10-Q

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, 2017 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.)

1870 Cordell Court, Suite 210

El Cajon, CA 92020

(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  ☒    No  ☐

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 ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).  Check one:

Large accelerated filer  ☐	Accelerated filer  ☐
Non-accelerated filer  ☐	Smaller reporting company  ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).               Yes ☐    No ☒

Indicate by check mark whether the registrant is a blank check company (as defined in Rule 12b-2 of the Exchange Act).                  Yes  ☐    No  ☒

At August 2, 2017, a total of 21,839,592 shares of registrant’s common stock were outstanding.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II	OTHER INFORMATION	15
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 6.	Exhibits	15
	Signatures	16

PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements

ROYALE ENERGY, INC.

BALANCE SHEETS

	June 30, 2017		December 31, 2016
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash	$	4,216,824	$	4,994,598
Other Receivables, net		792,912		676,647
Revenue Receivables		147,940		303,528
Prepaid Expenses		641,710		63,308
Total Current Assets		5,799,386		6,038,081
Other Assets		611,120		610,779
Oil and Gas Properties, (Successful Efforts Basis),   Equipment and Fixtures, net		1,602,028		1,733,424
Total Assets	$	8,012,534	$	8,382,284

See notes to unaudited financial statements.

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ROYALE ENERGY, INC.

BALANCE SHEETS

	June 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts Payable and Accrued Expenses	$	3,427,957		$	2,469,245
Cash Advances on Pending Transactions		1,580,000			1,580,000
Deferred Drilling Obligation		7,450,467			7,894,001
Total Current Liabilities		12,458,424			11,943,246
Noncurrent Liabilities:
Asset Retirement Obligation		990,414			952,110
Total Noncurrent Liabilities		990,414			952,110
Total Liabilities		13,448,838			12,895,356
Stockholders’ Deficit:
Common Stock, No Par Value, 30,000,000 Shares Authorized,   21,839,592 and 21,836,033 shares issued and outstanding   at June 30, 2017 and December 31, 2016		41,259,199			41,265,449
Accumulated Deficit		(46,695,503	)		(45,778,521	)
Total Stockholders’ Deficit		(5,436,304	)		(4,513,072	)
Total Liabilities and Stockholders’ Deficit	$	8,012,534		$	8,382,284

See notes to unaudited financial statements.

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ROYALE ENERGY, INC.

STATEMENTS OF OPERATIONS

FOR THE PERIODS ENDED JUNE 30, 2017 AND 2016

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues:
Sale of Oil and Gas	$	163,706		$	115,823		$	351,049		$	249,940
Supervisory Fees and Other		81,802			216,519			168,857			369,360
Total Revenues		245,508			332,342			519,906			619,300
Costs and Expenses:
Lease Operating		123,832			153,808			230,453			338,943
Lease Impairment		99,468			60,237			136,837			60,237
Well Equipment Write Down		-			8,562			6,000			19,151
General and Administrative		450,042			494,893			1,015,028			1,127,670
Legal and Accounting		188,989			72,642			668,283			232,279
Marketing		108,084			59,530			162,232			103,911
Depreciation, Depletion and Amortization		43,464			71,989			90,304			149,172
Total Costs and Expenses		1,013,879			921,661			2,309,137			2,031,363
Gain (Loss) on Turnkey Drilling		878,533			(300,086	)		878,533			(80,012	)
Income (Loss) From Operations		110,162			(889,405	)		(910,698	)		(1,492,075	)
Other Income (Loss):
Interest Expense		(39,500	)		(25,852	)		(79,412	)		(47,502	)
Gain on Settlement of Accounts Payable		-			240,885			73,128			240,885
Gain on Sale of assets		-			198,975			-			198,975
Income (Loss) Before Income Tax Expense		70,662			(475,397	)		(916,982	)		(1,099,717	)
Net Income (Loss)	$	70,662		$	(475,397	)	$	(916,982	)	$	(1,099,717	)
Basic Earnings (Loss) Per Share	$	0.00		$	(0.03	)	$	(0.04	)	$	(0.06	)
Diluted Earnings (Loss) Per Share	$	0.00		$	(0.03	)	$	(0.04	)	$	(0.06	)

See notes to unaudited financial statements.

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ROYALE ENERGY, INC.

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

	2017			2016
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(916,982	)	$	(1,099,717	)
Adjustments to Reconcile Net Loss to Net  Cash Used in Operating Activities:
Depreciation, Depletion and Amortization		90,304			149,172
Lease Impairment		136,837			60,237
Gain on Sale of Assets		-			(198,975	)
(Gain) Loss on Turnkey Drilling Programs		(878,533	)		80,012
Gain on Settlement of Accounts Payable		(73,128	)		(240,885	)
Well Equipment Write Down		6,000			19,151
Stock-Based Compensation		-			278,352
(Increase) Decrease in:
Other & Revenue Receivables		39,323			(225,723	)
Prepaid Expenses and Other Assets		(578,743	)		69,907
Increase (Decrease) in:
Accounts Payable and Accrued Expenses		1,025,590			(354,478	)
Net Cash Used in Operating Activities		(1,149,332	)		(1,462,947	)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for Oil and Gas Properties and Other Capital Expenditures		(1,053,442	)		(17,792	)
Proceeds from Turnkey Drilling Programs		1,425,000			925,000
Proceeds from Sale of Assets		-			935,927
Net Cash Provided By Investing Activities		371,558			1,843,135
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock		-			203,884
Principal Payments on Long-Term Debt		-			(1,446,853	)
Net Cash Used in Financing Activities		-			(1,242,969	)
Net Decrease in Cash and Cash Equivalents		(777,774	)		(862,781	)
Cash at Beginning of Period		4,994,598			3,763,819
Cash at End of Period	$	4,216,824		$	2,901,038
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid for Interest	$	412		$	47,502
Cash Paid for Taxes	$	1,539		$	2,100
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:
Asset Retirement Obligation Addition	$	30,000		$	-
Issuance of Common Stock for Accrued Compensation Expense	$	18,750		$	-

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 three 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.

Merger with Matrix Oil Management Corporation

In July 2016, the Company entered into a letter of intent with Matrix Oil Management Corporation (“Matrix”) to merge Royale Energy and Matrix in a combined stock and assumption of debt transaction.  On November 30, 2016, the Company entered into an Agreement and Plan of Merger and Reorganization dated November 30, 2016, among Royale, Royale Energy Holdings, Inc., a Delaware corporation (the “Parent”), Royale Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Parent, Matrix Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Parent, and Matrix.  The Merger Agreement was subsequently amended and restated as of December 31, 2016, and amended again as of March 31 and June 30, 2017 (the “Merger Agreement”).

The Merger Agreement is part of a series of related transactions in which the Parent will (i) issue its common stock to acquire all of (A) the common stock of Royale Energy, Matrix and Matrix’s affiliate, Matrix Oil Corporation, a California corporation, and (B) the partnership interests of three limited partnerships affiliated with Matrix and (ii) issue newly created Series B 3.5% Convertible Preferred Stock in exchange for approximately $20,398,537 of subordinated debt issued by Matrix and its affiliates.

Immediately after the mergers and the related transactions, it is expected that (i) former holders of Matrix common stock, Matrix Oil Corporation capital stock and the three limited partnerships affiliated with Matrix will collectively own 50% of the Parent’s common stock then outstanding, (ii) former holders of Royale Energy common stock will collectively own 50% of the Parent’s common stock then outstanding, in each case giving effect to the number of shares of the Parent’s common stock issuable under all options and warrants outstanding immediately after the mergers other than shares issuable on exercise of certain options and warrants issued by Royale Energy and (iii) former holders of subordinated debt issued by Matrix and its affiliates will collectively own 100% of all of the Parent’s Series B Convertible Preferred Stock then outstanding.

The merger and related transactions will require the approval of the shareholders of each company and registration of the Royale Energy equity securities to be issued in the merger under the Securities Act of 1933 prior to completion of the transaction.  The Merger Agreement will terminate unless extended by agreement of the parties if the merger and related transactions do not close by September 30, 2017, and the failure to close is not due to the failure of the terminating party to perform or comply with any of its covenants or agreements to be performed under the Merger Agreement.

Matrix is an independent oil and natural gas producer based in Santa Barbara, California.  Matrix and its affiliates are privately held by fewer than ten equity holders and partners.

The Pre-Effective Form S-4/A filed by Royale Energy Holdings, Inc., on July 21, 2017, includes a preliminary proxy statement of Royale relating to (i) the Parent Common Stock to be issued in connection with the Mergers, the LP Exchanges, the Matrix Operator Exchange, upon the conversion of any Series B Preferred Stock, or the exercise of any outstanding warrants and options that become exercisable upon the effectiveness of the Mergers, and (ii) the Series B Preferred Stock to be issued in connection with the exchange for Preferred Interests issued by Matrix Investments, L.P. The definitive proxy statement/prospectus, when filed, will include important information about Royale, Matrix, the Matrix LPs and Matrix Operator. Royale also plans to file other relevant documents with the SEC regarding the proposed transaction. INVESTORS AND SECURITY HOLDERS ARE URGED TO CAREFULLY READ THE REGISTRATION STATEMENT, THE PROXY STATEMENT/PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT ROYALE, MATRIX AND THE PROPOSED TRANSACTION. Investors and security holders may obtain these documents when available free of charge at the SEC’s website at www.sec.gov.  In addition, the documents filed with the SEC by Royale can be obtained free of charge from Royale’s website at www.royl.com.

Use of Estimates

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

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Material estimates that are particularly susceptible to significant change relate to the estimate of Company oil and gas reserves prepared by an independent engineering consultant.  Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proven reserves. Estimated reserves are used in the calculation of depletion, depreciation and amortization, unevaluated property costs, impairment of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.

Liquidity and Going Concern

The primary sources of liquidity have historically been issuances of common stock and operations. We believe that the completion of the contemplated merger with will enable us to return to positive cash flow.  There is some doubt about the company’s ability to meet liquidity demands, and we anticipate that our primary sources of liquidity will be from the issuance of debt and/or equity, and the sale of oil and natural gas property participation interest.

The Company’s consolidated financial statements reflect an accumulated deficit of $46,695,503, a working capital deficiency of $6,659,038 and a stockholders’ deficit of $5,436,304. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management’s plans to alleviate the going concern include the proposed merger with Matrix and additional financing through issuances of common stock and the reduction of overhead costs.  There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, and reduce overhead until sufficient additional capital is raised to support further operations.  There can be no assurance that such a plan will be successful.

