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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 September 30, 2014
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
San Diego, 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 September 30, 2014, a total of 14,942,728 shares of registrant’s common stock were outstanding.
 
 
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
1
Item 1.
1
Item 2.
8
Item 3.
10
Item 4.
10
     
PART II
OTHER INFORMATION
11
Item 1.
11
Item 1A.
11
Item 6.
11
 
12
 
 
 
PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements
 
ROYALE ENERGY, INC.
BALANCE SHEETS
 
   
September 30,
2014
   
December 31,
2013
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
Current Assets
           
Cash and Cash Equivalents
 
$
2,658,657
   
$
4,878,233
 
Accounts Receivable, net
   
2,680,986
     
1,680,792
 
Prepaid Expenses
   
650,220
     
684,848
 
Available for Sale Securities
   
6,707
     
16,448
 
Inventory
   
320,473
     
317,043
 
                 
Total Current Assets
   
6,317,043
     
7,577,364
 
                 
                 
Other Assets
   
946
     
946
 
                 
Oil and Gas Properties, at cost, (successful efforts basis),
Equipment and Fixtures
   
7,060,618
     
7,237,382
 
                 
                 
Total Assets
 
$
13,378,607
   
$
14,815,692
 
 
See notes to unaudited financial statements
 
 
ROYALE ENERGY, INC.
BALANCE SHEETS
 
   
September 30,
2014
   
December 31,
2013
 
   
(Unaudited)
   
(Audited)
 
LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
Current Liabilities:
           
Accounts Payable and Accrued Expenses
 
$
4,864,920
   
$
5,332,323
 
Current Portion of Long-Term Debt
   
28,613
     
22,916
 
Current Portion of Deferred Tax Liability
   
1,775
     
1,775
 
Deferred Drilling Obligations
   
5,531,224
     
6,125,933
 
                 
Total Current Liabilities
   
10,426,532
     
11,482,947
 
                 
Noncurrent Liabilities:
               
Asset Retirement Obligation
   
837,596
     
862,369
 
Note Payable
   
1,454,326
     
1,477,084
 
                 
Total Noncurrent Liabilities
   
2,291,922
     
2,339,453
 
                 
Total Liabilities
   
12,718,454
     
13,822,400
 
                 
Stockholders' Equity:
               
Common Stock, no par value, authorized 20,000,000 shares, 
14,942,728 shares outstanding.
   
37,996,866
     
37,996,866
 
Convertible preferred stock, Series AA, no par value,
147,500 shares authorized; 52,784 outstanding
   
154,014
     
154,014
 
Accumulated (Deficit)
   
(37,794,786
)
   
(37,471,388
)
Paid in Capital
   
303,855
     
303,855
 
Accumulated Other Comprehensive Income
   
204
     
9,945
 
                 
                 
                 
Total Stockholders' Equity
   
660,153
     
993,292
 
                 
Total Liabilities and Stockholders' Equity
 
$
13,378,607
   
$
14,815,692
 
 
See notes to unaudited financial statements
 
 
ROYALE ENERGY, INC.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013-restated
   
2014
   
2013-restated
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Revenues:
                       
Sale of Oil and Gas
 
$
507,784
   
$
498,838
   
$
2,077,750
   
$
1,286,834
 
Supervisory Fees and Other
   
169,475
     
160,496
     
497,379
     
485,534
 
                                 
Total Revenues
   
677,259
     
659,334
     
2,575,129
     
1,772,368
 
                                 
Costs and Expenses:
                               
