ROYALE ENERGY FUNDS, INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - ROYALE ENERGY FUNDS, INC	Financial_Report.xls
EX-32.1 - ROYALE ENERGY FUNDS, INC	ex32-1.htm
EX-31.2 - ROYALE ENERGY FUNDS, INC	ex31-2.htm
EX-31.1 - ROYALE ENERGY FUNDS, INC	ex31-1.htm
EX-32.2 - ROYALE ENERGY FUNDS, INC	ex32-2.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, 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

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	11
Item 4.	Controls and Procedures	11

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	12
Item 1A.	Risk Factors	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3.	Defaults Upon Senior Securities	12
Item 4.	Mine Safety Disclosures	12
Item 5.	Other Information	12
Item 6.	Exhibits	12
	Signatures	13

Table of Contents

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

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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

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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

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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

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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.

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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.

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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	)

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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.

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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.

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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.

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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.

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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		Rule 13a-14(a)/15d-14(a) Certification

31.2		Rule 13a-14(a)/15d-14(a) Certification

32.1		18 U.S.C. § 1350 Certification

32.2		18 U.S.C. § 1350 Certification

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.

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Signatures

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

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