Revenue Recognition

Royale Energy’s primary business is oil and gas production.  Natural gas flows from the wells into gathering line systems, which are equipped occasionally with compressor systems, which in turn flow into metered transportation and customer pipelines.  Monthly price data and daily production are used to invoice customers for amounts due to Royale Energy and other working interest owners.  Royale Energy operates virtually all of its own wells and receives industry standard operator fees.

Royale Energy generally sells crude oil and natural gas under short-term agreements at prevailing market prices. Revenues are recognized when the products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.

Revenues from the production of oil and natural gas properties in which the Royale Energy has an interest with other producers are recognized on the basis of Royale Energy’s net working interest. Differences between actual production and net working interest volumes are not significant.

Royale Energy’s financial statements include its pro rata ownership of wells.  Royale Energy usually sells a portion of the working interest in each well it drills or participates in to third party investors and retains a portion of the prospect for its own account.  Royale Energy generally retains about a 50% working interest.  All results, successful or not, are included at its pro rata ownership amounts: revenue, expenses, assets, and liabilities as defined in FASB ASC 932-323-25 and 932-360.

Oil and Gas Property and Equipment

Depreciation, depletion and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration.  Maintenance and repairs, including planned major maintenance, are expensed as incurred.  Major renewals and improvements are capitalized and the assets replaced are retired.

The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use.  Interest costs, to the extent they are incurred to finance expenditures during the construction phase, are included in property, plant and equipment and are depreciated over the service life of the related assets.

Royale Energy uses the “successful efforts” method to account for its exploration and production activities.  Under this method, Royale Energy accumulates its proportionate share of costs on a well-by-well basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred, and capitalizes expenditures for productive wells.  Royale Energy amortizes the costs of productive wells under the unit-of-production method.

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Royale Energy carries, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where Royale Energy is making sufficient progress assessing the reserves and the economic and operating viability of the project.  Exploratory well costs not meeting these criteria are charged to expense. Other exploratory expenditures, including geophysical costs and annual lease rentals, are expensed as incurred.

Acquisition costs of proved properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves.

Capitalized exploratory drilling and development costs associated with productive depletable extractive properties are amortized using unit-of-production rates based on the amount of proved developed reserves of oil and gas that are estimated to be recoverable from existing facilities using current operating methods.  Under the unit-of-production method, oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank.

Production costs are expensed as incurred. Production involves lifting the oil and gas to the surface and gathering, treating, field processing and field storage of the oil and gas. The production function normally terminates at the outlet valve on the lease or field production storage tank. Production costs are those incurred to operate and maintain Royale Energy’s wells and related equipment and facilities. They become part of the cost of oil and gas produced. These costs, sometimes referred to as lifting costs, include such items as labor costs to operate the wells and related equipment; repair and maintenance costs on the wells and equipment; materials, supplies and energy costs required to operate the wells and related equipment; and administrative expenses related to the production activity.

Proved oil and gas properties held and used by Royale Energy are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Royale Energy estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts. Cash flows used in impairment evaluations are developed using annually updated evaluation assumptions for crude oil commodity prices.  Annual volumes are based on field production profiles, which are also updated annually. Prices for natural gas and other products are based on assumptions developed annually for evaluation purposes.

Impairment analyses are generally based on proved reserves.  An asset group would be impaired if the undiscounted cash flows were less than its carrying value.  Impairments are measured by the amount the carrying value exceeds fair value. During the six months ended June 30, 2017 and 2016, impairment losses of $136,837 and $60,237, respectively, were recorded on various capitalized lease and land costs that were no longer viable. 

Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that Royale Energy expects to hold the properties.  The valuation allowances are reviewed at least annually.

Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resultant gain or loss is recorded to Royale Energy’s Statement of Operations.  Upon the sale of an entire interest in an unproved property where the property has been assessed for impairment individually, a gain or loss is recognized in Royale Energy’s Statement of Operations.  If a partial interest in an unproved property is sold, any funds received are accounted for as a recovery of the cost in the interest retained with any excess funds recognized as a gain. Should Royale Energy’s turnkey drilling agreements include unproved property, total drilling costs incurred to satisfy its obligations are recovered by the total funds received under the agreements.  Any excess funds are recorded as a Gain on Turnkey Drilling Programs, and any costs not recovered are capitalized and accounted for under the “successful efforts” method. 

Royale Energy sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest.  Gains on Turnkey Drilling Programs represent funds received from turnkey drilling participants in excess of all costs Royale incurs during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account; and are recognized only upon making this determination after Royale’s obligations have been fulfilled.

The contracts require the participants pay Royale Energy the full contract price upon execution of the agreement.   Royale Energy completes the drilling activities typically between 10 and 30 days after drilling begins.  The participant retains an undivided or proportional beneficial interest in the property, and is also responsible for its proportionate share of operating costs.  Royale Energy retains legal title to the lease.  The participants purchase a working interest directly in the well bore.

In these working interest arrangements, the participants are responsible for sharing in the risk of development, but also sharing in a proportional interest in rights to revenues and proportional liability for the cost of operations after drilling is completed and the interest is conveyed to the participant.

7

A certain portion of the turnkey drilling participant’s funds received are non-refundable.  The company holds all funds invested as Deferred Drilling Obligations until drilling is complete.  Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations.  At June 30, 2017 and December 31, 2016, Royale Energy had Deferred Drilling Obligations of $7,450,467 and $7,894,001, respectively.

If Royale Energy is unable to drill the wells, and a suitable replacement well is not found, Royale would retain the non-refundable portion of the contact and return the remaining funds to the participant.  Included in cash and cash equivalents are amounts for use in completion of turnkey drilling programs in progress.

Losses on properties sold are recognized when incurred or when the properties are held for sale and the fair value of the properties is less than the carrying value.

Other Receivables

Our other receivables consist of receivables from direct working interest investors and industry partners. We provide for uncollectible accounts receivable using the allowance method of accounting for bad debts.  Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected.  The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable.  All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance.  At June 30, 2017 and December 31, 2016, the Company established an allowance for uncollectable accounts of $2,255,542 and $2,270,773, respectively, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

Revenue Receivables

Our revenue receivables consist of receivables related to the sale of our natural gas and oil.  Once a production month is completed we receive payment approximately 15 to 30 days later.

Equipment and Fixtures

Equipment and fixtures are stated at cost and depreciated over the estimated useful lives of the assets, which range from three to seven years, using the straight-line method. Repairs and maintenance are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment, other than oil and gas, are reflected in operations.

Fair Value Measurements

According to Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

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Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

At June 30, 2017 and December 31, 2016, Royale Energy did not have any financial assets measured and recognized at fair value on a recurring basis.  The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “Asset Retirement and Environmental Obligations” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.

Accounts Payable and Accrued Expenses

At June 30, 2017, the components of accounts payable and accrued expenses consisted of $1,492,387 in trade accounts payable due to various vendors, $1,141,156 in payables and accruals related to direct working interest investors and revenues, operating costs and drilling activities, $222,023 in accrued expenses related to current drilling efforts, $266,110 for accrued liabilities for amounts set aside mainly for the plugging and abandonment of certain wells, $118,624 for employee related taxes and accruals, $144,833 related to interest payable on cash advances from pending transactions, $25,701 in deferred rent and $17,123 in federal and state income taxes payable.  At December 31, 2016, the components of accounts payable and accrued expenses consisted of $1,205,740 in trade accounts payable due to various vendors, $699,068 in payables and accruals related to direct working interest investors operating costs, $98,172 in accrued expenses related to current drilling efforts, $266,110 for accrued liabilities for amounts set aside mainly for the plugging and abandonment of certain wells, $103,212 for employee related taxes and accruals, $65,833 related to interest payable on cash advances from pending transactions, $12,446 in deferred rent and $18,662 in federal and state income taxes payable.

Cash Advances on Pending Transactions

In July 2016, we received a cash investment of $1,580,000 from two investors to purchase convertible promissory notes of $1,280,000 and $300,000, with a conversion price of $0.40 per share, with warrants to purchase one share of common stock for every three shares of common stock issuable upon conversion of the notes.  The notes matured on August 2, 2017, (one year from the date of issuance) and carry a 10% interest rate, which is due at maturity.  The conversion of the notes to shares is subject to shareholder approval.  The funds from these transactions is to be used to continue drilling activities, fund expenses to be incurred in connection with the completion of Royale Energy’s proposed merger with Matrix Oil Corporation and for general corporate purposes.  The Company has received an extension of the $300,000 obligation until December 31, 2017, and has requested a similar extension of the $1,280,000 obligation.

Recently Issued Accounting Pronouncements

The Company has reviewed the updates issued by the Financial Accounting Standards Board (FASB) during the six months ended June 30, 2017:

ASU 2017-01: Business Combinations (Topic 805) – Clarifying the Definition of a Business

In January 2017, FASB issued ASU 2017-01. The objective of ASU 2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-01 will have on the Company’s financial statements.

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ASU 2016-02: Leases (Topic 842)

In February 2016, FASB issued ASU 2016-02 which aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing agreements. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2016-02 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements. 

ASU 2016-09: Compensation—Stock Compensation (Topic 718): Improvements to Employee Share- Based Payment Accounting

In March 2016, FASB issued ASU 2016-09 which amends several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all of the amendments in the same period. The Company is currently evaluating the impact of the adoption of ASU 2016-09 on the Company’s financial statements. 

NOTE 2 –LOSS PER SHARE

Basic and diluted loss per share are calculated as follows:

	Three Months Ended June 30,
	2017				2016
	Basic		Diluted		Basic			Diluted
Net Income (Loss)	$	70,662	$	70,662	$	(475,397	)	$	(475,397	)
Weighted average common shares outstanding		21,825,770		21,825,770		17,670,024			17,670,024
Effect of dilutive securities		--		-		--			23,331
Weighted average common shares, including      Dilutive effect		21,825,770		21,825,770		17,670,024			17,693,355
Per share:
Net Income (Loss)	$	0.00	$	0.00	$	(0.03	)	$	(0.03	)

	Six Months Ended June 30,
	2017						2016
	Basic			Diluted			Basic			Diluted
Net Loss	$	(916,982	)	$	(916,982	)	$	(1,099,717	)	$	(1,099,717	)
Weighted average common shares outstanding		21,825,770			21,825,770			17,670,024			17,670,024
Effect of dilutive securities		--			-			--			23,331
Weighted average common shares, including      Dilutive effect		21,825,770			21,825,770			17,670,024			17,693,355
Per share:
Net Loss	$	(0.04	)	$	(0.04	)	$	(0.06	)	$	(0.06	)

For the six months ended June 30, 2017 and 2016, Royale Energy had dilutive securities of 0 and 23,331, respectively.  These securities were not included in the dilutive loss per share due to their antidilutive nature.