General and Administrative
   
858,137
     
753,227
     
2,280,268
     
2,309,441
 
Lease Operating
   
248,028
     
301,635
     
969,390
     
808,772
 
Delay Rentals
   
2,400
     
24,880
     
34,192
     
51,693
 
Lease Impairment
   
37,494
     
46,311
     
37,494
     
46,311
 
Geological and Geophysical Expense
   
0
     
24,997
     
0
     
24,997
 
Inventory Write Down
   
0
     
39,185
     
0
     
39,185
 
Legal and Accounting
   
39,030
     
26,509
     
307,433
     
278,973
 
Marketing
   
133,047
     
101,844
     
263,365
     
204,565
 
Depreciation, Depletion and Amortization
   
62,880
     
77,691
     
241,015
     
204,002
 
                                 
Total Costs and Expenses
   
1,381,016
     
1,396,279
     
4,133,157
     
3,967,939
 
                                 
Gain on Turnkey Drilling Programs
   
562,885
     
739,816
     
959,339
     
981,748
 
Gain on Sale of Assets
   
369,977
     
350,233
     
335,376
     
2,645,153
 
                                 
Income (Loss) From Operations
   
229,105
     
353,104
     
(263,313
)
   
1,431,330
 
Other Income (Expense):
                               
Interest Expense
   
(22,792
)
   
(1,105
)
   
(60,085
)
   
(304,472
)
                                 
Income (Loss) Before Income Tax Expense (Benefit)
   
206,313
     
351,999
     
(323,398
)
   
1,126,858
 
                                 
Net Income (Loss)
 
$
206,313
     
351,999
     
(323,398
)
   
1,126,858
 
                                 
Basic Earnings (Loss) Per Share
 
$
0.01
     
0.03
     
(0.02
)
   
0.08
 
                                 
                                 
Diluted Earnings (Loss) Per Share
 
$
0.01
     
0.03
     
(0.02
)
   
0.08
 
                                 
                                 
Other Comprehensive Income
                               
Unrealized Gain (Loss) on Equity Securities
 
$
(9,741
)
   
9,945
     
(9,741
)
   
9,945
 
                                 
Other Comprehensive Income, before tax
                               
Income Tax Expense Related to Items of Other Comprehensive Income
   
0
     
0
     
0
     
0
 
                                 
Other Comprehensive Income (Loss), net of tax
   
(9,741
)
   
9,945
     
(9,741
)
   
9,945
 
                                 
Comprehensive Income (Loss)
 
$
196,572
     
361,944
     
(333,139
)
   
1,136,803
 
 
See notes to unaudited financial statements 

 
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

   
2014
   
2013-Restated
 
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income (Loss)
 
$
(323,398
)
 
$
1,126,858
 
                 
Adjustments to Reconcile Net Income (Loss) to
Net Cash Used in Operating Activities:
               
Depreciation, Depletion and Amortization
   
241,015
     
204,002
 
Lease Impairment
   
37,494
     
46,311
 
(Gain) Loss on Sale of Assets
   
(335,376
)    
(2,645,153
)
(Gain) on Turnkey Drilling Programs
   
(959,339
)
   
(981,748
)
Inventory Write Down
   
0
     
39,185
 
Debt Discount Amortization, net of adjustments
   
0
     
280,583
 
Decrease (Increase) in:
               
Accounts Receivable
   
(1,000,194
)
   
268,875
 
Prepaid Expenses and Other Assets
   
31,198
     
(215,286
)
Increase (Decrease) in:
               
Accounts Payable and Accrued expenses
   
    (492,176
   
(662,053
)
Deferred Drilling Obligations
   
(594,709
)
   
(1,446,672
)
                 
Net Cash Used in Operating Activities
   
(3,395,485
)
   
(3,985,098
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Expenditures for Oil and Gas Properties and Other Capital Expenditures
   
(2,696,088
)
   
(2,909,030
)
Proceeds from Turnkey Drilling Programs
   
3,889,058
     
3,363,989
 
Proceeds from Sale of Assets
   
0
     
4,020,755
 
                 
Net Cash Provided by Investing Activities
   
1,192,970
     
4,475,714
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Principal Payments on Long-Term Debt
   
(17,061
)
   
(1,183,333
)
Proceeds from Stock Option and Warrant Exercises
   
0
     
643,630
 
Proceeds from Sale of Common Stock
   
0
     
1,021,668
 
                 
Net Cash Provided (Used) by Financing Activities
   
(17,061
)
   
