XNAS:ROYL Royale Energy Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012
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.)

7676 Hazard Center Drive, Suite 1500
San Diego, CA 92108
(Address of principal executive offices) (Zip Code)
 
619-881-2800
(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, 2012, a total of 11,124,166 shares of registrant’s common stock were outstanding.
 
 
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
 
Item 1.
 1
Item 2.
  9
Item 3.
  11
Item 4.
  11
     
PART II
OTHER INFORMATION
 
Item 1.
  12
Item 1A.
  12
Item 2.
  12
Item 3.
  12
Item 4.
  12
Item 5.
  12
Item 6.
  12
 
  13

 
 
PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements
 
ROYALE ENERGY, INC.
BALANCE SHEETS
 
   
June 30, 2012
   
December 31, 2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
Current Assets
           
    Cash and Cash Equivalents
 
$
2,470,550
   
$
2,946,131
 
    Accounts Receivable, net
   
1,522,538
     
1,872,067
 
    Prepaid Expenses
   
344,409
     
432,168
 
    Deferred Tax Asset
   
 661,645
     
661,645
 
    Available for Sale Securities
   
31,369
     
31,027
 
    Inventory
   
612,464
     
664,458
 
                 
    Total Current Assets
   
5,642,975
     
6,607,496
 
                 
                 
Other Assets
   
6,946
     
6,946
 
Deferred Tax Asset-Noncurrent
   
6,986,892
     
6,055,803
 
                 
Oil and Gas Properties, at cost, (successful efforts basis),
     Equipment and Fixtures
   
7,536,215
     
8,075,344
 
                 
                 
Total Assets
 
$
20,173,028
   
$
20,745,589
 
 
See notes to unaudited financial statements
 
 
ROYALE ENERGY, INC.
BALANCE SHEETS
 
   
June 30, 2012
   
December 31, 2011
 
   
(Unaudited)
   
(Audited)
 
LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
Current Liabilities:
           
    Accounts Payable and Accrued Expenses
 
$
4,434,420
   
$
4,542,741
 
Current Portion of Long-Term Debt
   
 1,550,000
     
 0
 
    Current Portion of Deferred Tax Liability
   
1,340
     
1,240
 
    Deferred Revenue from Turnkey Drilling
   
6,697,235
     
4,879,853
 
                 
    Total Current Liabilities
   
12,682,995
     
9,423,834
 
                 
Noncurrent Liabilities:
               
    Asset Retirement Obligation
   
581,099
     
575,612
 
    Long-Term Debt, Net of Current Portion
   
0
     
2,750,000
 
                 
    Total Noncurrent Liabilities
   
581,099
     
3,325,612
 
                 
Total Liabilities
   
13,264,094
     
12,749,446
 
                 
Stockholders' Equity:
               
    Common Stock, no par value, authorized 20,000,000 shares, 
      11,156,785 and 10,823,050 shares issued; 11,124,166 and
      10,790,431 shares outstanding, respectively
   
29,454,862
     
28,298,228
 
    Convertible preferred stock, Series AA, no par value,
      147,500 shares authorized; 52,784 and 52,784 shares
      issued and outstanding, respectively
   
154,014
     
154,014
 
    Accumulated (Deficit)
   
(23,175,477
   
(20,911,762
    Accumulated Other Comprehensive Income
   
3,277
     
3,035
 
                 
    Total Paid in Capital and Accumulated Deficit
   
6,436,676
     
7,543,515
 
    Less Cost of Treasury Stock 32,619 and 32,619 shares
   
(179,376
   
(179,376
    Additional Paid in Capital
   
651,634
     
632,004
 
                 
    Total Stockholders' Equity
   
6,908,934
     
7,996,143
 
                 
Total Liabilities and Stockholders' Equity
 
$
20,173,028
   
$
20,745,589
 

See notes to unaudited financial statements
 

ROYALE ENERGY, INC.
STATEMENTS OF OPERATIONS
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Revenues:
                       