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NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

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

	June 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
Oil and Gas
Producing properties, including drilling costs	$	3,755,705		$	3,755,705
Undeveloped properties		260,484			307,158
Lease and well equipment		4,122,178			4,128,178
		8,138,367			8,191,041
Accumulated depletion, depreciation & amortization		(6,546,113	)		(6,468,279	)
		1,592,254			1,722,762
Commercial and Other
Vehicles		40,061			40,061
Furniture and equipment		1,092,926			1,089,648
		1,132,987			1,129,709
Accumulated depreciation		(1,123,213	)		(1,119,047	)
		9,774			10,662
	$	1,602,028		$	1,733,424

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 2017 or 2016. 

NOTE 4 – INCOME TAXES

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  At the end of 2015, management reviewed the reliability of the Company’s net deferred tax assets, and due to the Company’s continued cumulative losses in recent years, the Company concluded it is not “more-likely-than-not” its deferred tax assets will be realized.  As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2016.

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at June 30, 2017 and 2016, respectively, to pretax income is as follows:

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Tax benefit computed at statutory rate of 34%	$	(311,774	)	$	(373,904	)
Increase (decrease) in taxes resulting from:
State tax / percentage depletion / other
Other non-deductible expenses		205			253
Change in valuation allowance		311,569			373,651
Provision (benefit)	$	-		$	-

NOTE 5 – SUBSEQUENT EVENTS

On August 2, 2017, the two notes recorded as Cash Advances on Pending Transactions, matured.  The Company has received an extension of the $300,000 obligation until to December 31, 2017, and has requested a similar extension of the $1,280,000 obligation.

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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.

Going Concern

At June 30, 2017, the Company has an accumulated deficit of $46,695,503, a working capital deficiency of $6,659,038 and a stockholders’ deficit of $5,436,304. As a result, our financial statements include a “going concern qualification” reflecting substantial doubt as to our ability to continue as a going concern.  We are seeking to merge with Matrix to increase efficiency and reduce costs to both companies, thereby allowing a return to positive cash flow.  We have no commitments to provide any additional financing and there is no guarantee that we will be able to secure additional financing on acceptable terms, or at all, if needed to fully fund our 2017 drilling budget and to support future operations.

Results of Operations

We recorded net income of $70,662 for the second quarter of 2017, which compares to a net loss of $475,397 in the second quarter of 2016, a $546,059 or 114.9% improvement.  Our total operating expenses increased in the second quarter of 2017 by $92,218 over the second quarter of 2016, mainly due to increased legal and accounting expenses associated with our proposed merger with Matrix.

Our positive results in the second quarter of 2017 resulted mainly from recording $878,533 for drilling and completing one well. We had been unable to drill any wells in the first quarter of 2017 due to wet weather in our Northern California fields. We expect to drill two additional wells in the third quarter of 2017.

For the six months ended June 30, 2017, we had a net loss of $916,982, a $182,735 or 16.6% improvement when compared to net loss of $1,099,717 during the six months ended June 30, 2016.  Total revenues for the first six months of 2017 were $519,906, a decrease of $99,394 or 16.1% from the total revenues of $619,300 during the period in 2016.  The lower revenues were mainly due to reduced supervisory fees during the period in 2017, when compared to 2016, due to a decrease in the number of wells operated by the Company.

During the first six months of 2017, revenues from oil and gas production increased $101,109 or 40.5% to $351,049 from the 2016 six month revenues of $249,940.  This increase was due to higher natural gas commodity prices during the period in 2017.  The net sales volume of natural gas for the six months ended June 30, 2017, was approximately 117,475 Mcf with an average price of $2.95 per Mcf, versus 131,697 Mcf with an average price of $1.89 per Mcf for the period in 2016.  This represents a decrease in net sales volume of 14,222 Mcf or 10.8%.  The decrease in production volume was mainly due to the sale of our Victor Ranch field interests in 2016, which had an effective date of September 1, 2016 and to the natural declines of our existing wells.  For the quarter ended June 30, 2017, revenues from oil and gas production increased $47,883 or 41.3% to $163,706 from the 2016 second quarter revenues of $115,823.  This increase was also due to higher natural gas commodity prices during the quarter in 2017.  The net sales volume of natural gas for the quarter ended June 30, 2017, was approximately 58,287 Mcf with an average price of $2.77 per Mcf, versus 63,361 Mcf with an average price of $1.82 per Mcf for the second quarter of 2016.  This represents a decrease in net sales volume of 5,074 Mcf or 8.0% for the quarter in 2017.

Oil and natural gas lease operating expenses decreased by $108,490 or 32.0%, to $230,453 for the six months ended June 30, 2017, from $338,943 for the same period in 2016.  For the second quarter in 2017, lease operating expenses decreased $29,976 or 19.5% from the same quarter in 2016.  These decreases were mainly due to the sale of our Victor Ranch field interests in 2016 which reduced overhead, pumping and compression costs during the periods in 2017.

The aggregate of supervisory fees and other income was $168,857 for six months ended June 30, 2017, a decrease of $200,503 or 54.3% from $369,360 during the six months in 2016.  During the second quarter 2017, supervisory fees and other income decreased $134,717 or 62.2% when compared to the period in 2016.  These decreases were due to lower supervisory and drilling overhead during the period in 2017 mainly due to the sale of our Victor Ranch field interests in 2016.  

Depreciation, depletion and amortization expense decreased to $90,304 from $149,172, a decrease of $58,868 or 39.5% for the six months ended June 30, 2017, as compared to the same period in 2016.  During the second quarter 2017, depreciation, depletion and amortization expenses decreased $28,525 or 39.6%.   The depletion rate is calculated using production as a percentage of reserves.  These decreases in depreciation expense was due to a lower depletion rate as reserve volumes were higher at the end of 2016 and due to a lower asset base due to the sale of our Victor Ranch field interests in 2016.

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General and administrative expenses decreased by $112,642 or 10.0% from $1,127,670 for the six months ended June 30, 2016, to $1,015,028, for the six month period in 2017.  For the second quarter 2017, general and administrative expenses decreased $44,851 or 9.1% when compared to the same period in 2016.  These decreases were primarily due to employee related cost reduction measures and reductions in outside consulting services.  Marketing expense for the six months ended June 30, 2017, increased $58,321, or 56.1%, to $162,232, compared to $103,911 for the same period in 2016.  For the second quarter 2017, marketing expenses increased $48,554 or 81.6% when compared to the second quarter in 2016.   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 $668,283 for the six month period, compared to $232,279 for the same period in 2016, a $436,004 or 187.7% increase.  For the second quarter 2017, legal and accounting expenses increased $116,347 or 160.2%, when compared to the second quarter in 2016.  This increase was primarily due to legal and accounting fees related to the proposed Matrix merger.

At June 30, 2017, Royale Energy had a Deferred Drilling Obligation of $7,450,467.  During the first six months of 2017, we disposed of $1,868,534 of drilling obligations upon completing the drilling of one well, while incurring expenses of $990,001, resulting in a gain of $878,533. During the same six month period in 2016, we disposed of $1,691,085 of drilling obligations upon completing the drilling of one well, while incurring expenses of $1,771,097, resulting in a loss of $80,012.  Royale Energy expects to drill two wells during the third quarter of 2017.

During the six months ended June 30, 2017, we recorded a gain of $73,128 on the settlement of accounts payable.  We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense. During the six month periods in 2017 and 2016, we recorded lease impairments of $136,837 and $60,237, respectively, on various lease and land costs that were no longer viable.  During the periods in 2017 and 2016, we recorded write downs of $6,000 and $19,151, respectively, on certain well equipment that was no longer useable.  During the six months ended June 30, 2016, we recorded a gain of $198,975 on the sale of our Company owned office building located in El Cajon, California.  Also during the period in 2016, we recorded a gain of $240,885 on the settlement of accounts payable. 

Interest expense increased to $79,412 for the six months ended June 30, 2017, from $47,502 for the same period in 2016, a $31,910 or 67.2% increase.  This increase resulted from interest accrued on its convertible promissory notes issued in August 2016.  The interest during the period in 2016 was primarily related to the outstanding loan for the corporate headquarters.  Further details concerning Royale’s notes payable can be found in Capital Resources and Liquidity, below.   

Capital Resources and Liquidity

At June 30, 2017, Royale Energy had current assets totaling $5,799,386 and current liabilities totaling $12,458,424 a $6,659,038 working capital deficit.  We had cash at June 30, 2017, of $4,216,824 compared to $4,994,598 at December 31, 2016.

Ordinarily, we fund our operations and cash needs from our available credit and cash flows generated from operations.  We believe that, should the merger be consummated, for the foreseeable future we will be able to meet our liquidity demands.  However, should the merger fail to close, there is doubt as to the ability to meet liquidity demands through cash flow or ongoing operations.  In that event, the Company will seek alternative capital sources through additional sales of equity or debt securities.

At June 30, 2017, our other receivables, which consist of receivables from direct working interest investors and industry partners, totaled $792,912, compared to $676,647 at December 31, 2016, a $116,265 or 17.2% increase.  This increase was mainly due to receivables from investors for workovers on a non-operated well.  At June 30, 2017, Royale’s revenue receivable was $147,940, a decrease of $155,588 or 51.3%, compared to $303,528 at December 31, 2016, due to lower oil and gas production volumes when compared to year end 2016 due to the sale Victor Ranch leases in 2016.  At June 30, 2017, our accounts payable and accrued expenses totaled $3,427,957, an increase of $958,712 or 38.8% from the accounts payable at December 31, 2016 of $2,469,245, mainly related to current drilling activity and non-operated workover costs. 

In July 2016, we received a cash investment of $1,580,000 from two investors to purchase convertible promissory notes of $1,280,000 and $300,000, with a conversion price of $0.40 per share, with warrants to purchase one share of common stock for every three shares of common stock issuable upon conversion of the notes.  The notes mature one year from the date of issuance and carry a 10% interest rate, which is due at maturity.  The conversion of the notes to shares is subject to shareholder approval.   The funds from these transactions is to be used to continue drilling activities, fund expenses to be incurred in connection with completion of Royale’s proposed merger with Matrix Oil Corporation and for general corporate purposes.  The maturity date of one of the notes for $300,000 has been extended to December 31, 2017.  The Company has requested an extension of the other note.

