an evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures.  These controls and procedures are based on the definition of disclosure controls and procedures in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934.  Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2015.
 
No changes occurred in our internal control over financial reporting during the six months ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

PART II.   OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
Royale Energy, Inc. vs. Rampart Alaska LLC, Superior Court, Nome, Alaska.  On November 14, 2014, Royale Energy, Inc. caused a complaint for lien foreclosure to be filed in the Superior Court for the State of Alaska, Second Judicial District at Nome.  Royale Energy caused certain liens to be files against the working interests of Rampart Alaska LLC involving oil leases on the North Slope Alaska.  The filing of the liens came about as the result of Rampart’s failure to reimburse for joint interest billings and cash calls.  Royale seeks in the litigation to foreclose the liens to recover the sums secured thereby or the working interests themselves.  Rampart Alaska answered the complaint and asserted a counterclaim against Royale for damages alleging breach of contract, violation of the covenant of good faith and fair dealing, unjust enrichment, defamation, violations of the Alaska Securities Act and seeking to undo the filing of the lien claims.  Stephen Hosmer, as an officer of Royale, was also independently named as a third party defendant by Rampart for claims arising out of defamation and violation of the Alaska Securities Act.  At this juncture, the case is in its preliminary phase and we are unable to provide a possible outcome other than to note that management vigorously will contest the allegations of the counterclaim and third-party complaint and will seek to aggressively move to realize on its lien claims to recover funds due and owing from Rampart.  Because the case is only a number of months old, we are unable to provide an evaluation of the likelihood of an unfavorable outcome nor can we estimate the amount or range of potential loss.

Item 1A.  Risk Factors

Please review the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2014.

Potential NASDAQ Delisting.  On April 7, 2015, NASDAQ notified us that the company is not in compliance with the minimum stockholders’ equity requirement of the NASDAQ Capital Market listing standards, which require that issuers maintain a minimum stockholders’ equity of at least $2.5 million.  We have filed a registration statement with the SEC to sell common stock sufficient to raise net stockholder’s equity to a level above $2.5 million.  On May 20, 2015, the registration statement became effective with the SEC.  On June 4, 2015, NASDAQ granted an extension through October 5, 2015, to file financial statements demonstrating compliance with the minimum stockholders’ equity requirement. The fulfillment of this plan will allow Royale Energy’s stock to continue trading on the NASDAQ Capital Market.  If the Company becomes delisted from the NASDAQ Capital Market, it will become ineligible to register and sell its securities on SEC Form S-3, and thus the failure to maintain a listing on the NASDAQ Capital Market may make it more difficult for the company to meet its capital needs through the sale of its securities in a public offering.
 
Item 6.  Exhibits
 
31.1
 
     
31.2
 
     
32.1
 
     
32.2
 
     
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 the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
ROYALE ENERGY, INC.
 
     
Date:    August 4, 2015
/s/ Donald H. Hosmer
 
 
Donald H. Hosmer, Co-President and Co-Chief Executive Officer
     
Date:    August 4, 2015
/s/ Stephen M. Hosmer
 
 
Stephen M. Hosmer, Co-President, Co-Chief Executive Officer, and Chief Financial Officer
 
 
 
14