    Sale of Oil and Gas
 
$
370,950
   
$
1,864,515
   
$
867,844
   
$
3,302,074
 
    Turnkey drilling
   
341,676
     
1,311,320
     
592,558
     
2,507,191
 
    Supervisory Fees and Other
   
164,863
     
300,810
     
369,547
     
502,536
 
                                 
      Total Revenues
   
877,489
     
3,476,645
     
1,829,949
     
6,311,801
 
                                 
Costs and Expenses:
                               
    General and Administrative
   
991,495
     
993,596
     
2,011,447
     
2,041,390
 
    Turnkey Drilling and Development
   
119,758
     
474,963
     
190,158
     
1,425,977
 
    Lease Operating
   
310,821
     
493,943
     
606,331
     
800,051
 
    Lease Impairment
   
181,627
     
0
     
181,627
     
0
 
    Geological and Geophysical Expense
   
63,657
     
25,059
     
422,686
     
66,968
 
   Inventory Write Down
   
0
     
0
     
62,744
     
0
 
    Legal and Accounting
   
149,572
     
94,768
     
419,875
     
497,979
 
    Marketing
   
171,922
     
244,888
     
326,141
     
425,492
 
    Depreciation, Depletion and Amortization
   
373,657
     
717,114
     
737,119
     
1,246,561
 
                                 
        Total Costs and Expenses
   
2,362,509
     
3,044,331
     
4,958,128
     
6,504,418
 
                                 
Gain on Sale of Assets
   
430
     
8,024
     
1,737
     
793,156
 
                                 
      Income (Loss) From Operations
   
(1,484,590
   
440,338
     
(3,126,442
   
600,539
 
Other Income (Expense):
                               
    Interest Expense
   
(35,624
   
(37,232
   
(68,362
   
(75,450
                                 
Income Before Income Tax Expense
   
(1,520,214
   
403,106
     
(3,194,804
   
525,089
 
Income tax provision (benefit)
   
(445,258
   
143,759
     
(931,089
   
188,889
 
                                 
Net Income (Loss)
 
$
(1,074,956
 
$
259,347
   
$
(2,263,715
 
$
336,200
 
                                 
Basic Earnings Per Share
 
$
(0.10
 
$
0.02
   
$
(0.21
 
$
0.03
 
                                 
                                 
Diluted Earnings Per Share
 
$
(0.10
 
$
0.02
   
$
(0.21
 
$
0.03
 
                                 
                                 
Other Comprehensive Income
                               
    Unrealized Gain (Loss) on Equity Securities
 
$
(1,330
 
$
0
   
$
342
   
$
0
 
                                 
Other Comprehensive Income (Loss), before tax
   
(1,330
   
0
     
342
     
0
 
Income Tax Expense (Benefit) Related to Items of Other Comprehensive Income
   
(386
   
0
     
99
     
0
 
                                 
Other Comprehensive Income (Loss), net of tax
   
(944
   
0
     
243
     
0
 
                                 
  Comprehensive Income (Loss)
 
$
(1,075,900
 
$
259,347
   
$
(2,263,472
 
$
336,200
 
 
See notes to unaudited financial statements 
 
 
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
    Net Income (Loss)
 
$
(2,263,715
 
$
336,200
 
    
               
    Adjustments to Reconcile Net Income (Loss) to Net
      Cash Provided (Used) by Operating Activities:
               
        Depreciation, Depletion and Amortization
   
737,119
     
1,246,561
 
     Lease Impairment
   
181,627
     
0
 
        (Gain) Loss on Sale of Assets
   
      (1,737
   
(793,156
        Inventory Write Down
   
62,744
     
0
 
        Stock-Based Compensation, net of adjustments
   
19,630
     
67,278
 
     Decrease (Increase) in:
               
        Accounts Receivable
   
349,529
     
(122,966
        Prepaid Expenses and Other Assets
   
77,009
     
197,293
 
     Increase (Decrease) in:
               
        Accounts Payable and Accrued expenses
   
(102,834
   
(999,527
        Deferred Revenues - DWI
   
1,817,382
     
1,857,082
 
        Deferred Income Tax expense (benefit)
   
(931,088
   
188,889
 
                 
   Net Cash Provided (Used) by Operating Activities
   
(54,334
   
1,977,654
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
    Expenditures for Oil and Gas Properties and Other Capital Expenditures
   