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In December of 2013, Royale purchased an office building for $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 carried an interest rate of 5.75% until paid in full. In February 2016, Royale Energy entered into a purchase and sale agreement for the sale of the office building for $2.5 million.  In June 2016, the sale of the building was completed which resulted in a gain of $198,975 and the related principal and interest payments were paid in full.

Operating Activities.  Net cash used by operating activities totaled $1,149,332 and $1,462,947 for the six month periods ended June 30, 2017 and 2016, respectively.  This $313,615 or 21.4% decrease in cash used was mainly due to higher accounts payable and accrued expenses at the end of the period in 2017 which was related to drilling activity during the period.  During the six months ended June 30, 2017 and 2016, executive management and directors received 42,020 and 1,505,982, respectively, in compensatory shares of the Company’s common stock valued at $18,750 and $278,352, respectively.

Investing Activities. Net cash provided by investing activities totaled $371,558 and $1,843,135 for the six month periods ended June 30, 2017 and 2016, respectively.  This $1,471,577 decrease in net cash provided can be mainly attributed to proceeds of approximately $936,000 received from the sale of our office building during the period in 2016.

Financing Activities.  Net cash used by financing activities totaled $1,242,969 in the first six months of 2016.  During the period in 2016, $1,446,853 was used for principal payments on the Company’s note payable in the sale of its office building.   Also during the period in 2016, we issued 622,316 restricted common shares and received cash proceeds of $200,000 under a private placement stock sale. 

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 $3.12 per Mcf to a high of $3.62 per Mcf for the first six months of 2017.  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, 2017, 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.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Management identified an internal control deficiency that represents a material weakness in or internal control over financial reporting as of June 30, 2017, in that, certain legal documents, such as debt and equity financing transactions, during the fiscal year were not supported by fully executed agreements.

The control deficiency that gave rise to the material weakness did not result in a material misstatement of our financial statements for the six month period ending June 30, 2017.

Because of the material weakness described above, our management was unable to conclude that our internal control over financial reporting was effective as of the end of period to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Management is seeking written acknowledgement of the note transactions from the note holders in order to remediate the material weakness described above and will require written acknowledgement from counterparties of all similar future transactions.

Except for the actions described above that were taken to address the material weaknesses, there were no changes in our internal controls during the six months ended June 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

14

PART II.   OTHER INFORMATION

Item 1.  Legal Proceedings

None

Item 1A.  Risk Factors

Not applicable to smaller reporting companies.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

During the period covered by this report, we have not issued any unregistered shares.

Item 6.  Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification
31.2	Rule 13a-14(a)/15d-14(a) Certification
31.3	Rule 13a-14(a)/15d-14(a) Certification
32.1	18 U.S.C. § 1350 Certification
32.2	18 U.S.C. § 1350 Certification
32.3	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

15

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 10, 2017	/s/ Jonathan Gregory
	Jonathan Gregory, Chief Executive Officer
Date:  August 10, 2017	/s/ Donald H. Hosmer
	Donald H. Hosmer, President of Business Development
Date:  August 10, 2017	/s/ Stephen M. Hosmer
	Stephen M. Hosmer, President and Chief Financial Officer

16

EX-31.1

Exhibit 31.1

I, Jonathan Gregory, certify that:

1. I have reviewed this report on Form 10-Q of Royale Energy, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 10, 2017	/s/ Jonathan Gregory
	Jonathan Gregory, Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Donald H. Hosmer, certify that:

1. I have reviewed this report on Form 10-Q of Royale Energy, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 10, 2017	/s/ Donald H. Hosmer
	Donald H. Hosmer, President of Business Development

EX-31.3

Exhibit 31.3

I, Stephen M. Hosmer, certify that:

1. I have reviewed this report on Form 10-Q of Royale Energy, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions)

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 10, 2017	/s/ Stephen M. Hosmer
	Stephen M. Hosmer, President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. § 1350

The undersigned, Jonathan Gregory, Chief Executive Officer of Royale Energy, Inc., a California corporation (the “Company”), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, hereby certifies that:

(1) the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 10, 2017	By:	/s/ Jonathan Gregory
		Jonathan Gregory, Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. § 1350

The undersigned, Donald H. Hosmer, Co-President and Co-Chief Executive Officer of Royale Energy, Inc., a California corporation (the “Company”), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, hereby certifies that:

(1) the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 10, 2017	By:	/s/ Donald H. Hosmer
		Donald H. Hosmer, President of Business Development

EX-32.3

Exhibit 32.3

Certification Pursuant to 18 U.S.C. § 1350

The undersigned, Stephen M. Hosmer, Co-President, Co-Chief Executive Officer and Chief Financial Officer of Royale Energy, Inc., a California corporation (the “Company”), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, hereby certifies that:

(1) the Company’s Annual Report on Form 10-Q for the period ended June 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 10, 2017	By:	/s/ Stephen M. Hosmer
		Stephen M. Hosmer, President and Chief Financial Officer

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Aug. 02, 2017
Document and Entity Information [Abstract]
Entity Registrant Name	ROYALE ENERGY INC
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		21,839,592
Amendment Flag	false
Entity Central Index Key	0000864839
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2

XML

BALANCE SHEETS - USD ($)	Jun. 30, 2017	Dec. 31, 2016
Current Assets
Cash	$ 4,216,824	$ 4,994,598
Other Receivables, net	792,912	676,647
Revenue Receivables	147,940	303,528
Prepaid Expenses	641,710	63,308
Total Current Assets	5,799,386	6,038,081
Other Assets	611,120	610,779
Oil and Gas Properties, (Successful Efforts Basis), Equipment and Fixtures, net	1,602,028	1,733,424
Total Assets	8,012,534	8,382,284
Current Liabilities:
Accounts Payable and Accrued Expenses	3,427,957	2,469,245
Cash Advances on Pending Transactions	1,580,000	1,580,000
Deferred Drilling Obligation	7,450,467	7,894,001
Total Current Liabilities	12,458,424	11,943,246
Noncurrent Liabilities:
Asset Retirement Obligation	990,414	952,110
Total Noncurrent Liabilities	990,414	952,110
Total Liabilities	13,448,838	12,895,356
Stockholders’ Deficit:
Common Stock, No Par Value, 30,000,000 Shares Authorized, 21,839,592 and 21,836,033 shares issued and outstanding at June 30, 2017 and December 31, 2016	41,259,199	41,265,449
Accumulated Deficit	(46,695,503)	(45,778,521)
Total Stockholders’ Deficit	(5,436,304)	(4,513,072)
Total Liabilities and Stockholders’ Deficit	$ 8,012,534	$ 8,382,284

XML

BALANCE SHEETS (Parentheticals) - $ / shares	Jun. 30, 2017	Dec. 31, 2016
Common stock, no par value (in Dollars per share)	$ 0	$ 0
Common stock, shares authorized	30,000,000	30,000,000
Common stock, shares issued	21,839,592	21,836,033
Common Stock, shares outstanding	21,839,592	21,836,033

XML

STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Revenues:
Sale of Oil and Gas	$ 163,706	$ 115,823	$ 351,049	$ 249,940
Supervisory Fees and Other	81,802	216,519	168,857	369,360
Total Revenues	245,508	332,342	519,906	619,300
Costs and Expenses:
Lease Operating	123,832	153,808	230,453	338,943
Lease Impairment	99,468	60,237	136,837	60,237
Well Equipment Write Down		8,562	6,000	19,151
General and Administrative	450,042	494,893	1,015,028	1,127,670
Legal and Accounting	188,989	72,642	668,283	232,279
Marketing	108,084	59,530	162,232	103,911
Depreciation, Depletion and Amortization	43,464	71,989	90,304	149,172
Total Costs and Expenses	1,013,879	921,661	2,309,137	2,031,363
Gain (Loss) on Turnkey Drilling	878,533	(300,086)	878,533	(80,012)
Income (Loss) From Operations	110,162	(889,405)	(910,698)	(1,492,075)
Other Income (Loss):
Interest Expense	(39,500)	(25,852)	(79,412)	(47,502)
Gain on Settlement of Accounts Payable	0	240,885	73,128	240,885
Gain on Sale of assets	0	198,975	0	198,975
Income (Loss) Before Income Tax Expense	70,662	(475,397)	(916,982)	(1,099,717)
Net Income (Loss)	$ 70,662	$ (475,397)	$ (916,982)	$ (1,099,717)
Basic Earnings (Loss) Per Share (in Dollars per share)	$ 0.00	$ (0.03)	$ (0.04)	$ (0.06)
Diluted Earnings (Loss) Per Share (in Dollars per share)	$ 0.00	$ (0.03)	$ (0.04)	$ (0.06)

XML

STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$ (916,982)	$ (1,099,717)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation, Depletion and Amortization	90,304	149,172
Lease Impairment	136,837	60,237
Gain on Sale of Assets	0	(198,975)
(Gain) Loss on Turnkey Drilling Programs	(878,533)	80,012
Gain on Settlement of Accounts Payable	(73,128)	(240,885)
Well Equipment Write Down	6,000	19,151
Stock-Based Compensation	0	278,352
(Increase) Decrease in:
Other & Revenue Receivables	39,323	(225,723)
Prepaid Expenses and Other Assets	(578,743)	69,907
Increase (Decrease) in:
Accounts Payable and Accrued Expenses	1,025,590	(354,478)
Net Cash Used in Operating Activities	(1,149,332)	(1,462,947)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for Oil and Gas Properties and Other Capital Expenditures	(1,053,442)	(17,792)
Proceeds from Turnkey Drilling Programs	1,425,000	925,000
Proceeds from Sale of Assets	0	935,927
Net Cash Provided By Investing Activities	371,558	1,843,135
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock	0	203,884
Principal Payments on Long-Term Debt	0	(1,446,853)
Net Cash Used in Financing Activities	0	(1,242,969)
Net Decrease in Cash and Cash Equivalents	(777,774)	(862,781)
Cash at Beginning of Period	4,994,598	3,763,819
Cash at End of Period	4,216,824	2,901,038
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid for Interest	412	47,502
Cash Paid for Taxes	1,539	2,100
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING TRANSACTIONS:
Asset Retirement Obligation Addition	30,000	0
Issuance of Common Stock for Accrued Compensation Expense	$ 18,750	$ 0

XML

NOTE 1

6 Months Ended

Jun. 30, 2017

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

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 three 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.