481,965
 
                 
Net Increase (Decrease) in Cash and Cash Equivalents
   
(2,219,576
)
   
972,581
 
                 
Cash at Beginning of Year
 
$
4,878,233
   
$
1,489,930
 
                 
Cash at End of Period
 
$
2,658,657
   
$
2,462,511
 
                 
                 
Cash Paid for Interest
 
$
60,085
   
$
23,890
 
                 
Cash Paid for Taxes
 
$
2,000
   
$
800
 
 
See notes to unaudited financial statements
 
 
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING & FINANCING ACTIVITIES:
 
             
Other Comprehensive Income Items
           
Unrealized Gain (Loss) on Equity Securities
    (9,741 )     9,945  
Income Tax Expense (Benefit) Relating to Items of Other Comprehensive Income
    -       -  
                 
Other Comprehensive Income, net of tax
    (9,741 )     9,945  
 
 

 

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 nine 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 (LOSS) PER SHARE
 
Basic and diluted earnings (loss) per share are calculated as follows:
 
   
Three Months Ended September 30,
 
   
2014
   
2013 - Restated
 
   
Basic
   
Diluted
   
Basic
   
Diluted
 
Net Income
 
$
206,313
   
$
206,313
   
$
351,999
   
$
351,999
 
                                 
Weighted average common shares outstanding 
   
14,942,728
     
14,942,728
     
13,567,216
     
13,567,216
 
Effect of dilutive securities
   
--
     
262,573
     
--
     
97,116
 
Weighted average common shares, including
                               
Dilutive effect
   
14,942,728
     
15,205,301
     
13,567,216
     
13,664,332
 
Per share:
                               
Net income
 
$
0.01
   
$
0.01
   
$
0.03
   
$
0.03
 
 
   
Nine Months Ended September 30,
 
   
2014
   
2013 - Restated
 
   
Basic
   
Diluted
   
Basic
   
Diluted
 
Net Income (Loss)
 
$
(323,398
 
$
(323,398
)
 
$
1,126,858
   
$
1,126,858
 
                                 
Weighted average common shares outstanding 
   
14,942,728
     
14,942,728
     
13,567,216
     
13,567,216
 
Effect of dilutive securities
   
--
     
--
     
--
     
77,814
 
Weighted average common shares, including
                               
Dilutive effect
   
14,942,728
     
14,942,728
     
13,567,216
     
13,645,030
 
Per share:
                               
Net income
 
$
(0.02
)
 
$
(0.02
)
 
$
0.08
   
$
0.08
 
 
For the nine months ended September 30, 2014, Royale Energy had dilutive securities of 184,844.  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:

   
September 30, 2014
(Unaudited)
   
December 31, 2013
(Audited)
 
Oil and Gas
           
Producing properties, including drilling costs
 
$
4,965,757
   
$
4,862,657
 
Undeveloped properties
   
2,689,661
     
2,779,672
 
Lease and well equipment
   
4,096,890
     
4,075,320
 
     
11,752,308
     
11,717,649
 
                 
Accumulated depletion, depreciation & amortization
   
(7,254,978
   
(7,065,362
     
4,497,330
     
4,652,287
 
Commercial and Other
               
Real estate, including furniture and fixtures
 
$
2,503,803
   
$
2,503,803
 
Vehicles
   
120,314
     
120,314
 
Furniture and equipment
   
1,114,086
     
1,300,523
 
     
3,738,203
     
3,924,640
 
Accumulated depreciation
   
(1,174,915
   
(1,339,545
     
2,563,288
     
2,585,095
 
                 
   
$
7,060,618
   
$
7,237,382
 
 
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 2014 or 2013. 
 