(379,619
   
(2,242,964
    Proceeds from Sale of Assets
   
1,737
     
806,353
 
                 
   Net Cash Used by Investing Activities
   
(377,882
   
(1,436,611
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
    Proceeds from Long-Term Debt
   
0
     
650,000
 
    Principal Payments on Long-Term Debt
   
(1,200,000
   
(600,000
    Proceeds from Stock Option and Warrant Exercises
   
299,499
     
1,051,489
 
    Proceeds from Sale of Common Stock
   
857,136
       0  
                 
   Net Cash Provided (Used) by Financing Activities
   
(43,365
   
1,101,489
 
                 
Net Increase (Decrease) in Cash and Cash Equivalents
   
(475,581
   
1,642,532
 
                 
Cash at Beginning of Year
 
$
2,946,131
   
$
4,630,722
 
                 
Cash at End of Period
 
$
2,470,550
   
$
6,273,254
 
                 
           
  Cash Paid for Interest
 
$
60,485
   
$
75,775
 
                 
  Cash Paid for Taxes
 
$
800
   
$
2,522
 

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.

NOTE 2 – EARNINGS PER SHARE

Basic and diluted earnings (loss) per share are calculated as follows:

   
For the Six Months ended
 June 30, 2012
 
   
Loss
(Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
 
Basic Earnings Per Share:
                 
   Net loss available to common stock
 
$
(2,263,715
   
10,977,537
   
$
(0.21
                         
Diluted Earnings Per Share:
                       
   Effect of dilutive securities and stock options
   
0
     
0
     
0
 
                         
Net loss available to common stock
 
$
(2,263,715
   
10,977,537
   
$
(0.21
 
   
For the Six Months ended
 June 30, 2011
 
   
Income
(Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
 
Basic Earnings Per Share:
                       
   Net income available to common stock
 
$
336,200
     
10,542,890
   
$
0.03
 
                         
Diluted Earnings Per Share:
                       
   Effect of dilutive securities and stock options
   
0
     
354,266
     
0.00
 
                         
Net income available to common stock
 
$
336,200
     
10,897,156
   
$
0.03
 
 
For the six months ended June 30, 2012, Royale Energy had dilutive securities of 781,304.  These securities were not included in the dilutive loss per share due to their antidilutive nature.
 
 
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

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

   
June 30, 2012
   
December 31, 2011
 
Oil and Gas
           
  Producing properties, including drilling costs
 
$
23,774,965
   
$
23,684,048
 
  Undeveloped properties
   
1,119,409
     
994,687
 
  Lease and well equipment
   
10,255,761
     
10,284,315
 
     
35,150,135
     
34,963,050
 
                 
  Accumulated depletion, depreciation & amortization
   
(28,262,264
   
(27,553,222
     
6,887,871
     
7,409,828
 
Commercial and Other
               
  Real estate, including furniture and fixtures
 
$
502,344
   
$
502,344
 
  Vehicles
   
151,669
     
151,669
 
  Furniture and equipment
   
1,299,300
     
1,307,299
 
     
   1,953,313
     
     1,961,312
 
                 
  Accumulated depreciation
   
(1,304,969
   
(1,295,796
     
648,344
     
665,516
 
                 
   
$
7,536,215
   
$
8,075,344
 
 
The guidance set forth in the Continued Capitalization of Exploratory Well Costs paragraph of the Extractive Activities Topic of the FASB Accounting Standards Codification (ASC) 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 2012 or 2011.

NOTE 4 – STOCK BASED COMPENSATION

Royale Energy has a stock-based employee compensation plan. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards.

In November 2008, the Board of Directors granted the directors and executive officers of Royale Energy 95,000 shares of restricted common stock.  On November 30, 2009 and November 30, 2010, 31,665 shares vested, and the remaining 31,670 shares vested on November 30, 2011. Royale recognized share-based compensation expense of $46,893 and $16,442 as a tax benefit in the first two quarters of 2011 relating to this grant. No compensation cost or tax benefit was recognized in 2012 relating to this option grant.