Merger with Matrix Oil Management Corporation

In July 2016, the Company entered into a letter of intent with Matrix Oil Management Corporation (“Matrix”) to merge Royale Energy and Matrix in a combined stock and assumption of debt transaction.  On November 30, 2016, the Company entered into an Agreement and Plan of Merger and Reorganization dated November 30, 2016, among Royale, Royale Energy Holdings, Inc., a Delaware corporation (the “Parent”), Royale Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Parent, Matrix Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Parent, and Matrix.  The Merger Agreement was subsequently amended and restated as of December 31, 2016, and amended again as of March 31 and June 30, 2017 (the “Merger Agreement”).

The Merger Agreement is part of a series of related transactions in which the Parent will (i) issue its common stock to acquire all of (A) the common stock of Royale Energy, Matrix and Matrix’s affiliate, Matrix Oil Corporation, a California corporation, and (B) the partnership interests of three limited partnerships affiliated with Matrix and (ii) issue newly created Series B 3.5% Convertible Preferred Stock in exchange for approximately $20,398,537 of subordinated debt issued by Matrix and its affiliates.

Immediately after the mergers and the related transactions, it is expected that (i) former holders of Matrix common stock, Matrix Oil Corporation capital stock and the three limited partnerships affiliated with Matrix will collectively own 50% of the Parent’s common stock then outstanding, (ii) former holders of Royale Energy common stock will collectively own 50% of the Parent’s common stock then outstanding, in each case giving effect to the number of shares of the Parent’s common stock issuable under all options and warrants outstanding immediately after the mergers other than shares issuable on exercise of certain options and warrants issued by Royale Energy and (iii) former holders of subordinated debt issued by Matrix and its affiliates will collectively own 100% of all of the Parent’s Series B Convertible Preferred Stock then outstanding.

The merger and related transactions will require the approval of the shareholders of each company and registration of the Royale Energy equity securities to be issued in the merger under the Securities Act of 1933 prior to completion of the transaction.  The Merger Agreement will terminate unless extended by agreement of the parties if the merger and related transactions do not close by September 30, 2017, and the failure to close is not due to the failure of the terminating party to perform or comply with any of its covenants or agreements to be performed under the Merger Agreement.

Matrix is an independent oil and natural gas producer based in Santa Barbara, California.  Matrix and its affiliates are privately held by fewer than ten equity holders and partners.

The Pre-Effective Form S-4/A filed by Royale Energy Holdings, Inc., on July 21, 2017, includes a preliminary proxy statement of Royale relating to (i) the Parent Common Stock to be issued in connection with the Mergers, the LP Exchanges, the Matrix Operator Exchange, upon the conversion of any Series B Preferred Stock, or the exercise of any outstanding warrants and options that become exercisable upon the effectiveness of the Mergers, and (ii) the Series B Preferred Stock to be issued in connection with the exchange for Preferred Interests issued by Matrix Investments, L.P. The definitive proxy statement/prospectus, when filed, will include important information about Royale, Matrix, the Matrix LPs and Matrix Operator. Royale also plans to file other relevant documents with the SEC regarding the proposed transaction. INVESTORS AND SECURITY HOLDERS ARE URGED TO CAREFULLY READ THE REGISTRATION STATEMENT, THE PROXY STATEMENT/PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT ROYALE, MATRIX AND THE PROPOSED TRANSACTION. Investors and security holders may obtain these documents when available free of charge at the SEC’s website at www.sec.gov.  In addition, the documents filed with the SEC by Royale can be obtained free of charge from Royale’s website at www.royl.com.

Use of Estimates

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

Material estimates that are particularly susceptible to significant change relate to the estimate of Company oil and gas reserves prepared by an independent engineering consultant.  Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proven reserves. Estimated reserves are used in the calculation of depletion, depreciation and amortization, unevaluated property costs, impairment of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.

Liquidity and Going Concern

The primary sources of liquidity have historically been issuances of common stock and operations. We believe that the completion of the contemplated merger with will enable us to return to positive cash flow.  There is some doubt about the company’s ability to meet liquidity demands, and we anticipate that our primary sources of liquidity will be from the issuance of debt and/or equity, and the sale of oil and natural gas property participation interest.

The Company’s consolidated financial statements reflect an accumulated deficit of $46,695,503, a working capital deficiency of $6,659,038 and a stockholders’ deficit of $5,436,304. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management’s plans to alleviate the going concern include the proposed merger with Matrix and additional financing through issuances of common stock and the reduction of overhead costs.  There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, and reduce overhead until sufficient additional capital is raised to support further operations.  There can be no assurance that such a plan will be successful.

Revenue Recognition

Royale Energy’s primary business is oil and gas production.  Natural gas flows from the wells into gathering line systems, which are equipped occasionally with compressor systems, which in turn flow into metered transportation and customer pipelines.  Monthly price data and daily production are used to invoice customers for amounts due to Royale Energy and other working interest owners.  Royale Energy operates virtually all of its own wells and receives industry standard operator fees.

Royale Energy generally sells crude oil and natural gas under short-term agreements at prevailing market prices. Revenues are recognized when the products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.

Revenues from the production of oil and natural gas properties in which the Royale Energy has an interest with other producers are recognized on the basis of Royale Energy’s net working interest. Differences between actual production and net working interest volumes are not significant.

Royale Energy’s financial statements include its pro rata ownership of wells.  Royale Energy usually sells a portion of the working interest in each well it drills or participates in to third party investors and retains a portion of the prospect for its own account.  Royale Energy generally retains about a 50% working interest.  All results, successful or not, are included at its pro rata ownership amounts: revenue, expenses, assets, and liabilities as defined in FASB ASC 932-323-25 and 932-360.

Oil and Gas Property and Equipment

Depreciation, depletion and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration.  Maintenance and repairs, including planned major maintenance, are expensed as incurred.  Major renewals and improvements are capitalized and the assets replaced are retired.

The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use.  Interest costs, to the extent they are incurred to finance expenditures during the construction phase, are included in property, plant and equipment and are depreciated over the service life of the related assets.

Royale Energy uses the “successful efforts” method to account for its exploration and production activities.  Under this method, Royale Energy accumulates its proportionate share of costs on a well-by-well basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred, and capitalizes expenditures for productive wells.  Royale Energy amortizes the costs of productive wells under the unit-of-production method.

Royale Energy carries, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where Royale Energy is making sufficient progress assessing the reserves and the economic and operating viability of the project.  Exploratory well costs not meeting these criteria are charged to expense. Other exploratory expenditures, including geophysical costs and annual lease rentals, are expensed as incurred.

Acquisition costs of proved properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves.

Capitalized exploratory drilling and development costs associated with productive depletable extractive properties are amortized using unit-of-production rates based on the amount of proved developed reserves of oil and gas that are estimated to be recoverable from existing facilities using current operating methods.  Under the unit-of-production method, oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank.

Production costs are expensed as incurred. Production involves lifting the oil and gas to the surface and gathering, treating, field processing and field storage of the oil and gas. The production function normally terminates at the outlet valve on the lease or field production storage tank. Production costs are those incurred to operate and maintain Royale Energy’s wells and related equipment and facilities. They become part of the cost of oil and gas produced. These costs, sometimes referred to as lifting costs, include such items as labor costs to operate the wells and related equipment; repair and maintenance costs on the wells and equipment; materials, supplies and energy costs required to operate the wells and related equipment; and administrative expenses related to the production activity.

Proved oil and gas properties held and used by Royale Energy are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Royale Energy estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts. Cash flows used in impairment evaluations are developed using annually updated evaluation assumptions for crude oil commodity prices.  Annual volumes are based on field production profiles, which are also updated annually. Prices for natural gas and other products are based on assumptions developed annually for evaluation purposes.

Impairment analyses are generally based on proved reserves.  An asset group would be impaired if the undiscounted cash flows were less than its carrying value.  Impairments are measured by the amount the carrying value exceeds fair value. During the six months ended June 30, 2017 and 2016, impairment losses of $136,837 and $60,237, respectively, were recorded on various capitalized lease and land costs that were no longer viable. 

Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that Royale Energy expects to hold the properties.  The valuation allowances are reviewed at least annually.

Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resultant gain or loss is recorded to Royale Energy’s Statement of Operations.  Upon the sale of an entire interest in an unproved property where the property has been assessed for impairment individually, a gain or loss is recognized in Royale Energy’s Statement of Operations.  If a partial interest in an unproved property is sold, any funds received are accounted for as a recovery of the cost in the interest retained with any excess funds recognized as a gain. Should Royale Energy’s turnkey drilling agreements include unproved property, total drilling costs incurred to satisfy its obligations are recovered by the total funds received under the agreements.  Any excess funds are recorded as a Gain on Turnkey Drilling Programs, and any costs not recovered are capitalized and accounted for under the “successful efforts” method. 

Royale Energy sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest.  Gains on Turnkey Drilling Programs represent funds received from turnkey drilling participants in excess of all costs Royale incurs during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account; and are recognized only upon making this determination after Royale’s obligations have been fulfilled.

The contracts require the participants pay Royale Energy the full contract price upon execution of the agreement.   Royale Energy completes the drilling activities typically between 10 and 30 days after drilling begins.  The participant retains an undivided or proportional beneficial interest in the property, and is also responsible for its proportionate share of operating costs.  Royale Energy retains legal title to the lease.  The participants purchase a working interest directly in the well bore.

In these working interest arrangements, the participants are responsible for sharing in the risk of development, but also sharing in a proportional interest in rights to revenues and proportional liability for the cost of operations after drilling is completed and the interest is conveyed to the participant.

A certain portion of the turnkey drilling participant’s funds received are non-refundable.  The company holds all funds invested as Deferred Drilling Obligations until drilling is complete.  Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations.  At June 30, 2017 and December 31, 2016, Royale Energy had Deferred Drilling Obligations of $7,450,467 and $7,894,001, respectively.

If Royale Energy is unable to drill the wells, and a suitable replacement well is not found, Royale would retain the non-refundable portion of the contact and return the remaining funds to the participant.  Included in cash and cash equivalents are amounts for use in completion of turnkey drilling programs in progress.

Losses on properties sold are recognized when incurred or when the properties are held for sale and the fair value of the properties is less than the carrying value.

Other Receivables

Our other receivables consist of receivables from direct working interest investors and industry partners. We provide for uncollectible accounts receivable using the allowance method of accounting for bad debts.  Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected.  The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable.  All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance.  At June 30, 2017 and December 31, 2016, the Company established an allowance for uncollectable accounts of $2,255,542 and $2,270,773, respectively, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

Revenue Receivables

Our revenue receivables consist of receivables related to the sale of our natural gas and oil.  Once a production month is completed we receive payment approximately 15 to 30 days later.