NOTE 4 – RESTATEMENT TO REFLECT CHANGE IN REVENUE RECOGNITION POLICY

The Company has restated previously issued 2013 financial statements for the correction of an error in the method of revenue recognition.  The effect on the Company’s issued September 30, 2013 financial statements is summarized below:
 
   
As Previously
       
   
Reported
   
As Restated
 
                 
Statement of  Operations for the period ended September 30, 2013:
               
Revenues:
               
Turnkey Drilling
  $
3,363,989
    $
0
 
Total Revenues
   
5,136,357
     
1,772,368
 
                 
Costs and Expenses:
               
Turnkey Drilling and Development Expense
   
1,762,379
     
0
 
Lease Operating Expense
   
860,465
     
808,772
 
Delay Rentals
   
0
     
51,693
 
Depreciation, Depletion and Amortization Expense
   
807,357
     
204,002
 
Total Costs and Expenses
   
6,333,673
     
3,967,939
 
Net Income
 
1,143,365
    $
1,126,858
 
 
NOTE 5 – SUBSEQUENT EVENTS

At the October 10, 2014 Board of Directors meeting, directors of Royale Energy were granted 20,000 options 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.
 
 
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 nine months ended September 30, 2014, we had a net loss of $323,398 compared to net income of $1,126,858 during the nine months ended September 30, 2013, a $1,450,256 decrease.  Total revenues for the nine months ended September 30, 2014 were $2,575,129, an increase of $802,761 or 45.3% from the total revenues of $1,772,368 during the period in 2013.  The higher revenues in 2014 were the result of increases in both natural gas prices and production volumes during the nine months in 2014, when compared to 2013The 2013 net income  was higher, primarily as the result of the sale of a portion of our oil and gas leases in Alaska; see our Form 8-K filed on May 24, 2013.   For the three months ended September 30, 2014, we had net income of $206,313 compared to net income of $351,999 during the same period in 2013, a $145,686 decrease.  This decrease was mainly due to lower gains on Turnkey Drilling during the period in 2014.

During the first nine months of 2014, revenues from oil and gas production increased $790,916 or 61.5% to $2,077,750 from the nine month, 2013, revenues of $1,286,834.  This increase was due to higher commodity prices and natural gas production, from new wells brought online during the first half of 2014.  The net sales volume of natural gas for the nine months ended September 30, 2014, was approximately 421,445 Mcf with an average price of $4.83 per Mcf, versus 330,599 Mcf with an average price of $3.67 per Mcf for the period in 2013.  This represents an increase in net sales volume of 90,846 Mcf or 27.5%.  The net sales volume for oil and condensate (natural gas liquids) production was 438 barrels at an average price of $93.80 per barrel for the first nine months of 2014, compared to 810 barrels with an average price of $93.89 per barrel for the same period in 2013.  This represents a decrease in net sales volume of 372 barrels or 45.9%.
 
For the quarter ended September 30, 2014, revenues from oil and gas production increased $8,946 or 1.8% to $507,784 from the 2013 third quarter revenues of $498,838.  This increase was due to higher natural gas commodity prices.  The net sales volume of natural gas for the quarter ended September 30, 2014, was approximately 115,468 Mcf with an average price of $4.31 per Mcf, versus 133,138 Mcf with an average price of $3.57 per Mcf for the third quarter of 2013.  This represents a decrease in net sales volume of 17,670 Mcf or 13.3%.  The net sales volume for oil and condensate (natural gas liquids) production was 106 barrels with an average price of $95.05 per barrel for the third quarter of 2014, compared to 243 barrels at an average price of $96.38 per barrel for the third quarter of 2013.

Oil and natural gas lease operating expenses increased by $160,618 or 19.9%, to $969,390 for the nine months ended September 30, 2014, from $808,772 for the same period in 2013.  This increase was mainly due to higher plugging and abandonment expenses during the period in 2014. For the third quarter in 2014, lease operating expenses decreased $53,607 or 17.8% from the same period in 2013, due to lower compression and plugging expenses during the quarter in 2014.    Delay rental costs decreased by $17,501 or 33.9%, to $34,192 for the nine months ended September 30, 2014 from $51,693 for the same period in 2013.