In December 2010, the Board of Directors granted each of the directors and executive officers of Royale Energy 50,000 stock options, a total of 400,000 options, to purchase common stock at an exercise or base price of $3.25 per share. These options vested in two parts on January 1, 2011 and 2012. The options were granted with a legal life of five years, and a service period of two years beginning January 1, 2011. During the first six months of 2012 and 2011, Royale recognized compensation costs of $19,630 and $20,385, respectively relating to this grant. During the same time period Royale also recognized $5,696 and $7,147 as a tax benefit relating to this option grant for the quarters ended June 30, 2012 and 2011, respectively.
 
 
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 5 – FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS

Royale Energy identifies reportable segments by product and country, although Royale Energy currently does not have foreign country segments. Royale Energy includes revenues from both external customers and revenues from transactions with other operating segments in its measure of segment profit or loss. Royale Energy also includes interest revenue and expense, DD&A, and other operating expenses in its measure of segment profit or loss.

Royale Energy's operations are classified into two principal industry segments. Following is a summary of segmented information for the six months ended June 30, 2012, and 2011:
 
   
Oil and Gas
             
   
Producing
   
Turnkey
       
   
and
   
Drilling
       
   
Exploration
   
Services
   
Total
 
                   
Six Months Ended June 30, 2012:
                 
Revenues from External Customers
 
$
867,844
   
$
592,558
   
$
1,460,402
 
                         
Supervisory Fees
   
364,763
     
0
     
364,763
 
                         
Interest Revenue
   
0
     
4,784
     
4,784
 
                         
Interest Expense
   
34,181
     
34,181
     
68,362
 
                         
Operating Expenses for Segment Assets
   
2,526,241
     
1,513,141
     
4,039,382
 
                         
Depreciation, Depletion and Amortization
   
700,263
     
36,856
     
737,119
 
                         
Lease Impairment
   
90,814
     
90,813
     
181,627
 
                         
Gain on Sale of Assets
   
      1,737
     
0
     
1,737
 
                         
Income Tax Benefit
   
(617,021
   
(314,068
   
(931,089
                         
Total Assets
 
$
19,164,377
   
$
1,008,651
   
$
20,173,028
 
                         
Net Loss
 
$
(1,500,134
 
$
(763,581
 
$
(2,263,715
 
 
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

   
Oil and Gas
             
   
Producing
   
Turnkey
       
   
and
   
Drilling
       
   
Exploration
   
Services
   
Total
 
                   
Six Months Ended June 30, 2011:
                 
Revenues from External Customers
 
$
3,302,074
   
$
2,507,191
   
$
5,809,265
 
                         
Supervisory Fees
   
486,931
     
0
     
486,931
 
                         
Interest Revenue
   
0
     
15,605
     
15,605
 
                         
Interest Expense
   
37,725
     
37,725
     
75,450
 
                         
   Expenditures for Segment Assets
   
2,365,247
     
2,892,610
     
5,257,857
 
                         
Depreciation, Depletion and Amortization
   
1,184,233
     
62,328
     
1,246,561
 
                         
Gain on Sale of Assets
   
793,156
     
0
     
793,156
 
                         
Income Tax Expense (Benefit)
   
357,913
     
(169,024
   
188,889
 
                         
Total Assets
 
$
24,873,788
   
$
1,309,147
   
$
26,182,935
 
                         
Net Income (Loss)
 
$
637,043
   
$
(300,843
 
$
336,200
 

NOTE 6 – 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 periods 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.

During the third quarter of 2011, Royale Energy received 1,900 shares related to a settlement received approximately five years ago of natural gas revenues owed the Company.  At June 30, 2012, these shares had a fair value of $31,369 reported in available for sale securities.  The fair value was determined using the number of shares owned as of June 30, 2012, multiplied by the market price of those securities on June 30, 2012.


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, 2012, we had a net loss of $2,263,715 compared to net income of $336,200 during the same period in 2011, a $2,599,915 change.  Total revenues for the first six months in 2012 were $1,829,949, a decrease of $4,481,852 or 71.0% from the total revenues of $6,311,801 during the same period in 2011.  For the quarter ended June 30, 2012, we had a net loss of $1,074,956 compared to net income of $259,347 during the second quarter in 2011, a $1,334,303 difference. The lower net profits and revenues during the periods were the result of decreases in both natural gas production and price received and lower turnkey drilling revenues due to a decrease in drilling activity during the period in 2012.