Equipment and Fixtures

Equipment and fixtures are stated at cost and depreciated over the estimated useful lives of the assets, which range from three to seven years, using the straight-line method. Repairs and maintenance are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment, other than oil and gas, are reflected in operations.

Fair Value Measurements

According to Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

At June 30, 2017 and December 31, 2016, Royale Energy did not have any financial assets measured and recognized at fair value on a recurring basis.  The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “Asset Retirement and Environmental Obligations” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.

Accounts Payable and Accrued Expenses

At June 30, 2017, the components of accounts payable and accrued expenses consisted of $1,492,387 in trade accounts payable due to various vendors, $1,141,156 in payables and accruals related to direct working interest investors and revenues, operating costs and drilling activities, $222,023 in accrued expenses related to current drilling efforts, $266,110 for accrued liabilities for amounts set aside mainly for the plugging and abandonment of certain wells, $118,624 for employee related taxes and accruals, $144,833 related to interest payable on cash advances from pending transactions, $25,701 in deferred rent and $17,123 in federal and state income taxes payable.  At December 31, 2016, the components of accounts payable and accrued expenses consisted of $1,205,740 in trade accounts payable due to various vendors, $699,068 in payables and accruals related to direct working interest investors operating costs, $98,172 in accrued expenses related to current drilling efforts, $266,110 for accrued liabilities for amounts set aside mainly for the plugging and abandonment of certain wells, $103,212 for employee related taxes and accruals, $65,833 related to interest payable on cash advances from pending transactions, $12,446 in deferred rent and $18,662 in federal and state income taxes payable.

Cash Advances on Pending Transactions

In July 2016, we received a cash investment of $1,580,000 from two investors to purchase convertible promissory notes of $1,280,000 and $300,000, with a conversion price of $0.40 per share, with warrants to purchase one share of common stock for every three shares of common stock issuable upon conversion of the notes.  The notes matured on August 2, 2017, (one year from the date of issuance) and carry a 10% interest rate, which is due at maturity.  The conversion of the notes to shares is subject to shareholder approval.  The funds from these transactions is to be used to continue drilling activities, fund expenses to be incurred in connection with the completion of Royale Energy’s proposed merger with Matrix Oil Corporation and for general corporate purposes.  The Company has received an extension of the $300,000 obligation until December 31, 2017, and has requested a similar extension of the $1,280,000 obligation.

Recently Issued Accounting Pronouncements

The Company has reviewed the updates issued by the Financial Accounting Standards Board (FASB) during the six months ended June 30, 2017:

ASU 2017-01: Business Combinations (Topic 805) – Clarifying the Definition of a Business

In January 2017, FASB issued ASU 2017-01. The objective of ASU 2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-01 will have on the Company’s financial statements.

ASU 2016-02: Leases (Topic 842)

In February 2016, FASB issued ASU 2016-02 which aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing agreements. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2016-02 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements. 

ASU 2016-09: Compensation—Stock Compensation (Topic 718): Improvements to Employee Share- Based Payment Accounting

In March 2016, FASB issued ASU 2016-09 which amends several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all of the amendments in the same period. The Company is currently evaluating the impact of the adoption of ASU 2016-09 on the Company’s financial statements. 

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NOTE 2 - LOSS PER SHARE

6 Months Ended

Jun. 30, 2017

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

NOTE 2 –LOSS PER SHARE

Basic and diluted loss per share are calculated as follows:

	Three Months Ended June 30,
	2017				2016
	Basic		Diluted		Basic			Diluted
Net Income (Loss)	$	70,662	$	70,662	$	(475,397	)	$	(475,397	)
Weighted average common shares outstanding		21,825,770		21,825,770		17,670,024			17,670,024
Effect of dilutive securities		--		-		--			23,331
Weighted average common shares, including      Dilutive effect		21,825,770		21,825,770		17,670,024			17,693,355
Per share:
Net Income (Loss)	$	0.00	$	0.00	$	(0.03	)	$	(0.03	)

	Six Months Ended June 30,
	2017						2016
	Basic			Diluted			Basic			Diluted
Net Loss	$	(916,982	)	$	(916,982	)	$	(1,099,717	)	$	(1,099,717	)
Weighted average common shares outstanding		21,825,770			21,825,770			17,670,024			17,670,024
Effect of dilutive securities		--			-			--			23,331
Weighted average common shares, including      Dilutive effect		21,825,770			21,825,770			17,670,024			17,693,355
Per share:
Net Loss	$	(0.04	)	$	(0.04	)	$	(0.06	)	$	(0.06	)

For the six months ended June 30, 2017 and 2016, Royale Energy had dilutive securities of 0 and 23,331, respectively.  These securities were not included in the dilutive loss per share due to their antidilutive nature.

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NOTE 3 - OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

6 Months Ended

Jun. 30, 2017

Oil and Gas Exploration and Production Industries Disclosures [Abstract]

Oil and Gas Exploration and Production Industries Disclosures [Text Block]

NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

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

	June 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
Oil and Gas
Producing properties, including drilling costs	$	3,755,705		$	3,755,705
Undeveloped properties		260,484			307,158
Lease and well equipment		4,122,178			4,128,178
		8,138,367			8,191,041
Accumulated depletion, depreciation & amortization		(6,546,113	)		(6,468,279	)
		1,592,254			1,722,762
Commercial and Other
Vehicles		40,061			40,061
Furniture and equipment		1,092,926			1,089,648
		1,132,987			1,129,709
Accumulated depreciation		(1,123,213	)		(1,119,047	)
		9,774			10,662
	$	1,602,028		$	1,733,424

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 2017 or 2016. 

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NOTE 4 - INCOME TAXES

6 Months Ended

Jun. 30, 2017

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 4 – INCOME TAXES

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  At the end of 2015, management reviewed the reliability of the Company’s net deferred tax assets, and due to the Company’s continued cumulative losses in recent years, the Company concluded it is not “more-likely-than-not” its deferred tax assets will be realized.  As a result, the Company will continue to record a full valuation allowance against the deferred tax assets in 2016.

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at June 30, 2017 and 2016, respectively, to pretax income is as follows:

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Tax benefit computed at statutory rate of 34%	$	(311,774	)	$	(373,904	)
Increase (decrease) in taxes resulting from:
State tax / percentage depletion / other
Other non-deductible expenses		205			253
Change in valuation allowance		311,569			373,651
Provision (benefit)	$	-		$	-

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NOTE 5 - SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2017

Subsequent Events [Abstract]

Subsequent Events [Text Block]

NOTE 5 – SUBSEQUENT EVENTS

On August 2, 2017, the two notes recorded as Cash Advances on Pending Transactions, matured.  The Company has received an extension of the $300,000 obligation until to December 31, 2017, and has requested a similar extension of the $1,280,000 obligation.

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Accounting Policies, by Policy (Policies)

6 Months Ended

Jun. 30, 2017

Accounting Policies [Abstract]

Business Combinations Policy [Policy Text Block]

Merger with Matrix Oil Management Corporation

In July 2016, the Company entered into a letter of intent with Matrix Oil Management Corporation (“Matrix”) to merge Royale Energy and Matrix in a combined stock and assumption of debt transaction.  On November 30, 2016, the Company entered into an Agreement and Plan of Merger and Reorganization dated November 30, 2016, among Royale, Royale Energy Holdings, Inc., a Delaware corporation (the “Parent”), Royale Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Parent, Matrix Merger Sub, Inc., a California corporation and wholly-owned subsidiary of Parent, and Matrix.  The Merger Agreement was subsequently amended and restated as of December 31, 2016, and amended again as of March 31 and June 30, 2017 (the “Merger Agreement”).

The Merger Agreement is part of a series of related transactions in which the Parent will (i) issue its common stock to acquire all of (A) the common stock of Royale Energy, Matrix and Matrix’s affiliate, Matrix Oil Corporation, a California corporation, and (B) the partnership interests of three limited partnerships affiliated with Matrix and (ii) issue newly created Series B 3.5% Convertible Preferred Stock in exchange for approximately $20,398,537 of subordinated debt issued by Matrix and its affiliates.

Immediately after the mergers and the related transactions, it is expected that (i) former holders of Matrix common stock, Matrix Oil Corporation capital stock and the three limited partnerships affiliated with Matrix will collectively own 50% of the Parent’s common stock then outstanding, (ii) former holders of Royale Energy common stock will collectively own 50% of the Parent’s common stock then outstanding, in each case giving effect to the number of shares of the Parent’s common stock issuable under all options and warrants outstanding immediately after the mergers other than shares issuable on exercise of certain options and warrants issued by Royale Energy and (iii) former holders of subordinated debt issued by Matrix and its affiliates will collectively own 100% of all of the Parent’s Series B Convertible Preferred Stock then outstanding.

The merger and related transactions will require the approval of the shareholders of each company and registration of the Royale Energy equity securities to be issued in the merger under the Securities Act of 1933 prior to completion of the transaction.  The Merger Agreement will terminate unless extended by agreement of the parties if the merger and related transactions do not close by September 30, 2017, and the failure to close is not due to the failure of the terminating party to perform or comply with any of its covenants or agreements to be performed under the Merger Agreement.

Matrix is an independent oil and natural gas producer based in Santa Barbara, California.  Matrix and its affiliates are privately held by fewer than ten equity holders and partners.

The Pre-Effective Form S-4/A filed by Royale Energy Holdings, Inc., on July 21, 2017, includes a preliminary proxy statement of Royale relating to (i) the Parent Common Stock to be issued in connection with the Mergers, the LP Exchanges, the Matrix Operator Exchange, upon the conversion of any Series B Preferred Stock, or the exercise of any outstanding warrants and options that become exercisable upon the effectiveness of the Mergers, and (ii) the Series B Preferred Stock to be issued in connection with the exchange for Preferred Interests issued by Matrix Investments, L.P. The definitive proxy statement/prospectus, when filed, will include important information about Royale, Matrix, the Matrix LPs and Matrix Operator. Royale also plans to file other relevant documents with the SEC regarding the proposed transaction. INVESTORS AND SECURITY HOLDERS ARE URGED TO CAREFULLY READ THE REGISTRATION STATEMENT, THE PROXY STATEMENT/PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT ROYALE, MATRIX AND THE PROPOSED TRANSACTION. Investors and security holders may obtain these documents when available free of charge at the SEC’s website at www.sec.gov.  In addition, the documents filed with the SEC by Royale can be obtained free of charge from Royale’s website at www.royl.com.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

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

Material estimates that are particularly susceptible to significant change relate to the estimate of Company oil and gas reserves prepared by an independent engineering consultant.  Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proven reserves. Estimated reserves are used in the calculation of depletion, depreciation and amortization, unevaluated property costs, impairment of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.