The aggregate of supervisory fees and other income was $497,379 for nine months ended September 30, 2014, an increase of $11,845 or 2.4% from $485,534 during the period in 2013.  This increase was mainly the result of higher overhead rates during the periods in 2014 due to higher production volumes.  During the third quarter 2014, supervisory fees and other income increased $8,979 or 5.6%.

Depreciation, depletion and amortization expense increased to $241,015 from $204,002, an increase of $37,013 or 18.1% for the nine months ended September 30, 2014, as compared to the same period in 2013.  The depletion rate is calculated using production as a percentage of reserves.  This increase in depreciation expense was mainly due to a higher depletion rate as production volumes were higher during the period.  During the third quarter 2014, depreciation, depletion and amortization expenses decreased $14,811 or 19.1%.
 
General and administrative expenses decreased by $29,173 or 1.3% from $2,309,441 for the nine months ended September 30, 2013, to $2,280,268, for the period in 2014.  This decrease was primarily due to lower office rent expense during the period in 2014, as the company relocated into its own office building which it purchased at the end of 2013.  For the third quarter 2014, general and administrative expenses increased $104,910 or 13.9% when compared to the same period in 2013, mainly due to expenses related to moving into the new office building and outside consulting services.  Marketing expense for the nine months ended September 30, 2014, increased $58,800, or 28.7%, to $263,365, compared to $204,565 for the same period in 2013.  For the third quarter 2014, marketing expenses increased $31,203 or 30.6% when compared to the third quarter in 2013.   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 $307,433 for the nine months ended September 30, 2014, compared to $278,973 for the same period in 2013, a $28,460 or 10.20% increase.  For the third quarter 2014, legal and accounting expenses increased $12,521 or 47.2%, when compared to the same period in 2013.  This increase was mainly a result of higher legal fees paid during the period in 2014.
 
At September 30, 2014, Royale Energy had a Deferred Drilling Obligation of $5,531,224.  During this period, we disposed of $3,889,058 of these obligations upon completing the drilling of four wells, while incurring expenses of $2,929,719, resulting in a gain of $959,339.  In the same period in 2013, we disposed of $3,363,989 of these obligations upon completing three wells, while incurring expenses of $2,382,241, resulting in a gain of $981,748.  During the fourth quarter 2014, Royale expects to drill two wells, disposing of an additional $1,214,518 of deferred drilling obligation during the period.

During the period in 2014, we recorded a gain of $369,977 on the sale of certain oil and natural gas leases in Utah.  In the 2014 period, we also recorded a loss of $34,601 on previously capitalized office leasehold improvements due to our office relocation.  During the period in 2013 we recorded a gain of $2,682,651 from the sale of a portion of our western block oil and gas leases in Alaska.  In the period in 2013, we also recorded a gain of $40,000 on the sale of oil and gas leases in Texas and recorded a loss of $82,184 on the sale of surface casing previously included in inventory.  Additionally in 2013, we recorded a write down of $39,185 on certain oil and gas inventory that no longer appeared viable.  

We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense.  Impairment losses of $37,494 and $46,311 were recorded in the first nine months of 2014 and 2013, respectively.  These impairments were mainly due to various lease and land costs that were no longer viable.

On July 29, 2014, Royale Energy, Inc. notified Kuukpik Drilling that Royale was terminating its contract for drilling two wells on Royale’s block on the North Slope in Alaska during the 2014-2015 drilling season.  Royale elected to terminate the contract after Rampart Energy, Ltd., notified Royale that Rampart would not fund the initial payment due to Kuukpik Drilling under the drilling contract.  The decision was made to avoid incurring penalty fees that would have become due to Kuukpik Drilling for failure to make timely payment.  In order to seek new arrangements to fund the drilling commitment, Royale has delayed its drilling in Alaska until the 2015-2016 season.

Interest expense decreased to $60,085 for the nine months ended September 30, 2014, from $304,472 for the same period in 2013, a $244,387, or 80.3% decrease. This decrease resulted from a reduction of outstanding indebtedness after the 2013 repayment of a convertible note.  