During the first six months of 2012, revenues from oil and gas production decreased $2,434,230 or 73.7% to $867,844 from the 2011 six month revenues of $3,302,074.  This decrease was due to lower natural gas and oil production, stemming from the natural declines of our existing wells and lower commodity prices received during the period in 2012.  The net sales volume of natural gas for the six months ended June 30, 2012, was 315,421 Mcf with an average price of $2.49 per Mcf, versus 759,395 Mcf with an average price of $4.20 per Mcf for the period in 2011.  This represents a decrease in net sales volume of 443,974 Mcf or 58.5%.  For the quarter ended June 30, 2012, revenues from oil and gas production decreased $1,493,565 or 80.1% to $370,950 from the 2011 second quarter revenues of $1,864,515.  During the second quarter 2012, we produced 146,050 Mcf with an average price of $2.33 per Mcf versus 417,303 Mcf produced during the same quarter in 2011 with an average price of $4.33 per Mcf, which represents a 271,253 Mcf or 65.0% decrease in net sales volume.  The net sales volume for oil and condensate (natural gas liquids) production was 855 barrels with an average price of $94.13 per barrel for the first six months of 2012, compared to 1,233 barrels at an average price of $93.61 per barrel for the first six months in 2011.  This represents a decrease in net sales volume of 378 barrels, or 30.7%.  For the quarter ended June 30, 2012, oil and condensate production decreased 264 barrels, or 44.6%, from 592 barrels produced during the period in 2011 to 328 barrels produced in the same period in 2012.

Oil and natural gas lease operating expenses decreased by $193,720 or 24.2%, to $606,331 for the six months ended June 30, 2012, from $800,051 for the six months in 2011.  For the second quarter 2012, lease operating expenses decreased $183,122 or 37.1% from the same period in 2011.  These decreases were mainly due to lower plugging and transportation costs during the period in 2012.

For the six months ended June 30, 2012, turnkey drilling revenues decreased $1,914,633 or 76.4% to $592,558 from $2,507,191 in the same period in 2011.  We also had a $1,235,819 or 86.7% decrease in turnkey drilling and development costs to $190,158 in 2012 from $1,425,977 in 2011. For the second quarter of 2012, turnkey drilling revenues decreased $969,644 or 73.9% while turnkey drilling and development costs also decreased $355,205 or 74.8%.  During the first six months of 2012 we did not drill any wells, due to the lower overall natural gas commodity prices, while during the same period in 2011 we drilled three wells in California. 

The aggregate of supervisory fees and other income was $369,547 for the six months ended June 30, 2012, a decrease of $132,989 or 26.5% from $502,536 during the period in 2011.  During the second quarter 2012, supervisory fees decreased $135,947.  These decreases were due to lower pipeline and compressor fees as a result of lower natural gas production during the period in 2012.

Depreciation, depletion and amortization expense decreased to $737,119 from $1,246,561, a decrease of $509,442 or 40.9% for the six months ended June 30, 2012, as compared to the same period in 2011. This decrease in depletion expense was mainly due to the decrease in our oil and gas assets from our 2011 impairments.

General and administrative expenses decreased by $29,943 or 1.5% from $2,041,390 for the six months ended June 30, 2011, to $2,011,447 for the period in 2012. For the second quarter 2012, general and administrative expenses decreased $2,101 when compared to the same period in 2011.  These decreases were primarily due to lower share based compensation expense during the period in 2012.  Marketing expense for the six months ended June 30, 2012, decreased $99,351, or 23.3%, to $326,141, compared to $425,492 for the same period in 2011. For the second quarter 2012, marketing expenses decreased $72,966 or 29.8% when compared to the second quarter in 2011.  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 decreased to $419,875 for the six month period, compared to $497,979 for the same period in 2011, a $78,104 or 15.7% decrease.  For the second quarter 2012, legal and accounting expenses increased by $54,804 or 57.8% from the same period in 2011.  The overall decrease in legal and accounting expense was a result of a litigation settlement reached during the period in 2011.