Liquidity and Going Concern [Policy Text Block]

Liquidity and Going Concern

The primary sources of liquidity have historically been issuances of common stock and operations. We believe that the completion of the contemplated merger with will enable us to return to positive cash flow.  There is some doubt about the company’s ability to meet liquidity demands, and we anticipate that our primary sources of liquidity will be from the issuance of debt and/or equity, and the sale of oil and natural gas property participation interest.

The Company’s consolidated financial statements reflect an accumulated deficit of $46,695,503, a working capital deficiency of $6,659,038 and a stockholders’ deficit of $5,436,304. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management’s plans to alleviate the going concern include the proposed merger with Matrix and additional financing through issuances of common stock and the reduction of overhead costs.  There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, attempt to extend note repayments, and reduce overhead until sufficient additional capital is raised to support further operations.  There can be no assurance that such a plan will be successful.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

Royale Energy’s primary business is oil and gas production.  Natural gas flows from the wells into gathering line systems, which are equipped occasionally with compressor systems, which in turn flow into metered transportation and customer pipelines.  Monthly price data and daily production are used to invoice customers for amounts due to Royale Energy and other working interest owners.  Royale Energy operates virtually all of its own wells and receives industry standard operator fees.

Royale Energy generally sells crude oil and natural gas under short-term agreements at prevailing market prices. Revenues are recognized when the products are delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured.

Revenues from the production of oil and natural gas properties in which the Royale Energy has an interest with other producers are recognized on the basis of Royale Energy’s net working interest. Differences between actual production and net working interest volumes are not significant.

Royale Energy’s financial statements include its pro rata ownership of wells.  Royale Energy usually sells a portion of the working interest in each well it drills or participates in to third party investors and retains a portion of the prospect for its own account.  Royale Energy generally retains about a 50% working interest.  All results, successful or not, are included at its pro rata ownership amounts: revenue, expenses, assets, and liabilities as defined in FASB ASC 932-323-25 and 932-360.

Oil and Gas Properties Policy [Policy Text Block]

Oil and Gas Property and Equipment

Depreciation, depletion and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration.  Maintenance and repairs, including planned major maintenance, are expensed as incurred.  Major renewals and improvements are capitalized and the assets replaced are retired.

The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use.  Interest costs, to the extent they are incurred to finance expenditures during the construction phase, are included in property, plant and equipment and are depreciated over the service life of the related assets.

Royale Energy uses the “successful efforts” method to account for its exploration and production activities.  Under this method, Royale Energy accumulates its proportionate share of costs on a well-by-well basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred, and capitalizes expenditures for productive wells.  Royale Energy amortizes the costs of productive wells under the unit-of-production method.

Royale Energy carries, as an asset, exploratory well costs when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where Royale Energy is making sufficient progress assessing the reserves and the economic and operating viability of the project.  Exploratory well costs not meeting these criteria are charged to expense. Other exploratory expenditures, including geophysical costs and annual lease rentals, are expensed as incurred.

Acquisition costs of proved properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves.

Capitalized exploratory drilling and development costs associated with productive depletable extractive properties are amortized using unit-of-production rates based on the amount of proved developed reserves of oil and gas that are estimated to be recoverable from existing facilities using current operating methods.  Under the unit-of-production method, oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank.

Production costs are expensed as incurred. Production involves lifting the oil and gas to the surface and gathering, treating, field processing and field storage of the oil and gas. The production function normally terminates at the outlet valve on the lease or field production storage tank. Production costs are those incurred to operate and maintain Royale Energy’s wells and related equipment and facilities. They become part of the cost of oil and gas produced. These costs, sometimes referred to as lifting costs, include such items as labor costs to operate the wells and related equipment; repair and maintenance costs on the wells and equipment; materials, supplies and energy costs required to operate the wells and related equipment; and administrative expenses related to the production activity.

Proved oil and gas properties held and used by Royale Energy are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Royale Energy estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts. Cash flows used in impairment evaluations are developed using annually updated evaluation assumptions for crude oil commodity prices.  Annual volumes are based on field production profiles, which are also updated annually. Prices for natural gas and other products are based on assumptions developed annually for evaluation purposes.

Impairment analyses are generally based on proved reserves.  An asset group would be impaired if the undiscounted cash flows were less than its carrying value.  Impairments are measured by the amount the carrying value exceeds fair value. During the six months ended June 30, 2017 and 2016, impairment losses of $136,837 and $60,237, respectively, were recorded on various capitalized lease and land costs that were no longer viable. 

Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that Royale Energy expects to hold the properties.  The valuation allowances are reviewed at least annually.

Upon the sale or retirement of a complete field of a proved property, Royale Energy eliminates the cost from its books, and the resultant gain or loss is recorded to Royale Energy’s Statement of Operations.  Upon the sale of an entire interest in an unproved property where the property has been assessed for impairment individually, a gain or loss is recognized in Royale Energy’s Statement of Operations.  If a partial interest in an unproved property is sold, any funds received are accounted for as a recovery of the cost in the interest retained with any excess funds recognized as a gain. Should Royale Energy’s turnkey drilling agreements include unproved property, total drilling costs incurred to satisfy its obligations are recovered by the total funds received under the agreements.  Any excess funds are recorded as a Gain on Turnkey Drilling Programs, and any costs not recovered are capitalized and accounted for under the “successful efforts” method. 

Royale Energy sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest.  Gains on Turnkey Drilling Programs represent funds received from turnkey drilling participants in excess of all costs Royale incurs during the drilling programs (e.g., lease acquisition, exploration and development costs), including costs incurred on behalf of participants and costs incurred for its own account; and are recognized only upon making this determination after Royale’s obligations have been fulfilled.

The contracts require the participants pay Royale Energy the full contract price upon execution of the agreement.   Royale Energy completes the drilling activities typically between 10 and 30 days after drilling begins.  The participant retains an undivided or proportional beneficial interest in the property, and is also responsible for its proportionate share of operating costs.  Royale Energy retains legal title to the lease.  The participants purchase a working interest directly in the well bore.

In these working interest arrangements, the participants are responsible for sharing in the risk of development, but also sharing in a proportional interest in rights to revenues and proportional liability for the cost of operations after drilling is completed and the interest is conveyed to the participant.

A certain portion of the turnkey drilling participant’s funds received are non-refundable.  The company holds all funds invested as Deferred Drilling Obligations until drilling is complete.  Occasionally, drilling is delayed for various reasons such as weather, permitting, drilling rig availability and/or contractual obligations.  At June 30, 2017 and December 31, 2016, Royale Energy had Deferred Drilling Obligations of $7,450,467 and $7,894,001, respectively.

If Royale Energy is unable to drill the wells, and a suitable replacement well is not found, Royale would retain the non-refundable portion of the contact and return the remaining funds to the participant.  Included in cash and cash equivalents are amounts for use in completion of turnkey drilling programs in progress.

Losses on properties sold are recognized when incurred or when the properties are held for sale and the fair value of the properties is less than the carrying value.

Receivables, Policy [Policy Text Block]

Other Receivables

Our other receivables consist of receivables from direct working interest investors and industry partners. We provide for uncollectible accounts receivable using the allowance method of accounting for bad debts.  Under this method of accounting, a provision for uncollectible accounts is charged directly to bad debt expense when it becomes probable the receivable will not be collected.  The allowance account is increased or decreased based on past collection history and management’s evaluation of accounts receivable.  All amounts considered uncollectible are charged against the allowance account and recoveries of previously charged off accounts are added to the allowance.  At June 30, 2017 and December 31, 2016, the Company established an allowance for uncollectable accounts of $2,255,542 and $2,270,773, respectively, for receivables from direct working interest investors whose expenses on non-producing wells were unlikely to be collected from revenue.

Trade and Other Accounts Receivable, Policy [Policy Text Block]

Revenue Receivables

Our revenue receivables consist of receivables related to the sale of our natural gas and oil.  Once a production month is completed we receive payment approximately 15 to 30 days later.

Property, Plant and Equipment, Policy [Policy Text Block]

Equipment and Fixtures

Equipment and fixtures are stated at cost and depreciated over the estimated useful lives of the assets, which range from three to seven years, using the straight-line method. Repairs and maintenance are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment, other than oil and gas, are reflected in operations.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements

According to Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

At June 30, 2017 and December 31, 2016, Royale Energy did not have any financial assets measured and recognized at fair value on a recurring basis.  The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “Asset Retirement and Environmental Obligations” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.

Accounts Payable and Accrued Expenses [Policy Text Block]

Accounts Payable and Accrued Expenses

At June 30, 2017, the components of accounts payable and accrued expenses consisted of $1,492,387 in trade accounts payable due to various vendors, $1,141,156 in payables and accruals related to direct working interest investors and revenues, operating costs and drilling activities, $222,023 in accrued expenses related to current drilling efforts, $266,110 for accrued liabilities for amounts set aside mainly for the plugging and abandonment of certain wells, $118,624 for employee related taxes and accruals, $144,833 related to interest payable on cash advances from pending transactions, $25,701 in deferred rent and $17,123 in federal and state income taxes payable.  At December 31, 2016, the components of accounts payable and accrued expenses consisted of $1,205,740 in trade accounts payable due to various vendors, $699,068 in payables and accruals related to direct working interest investors operating costs, $98,172 in accrued expenses related to current drilling efforts, $266,110 for accrued liabilities for amounts set aside mainly for the plugging and abandonment of certain wells, $103,212 for employee related taxes and accruals, $65,833 related to interest payable on cash advances from pending transactions, $12,446 in deferred rent and $18,662 in federal and state income taxes payable.

Other Current Liabilities [Policy Text Block]

Cash Advances on Pending Transactions

In July 2016, we received a cash investment of $1,580,000 from two investors to purchase convertible promissory notes of $1,280,000 and $300,000, with a conversion price of $0.40 per share, with warrants to purchase one share of common stock for every three shares of common stock issuable upon conversion of the notes.  The notes matured on August 2, 2017, (one year from the date of issuance) and carry a 10% interest rate, which is due at maturity.  The conversion of the notes to shares is subject to shareholder approval.  The funds from these transactions is to be used to continue drilling activities, fund expenses to be incurred in connection with the completion of Royale Energy’s proposed merger with Matrix Oil Corporation and for general corporate purposes.  The Company has received an extension of the $300,000 obligation until December 31, 2017, and has requested a similar extension of the $1,280,000 obligation.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Pronouncements

The Company has reviewed the updates issued by the Financial Accounting Standards Board (FASB) during the six months ended June 30, 2017:

ASU 2017-01: Business Combinations (Topic 805) – Clarifying the Definition of a Business

In January 2017, FASB issued ASU 2017-01. The objective of ASU 2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-01 will have on the Company’s financial statements.