Capital Resources and Liquidity

At September 30, 2014, Royale Energy had current assets totaling $6,317,043 and current liabilities totaling $10,426,532, a $4,109,489 working capital deficit.  We had cash and cash equivalents at September 30, 2014, of $2,658,657 compared to $4,878,233 at December 31, 2013.
 
In October 2012, the Company obtained $3 million from the issuance of a convertible note.  See the Company’s Prospectus Supplement filed pursuant to Rule 424(b) on October 29, 2012, and the Company’s Form 8-K filed on October 29, 2012.  The Company used these proceeds for general corporate purposes, including the reduction of outstanding bank debt and for capital expenditures on oil and gas development.  During 2013, Royale repaid the note by paying a portion of the principal and interest in cash and by the note holder exercising the conversion feature to convert a portion of the principal and interest to common stock. As of September 30, 2014, this note was paid in full.

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 September 30, 2014, the outstanding balance of this note was $1,482,939.  
 
At September 30, 2014, our accounts receivable totaled $2,680,986, compared to $1,680,792 at December 31, 2013, an $1,000,194 or 59.5% increase.  This was primarily due to accounts receivable from an industry partner.  At September 30, 2014, our accounts payable and accrued expenses totaled $4,864,920, a decrease of $467,403 or 8.8% from the accounts payable at December 31, 2013, of $5,332,323, mainly due to lower accrued drilling costs and trade accounts payable at the end of the current period.

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 foreseeable future and 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.
 
 
Operating Activities.  Net cash used by operating activities totaled $3,395,485 and $3,985,098 for the nine month periods ended September 30, 2014 and 2013, respectively.  This $589,613 difference in cash used was mainly due to increases in accounts receivable during the period in 2014, due to receivables from an industry partner.
 
Investing Activities.  Net cash provided by investing activities, primarily the net result of turnkey drilling sales activities, amounted to $1,192,970 and $4,475,714 for the nine month periods ended September 30, 2014 and 2013, respectively.  This difference was primarily due to sale of a portion of our leases in Alaska during the period in 2013, from which we received proceeds of approximately $4 million.  During the nine month periods in 2014 and 2013, the Company drilled four and three wells, respectively.

Financing Activities.  Net cash used by financing activities totaled $17,061 during the nine month period in 2014, which were principal payments on the Company’s long-term debt; while $481,965 was provided by financing activities for the nine month period ended September 30, 2013.  This difference in cash was mainly due to the proceeds received during the period in 2013 for common stock sales and warrant exercises.  During the nine months ended September 30, 2013, Royale received proceeds of $1,021,668 and issued 500,000 shares of its common stock relating to its market equity offering program.  Also during the period in 2013, several warrants were exercised in exchange for shares of Royale’s common stock, and we received $643,630 and issued 323,253 shares of our common stock relating to these exercises.  The 2013 proceeds were added to working capital and used for ordinary operating expense.
 
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 $4.43 per Mcf to a high of $6.77 per Mcf for the first nine months of 2014.  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 September 30, 2014, 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 September 30, 2014.
 
No changes occurred in our internal control over financial reporting during the nine months ended September 30, 2014, 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
 
Douglas Jones v. Royale Energy, Broward County Circuit Court, Florida.  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 employee 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, through Florida counsel Adam Hodkin, filed a motion to dismiss the lawsuit for lack of jurisdiction in the Florida courts.  The Court ruled that it wanted to have an evidentiary hearing on the motion.  The Court finally held the evidentiary hearing on May 5, 2014.  No ruling has yet been issued.   If the motion to dismiss is denied, 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, 2013.
 
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
 
 
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:    November 6, 2014
/s/ Donald H. Hosmer
 
 
Donald H. Hosmer, Co-President and Co-Chief Executive Officer
     
Date:    November 6, 2014
/s/ Stephen M. Hosmer
 
 
Stephen M. Hosmer, Co-President, Co-Chief Executive Officer, and Chief Financial Officer
 
 
 
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