During 2011, we began laying the ground work for a new seismic survey in Northern California.  A majority of the actual seismic work took place during the first quarter of 2012.  We recorded Geological and Geophysical expenses of $422,686 during the first six months of 2012 and $66,968 during the same period in 2011.  During the first quarter of 2011, we sold our working interest in two separate non-core properties resulting in a gain of $785,132.  The properties were located in Kern County, California and Gaines County, Texas.  During the period in 2012, we recorded a gain of $1,737 on the sale of a non-oil and gas asset.  Additionally during the period in 2012, we had a write down of $62,744 on certain oil and gas inventory to its estimated current market value. 
 
Interest expense decreased to $68,362 for the six months ended June 30, 2012, from $75,450 for the same period in 2011, a $7,088, or 9.4% decrease.  This was due to a lower balance on our existing bank line of credit.  For the six month period in 2012, we had income tax benefit of $931,089 due to a net operating loss.  However, for the same period in 2011, we had an income tax expense of $188,889 due to net operating income.

Capital Resources and Liquidity

At June 30, 2012, Royale Energy had current assets totaling $5,642,975 and current liabilities totaling $12,682,995, a $7,040,020 working capital deficit.  We had cash and cash equivalents at June 30, 2012, of $2,470,550 compared to $2,946,131 at December 31, 2011.
 
In February 2009, we entered into a revolving credit agreement with Texas Capital Bank, N.A. secured by our oil and gas properties, of up to $14,250,000.  We also entered into a separate letter of credit facility with Texas Capital Bank of up to $750,000, for the purposes of refinancing Royale’s existing debt and to fund development, exploration and acquisition activities as well as other general corporate purposes.  Under the terms of the agreement, Royale Energy may borrow, repay, and re-borrow funds as necessary.  At June 30, 2012, we had a current borrowing base of $1,550,000 and outstanding indebtedness on this loan of $1,550,000, which is classified as a current liability as it reaches maturity on February 13, 2013.
 
At June 30, 2012, we were not in compliance with the current ratio financial covenant, the tangible net worth financial covenant and the interest coverage ratio of our loan agreement with the bank, but we have obtained a waiver from the terms of those loan covenants.  We are not in default on any principal, interest or sinking fund payment.
 
At June 30, 2012, our accounts receivable totaled $1,522,538, compared to $1,872,067 at December 31, 2011, a $349,529 or 18.7% decrease.  This was primarily due to lower oil and gas receivables due to a decline in natural gas production and prices at June 30, 2012 when compared to the year-end December 31, 2011.  At June 30, 2012, our accounts payable and accrued expenses totaled $4,434,420, a decrease of $108,321 or 2.4% from the accounts payable at December 31, 2011, of $4,542,741, mainly due to a decrease in revenues payable from the lower oil and gas production and revenues.

Ordinarily, we fund our operations and cash needs from our available credit and cash flows generated from operations.  We believe that we have sufficient liquidity for the remainder of 2012 and do not foresee any liquidity demands that cannot be met from cash flow or financing activities such as our current Preferred Stock Offering and effective Form S-3 filed with the SEC.
 
Operating Activities.  Net cash used by operating activities totaled $54,334 for the six month period ended June 30, 2012 and net cash provided by operating activities totaled $1,977,654 for the six month period ended June 30, 2011.  This $2,031,988 difference was mainly due to our lower oil and natural gas revenues and lower decreases in accounts payable for the period in 2012.
 
Investing Activities.  Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $377,882 and $1,436,611 for the six month period ended June 30, 2012 and 2011, respectively.  This decrease in capital acquisition costs was due to the drilling of three wells during the period in 2011 while there was no drilling of new wells during the period in 2012.  During the six month period in 2012, Royale also received proceeds of $1,737 relating to a sale of stock.  During the same period in 2011, we received proceeds of $806,353 relating to the sale of certain oil and natural gas properties in Kern County, California and Gaines County, Texas.
 