ASU 2016-02: Leases (Topic 842)

In February 2016, FASB issued ASU 2016-02 which aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing agreements. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2016-02 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements. 

ASU 2016-09: Compensation—Stock Compensation (Topic 718): Improvements to Employee Share- Based Payment Accounting

In March 2016, FASB issued ASU 2016-09 which amends several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all of the amendments in the same period. The Company is currently evaluating the impact of the adoption of ASU 2016-09 on the Company’s financial statements.

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NOTE 2 - LOSS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2017

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

Basic and diluted loss per share are calculated as follows:

	Three Months Ended June 30,
	2017				2016
	Basic		Diluted		Basic			Diluted
Net Income (Loss)	$	70,662	$	70,662	$	(475,397	)	$	(475,397	)
Weighted average common shares outstanding		21,825,770		21,825,770		17,670,024			17,670,024
Effect of dilutive securities		--		-		--			23,331
Weighted average common shares, including      Dilutive effect		21,825,770		21,825,770		17,670,024			17,693,355
Per share:
Net Income (Loss)	$	0.00	$	0.00	$	(0.03	)	$	(0.03	)

	Six Months Ended June 30,
	2017						2016
	Basic			Diluted			Basic			Diluted
Net Loss	$	(916,982	)	$	(916,982	)	$	(1,099,717	)	$	(1,099,717	)
Weighted average common shares outstanding		21,825,770			21,825,770			17,670,024			17,670,024
Effect of dilutive securities		--			-			--			23,331
Weighted average common shares, including      Dilutive effect		21,825,770			21,825,770			17,670,024			17,693,355
Per share:
Net Loss	$	(0.04	)	$	(0.04	)	$	(0.06	)	$	(0.06	)

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NOTE 3 - OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES (Tables)

6 Months Ended

Jun. 30, 2017

Oil and Gas Exploration and Production Industries Disclosures [Abstract]

Property, Plant and Equipment [Table Text Block]

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

	June 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
Oil and Gas
Producing properties, including drilling costs	$	3,755,705		$	3,755,705
Undeveloped properties		260,484			307,158
Lease and well equipment		4,122,178			4,128,178
		8,138,367			8,191,041
Accumulated depletion, depreciation & amortization		(6,546,113	)		(6,468,279	)
		1,592,254			1,722,762
Commercial and Other
Vehicles		40,061			40,061
Furniture and equipment		1,092,926			1,089,648
		1,132,987			1,129,709
Accumulated depreciation		(1,123,213	)		(1,119,047	)
		9,774			10,662
	$	1,602,028		$	1,733,424

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NOTE 4 - INCOME TAXES (Tables)

6 Months Ended

Jun. 30, 2017

Income Tax Disclosure [Abstract]

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

A reconciliation of Royale Energy’s provision for income taxes and the amount computed by applying the statutory income tax rates at June 30, 2017 and 2016, respectively, to pretax income is as follows:

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Tax benefit computed at statutory rate of 34%	$	(311,774	)	$	(373,904	)
Increase (decrease) in taxes resulting from:
State tax / percentage depletion / other
Other non-deductible expenses		205			253
Change in valuation allowance		311,569			373,651
Provision (benefit)	$	-		$	-

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NOTE 1 (Details) - USD ($)		6 Months Ended		12 Months Ended
	Aug. 02, 2017	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
NOTE 1 (Details) [Line Items]
Debt Conversion, Original Debt, Amount		$ 18,750	$ 0
Retained Earnings (Accumulated Deficit)		(46,695,503)		$ (45,778,521)
Working Capital (Deficit)		(6,659,038)
Stockholders' Equity Attributable to Parent		(5,436,304)		(4,513,072)
Impairment of Oil and Gas Properties		136,837	$ 60,237
Business Combination, Separately Recognized Transactions, Description			Royale Energy sponsors turnkey drilling agreement arrangements in unproved properties as a pooling of assets in a joint undertaking, whereby proceeds from participants are reported as Deferred Drilling Obligations, and then reduced as costs to complete its obligations are incurred with any excess booked against its property account to reduce any basis in its own interest.
Customer Deposits, Current		7,450,467		7,894,001
Allowance for Doubtful Accounts Receivable		2,255,542		2,270,773
Accounts Payable and Accrued Liabilities, Current		$ 3,427,957		2,469,245
Minimum [Member]
NOTE 1 (Details) [Line Items]
Property, Plant and Equipment, Useful Life		3 years
Maximum [Member]
NOTE 1 (Details) [Line Items]
Property, Plant and Equipment, Useful Life		7 years
Trading Liabilities [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		$ 1,492,387		1,205,740
Direct Working Interest Investor Liabilities [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		1,141,156		699,068
Drilling Effort Liabilities [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		222,023		98,172
Liabilities for Plugging and Abandonment [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		266,110		266,110
Employee Related Taxes [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		118,624		103,212
Interest Payable on Cash Advances [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		144,833		65,833
Deferred Rent [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		25,701		12,446
Federal and State Income Taxes [Member]
NOTE 1 (Details) [Line Items]
Accounts Payable and Accrued Liabilities, Current		17,123		18,662
Convertible Notes Payable [Member]
NOTE 1 (Details) [Line Items]
Debt Instrument, Face Amount		1,580,000
Convertible Notes Payable [Member] | Note #1 Entered into Negotiations [Member]
NOTE 1 (Details) [Line Items]
Debt Instrument, Face Amount		1,280,000
Convertible Notes Payable [Member] | Note #2 Entered into Negotiations [Member]
NOTE 1 (Details) [Line Items]
Debt Instrument, Face Amount		$ 300,000
Convertible Notes Payable [Member] | Notes Entered into Negotiations [Member]
NOTE 1 (Details) [Line Items]
Debt Instrument, Convertible, Conversion Price (in Dollars per share)		$ 0.40
Debt Instrument, Term		1 year
Debt Instrument, Interest Rate, Stated Percentage		10.00%
Matrix Agreement [Member]
NOTE 1 (Details) [Line Items]
Debt Conversion, Original Debt, Amount				$ 20,398,537
Subsequent Event [Member] | Note #1 Entered into Negotiations [Member]
NOTE 1 (Details) [Line Items]
Debt Instrument, Face Amount	$ 300,000
Debt Instrument, Maturity Date	Dec. 31, 2017
Subsequent Event [Member] | Note #2 Entered into Negotiations [Member]
NOTE 1 (Details) [Line Items]
Debt Instrument, Face Amount	$ 1,280,000

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NOTE 2 - LOSS PER SHARE (Details) - shares	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Earnings Per Share [Abstract]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	0	23,331

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NOTE 2 - LOSS PER SHARE (Details) - Schedule of Earnings Per Share, Basic and Diluted - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Schedule of Earnings Per Share, Basic and Diluted [Abstract]
Net Income (Loss), basic (in Dollars)	$ 70,662	$ (475,397)	$ (916,982)	$ (1,099,717)
Net Income (Loss), diluted (in Dollars)	$ 70,662	$ (475,397)	$ (916,982)	$ (1,099,717)
Weighted average common shares outstanding	21,825,770	17,670,024	21,825,770	17,670,024
Effect of dilutive securities	0	23,331	0	23,331
Weighted average common shares, including dilutive effect	21,825,770	17,693,355	21,825,770	17,693,355
Per share:
Net Income (Loss), basic (in Dollars per share)	$ 0.00	$ (0.03)	$ (0.04)	$ (0.06)
Net Income (Loss), diluted (in Dollars per share)	$ 0.00	$ (0.03)	$ (0.04)	$ (0.06)

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NOTE 3 - OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES (Details) - Schedule of Oil and Gas Properties, Equipment and Fixtures - USD ($)	Jun. 30, 2017	Dec. 31, 2016
Oil and Gas
Producing properties, including drilling costs	$ 3,755,705	$ 3,755,705
Undeveloped properties	260,484	307,158
Lease and well equipment	4,122,178	4,128,178
Oil and Gas, Gross	8,138,367	8,191,041
Accumulated depletion, depreciation & amortization	(6,546,113)	(6,468,279)
Oil and Gas, net	1,592,254	1,722,762
Commercial and Other
Property, Plant and Equipment, Gross	1,132,987	1,129,709
Accumulated depreciation	(1,123,213)	(1,119,047)
Property, Plant and Equipment, Net	9,774	10,662
Oil and Gas, Property, Plant and Equipment, Net	1,602,028	1,733,424
Vehicles [Member]
Commercial and Other
Property, Plant and Equipment, Gross	40,061	40,061
Furniture and Fixtures [Member]
Commercial and Other
Property, Plant and Equipment, Gross	$ 1,092,926	$ 1,089,648

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NOTE 4 - INCOME TAXES (Details) - Schedule of Effective Income Tax Rate Reconciliation - USD ($)	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Schedule of Effective Income Tax Rate Reconciliation [Abstract]
Tax benefit computed at statutory rate of 34%	$ (311,774)	$ (373,904)
Increase (decrease) in taxes resulting from:
State tax / percentage depletion / other	0	0
Other non-deductible expenses	205	253
Change in valuation allowance	311,569	373,651
Provision (benefit)	$ 0	$ 0

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NOTE 4 - INCOME TAXES (Details) - Schedule of Effective Income Tax Rate Reconciliation (Parentheticals)	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Schedule of Effective Income Tax Rate Reconciliation [Abstract]
Statutory rate	34.00%	34.00%

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NOTE 5 - SUBSEQUENT EVENTS (Details) - Subsequent Event [Member]	Aug. 02, 2017 USD ($)
Note #1 Entered into Negotiations [Member]
NOTE 5 - SUBSEQUENT EVENTS (Details) [Line Items]
Debt Instrument, Face Amount	$ 300,000
Debt Instrument, Maturity Date	Dec. 31, 2017
Note #2 Entered into Negotiations [Member]
NOTE 5 - SUBSEQUENT EVENTS (Details) [Line Items]
Debt Instrument, Face Amount	$ 1,280,000