 
Financing Activities.  Net cash used by financing activities totaled $43,365 and provided $1,101,489 for the six month period ended June 30, 2012 and 2011, respectively.  This difference was primarily due to principal payments totaling $1,200,000 on the Company’s letter of credit facility with Texas Capital Bank, during the period on 2012.  During first six months of 2012, options were exercised by one director for a total of 88,692 shares of the Company’s common stock in exchange for proceeds of $299,499.  Additionally during the period, Royale received proceeds of $857,136 and issued 168,697 shares of its common stock relating to its market equity offering program.  The proceeds were added to working capital and used for ordinary operating expense.  Also during the period in 2012, five directors exchanged 195,000 options in a cashless exercise for 76,346 common shares.  During the first six months of 2011, several warrants were exercised in exchange for shares of Royale’s common stock.  Royale received $1,051,489 and issued 468,928 shares of its common stock relating to these exercises.

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 $2.38 per Mcf to a high of $3.11 per Mcf for the first six months of 2012.  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, 2012, 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, 2012.
 
No changes occurred in our internal control over financial reporting during the six months ended June 30, 2012, 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
 
National Fuel Corporation v. Royale Energy, Inc. The Company is the defendant in litigation in the Eighth Judicial District Court of Uintah County, encaptioned National Fuel Corporation v. Royale Energy, Inc., Case No. 080800735.  The litigation involves actions for breach of contract for alleged failure to timely pay service companies and for allowing a lien to be filed against oil and gas properties, breach of implied covenant of good faith and fair dealing, removal of operator, and attorney’s fees and costs.  Plaintiff has not specified the amount of damages sought.  Damages recovered by the plaintiff would not be covered by insurance.  The Company’s management directed us to defend the Company vigorously.  The case was tried before the Honorable Clark A. McClellan October 18-20, 2011.  The Judge entered his Order and Judgment on April 5, 2012, finding that plaintiff could not remove Royale as operator and that plaintiff suffered only nominal damages, which are not awarded by the court.  National Fuel Corporation (“NFC”) submitted its notice of appeal on May 11, 2012.  Royale submitted its notice of cross appeal on June 15, 2012.  The case has been assigned to and will be decided by the Utah Court of Appeals.  NFC submitted its Docketing Statement to the Court of Appeals on June 1, 2012 and Royale submitted its Docketing Statement on June 25, 2012.  The records of the Court of Appeals indicate that the Record Index is due August 6, 2012.  Upon receipt of the notice of the Record Index from the Court of Appeals, NFC and Royale will have 40 days to prepare written briefs to submit to the court, with response and possibly reply briefs to follow.  Settlement proposals are currently pending.
 
Douglas Jones v. Royale Energy, Inc., et.al.
 
On July 1, 2010, Douglas Jones filed a lawsuit against the Company in the Circuit Court, 17th Judicial District, Broward County, Florida.  Mr. Jones was an independent contractor handling certain aspects of sales for the Company prior to July 2, 2008.  He asserts that he is entitled to an unspecified amount for commissions and expenses.  The Company denies that any money is owed to Mr. Jones..  On August 16, 2010, the Company filed a motion to dismiss the lawsuit for lack of jurisdiction in the Florida courts.  The Court had set the motion to dismiss for hearing on March 15, 2012, but it was taken off calendar at the request of plaintiff.  No new hearing date has been set, and there has been no ruling on the motion, which has now been pending for two years.    If the case is not dismissed on the jurisdictional motion, Royale intends to answer the complaint and oppose the lawsuit vigorously.
 
Item 1A.  Risk Factors

Please review the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Mine Safety Disclosures

Not Applicable

Item 5.  Other Information

None
 
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 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.
 
 
 
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 13, 2012
/s/ Donald H. Hosmer
 
 
Donald H. Hosmer, Co-President and Co-Chief Executive Officer
 
     
Date:    August 13, 2012
/s/ Stephen M. Hosmer
 
 
Stephen M. Hosmer, Co-President, Co-Chief Executive Officer, and Chief Financial Officer
 
 

XNAS:ROYL Royale Energy Inc Quarterly Report 10-Q Filling

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XNAS:ROYL Royale Energy Inc Quarterly Report 10-Q Filing - 6/30/2012
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