Company Quick10K Filing
Quick10K
Royal Energy Resources
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-11-30 Quarter: 2015-11-30
10-K 2015-08-31 Annual: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-Q 2015-02-28 Quarter: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-K 2014-08-31 Annual: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-09-23 Other Events
8-K 2019-09-06 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-06-20 Officers
8-K 2019-05-03 Shareholder Vote, Other Events
8-K 2019-03-05 Enter Agreement, Exhibits
8-K 2018-01-30 Sale of Shares, Officers, Other Events, Exhibits
8-K 2017-12-27 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
ACBM Acro Biomedical 239
FCRE FC Global Realty 132
HGBL Heritage Global 21
BSTG Biostage 15
LTUM Lithium 8
LRDC Laredo Oil 6
GRAS Greenfield Farms Food 0
JMIA Jumia 0
NXT Natcore Technology 0
SHRV Sharing Services 0
ROYE 2019-06-30
Part I.&Mdash;Financial Information
Item 1. Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4: Controls and Procedures
Part II - Other Information
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities.
Item 4: Mine Safety Disclosures.
Item 5: Other Information.
Item 6. Exhibits.
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm
EX-95.1 ex95-1.htm

Royal Energy Resources Earnings 2019-06-30

ROYE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2019

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:

 

Royal Energy Resources, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   000-52547   11-3480036
(State or Other Jurisdiction   (Commission   (I.R.S. Employer
of Incorporation or Organization)   File Number)   Identification No.)

 

56 Broad Street, Suite 2, Charleston, SC 29401

(Address of Principal Executive Offices) (Zip Code)

 

843-900-7693

(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each Exchange on which registered
n/a   n/a   n/a

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]

 

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 Securities Act. [  ]

 

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

 

As of August 2, 2019, the registrant had 18,579,293 shares of common stock issued and outstanding (including 914,797 shares held by its consolidated subsidiary, Rhino Resource Partners, LP) and 51,000 shares of Series A Convertible Preferred Stock outstanding.

 

 

 

   
 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
     
ITEM 1: Financial Statements 4
     
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
ITEM 4: Controls and Procedures 35
     
PART II - OTHER INFORMATION  
     
Item 1: Legal Proceedings 36
     
ITEM 1A: Risk Factors 37
     
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds 37
     
ITEM 3: Defaults upon Senior Securities. 37
     
ITEM 4: Mine Safety Disclosures. 37
     
ITEM 5: Other Information. 37
     
ITEM 6: Exhibits 38
     
SIGNATURES 39

 

 2 
 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain “forward-looking statements.” Statements included in this report that are not historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including things such as statements regarding our future financial position, expectations with respect to our liquidity, capital resources, plans for growth of the business, future capital expenditures, references to future goals or intentions or other such references are forward-looking statements. These statements can be identified by the use of forward-looking terminology, including “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” or similar words. These statements are made by us based on our experience and our perception of historical trends, current conditions and expected future developments as well as other considerations we believe are reasonable as and when made. Whether actual results and developments in the future will conform to our expectations is subject to numerous risks and uncertainties, many of which are beyond our control. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecasted in these statements.

 

Any differences could be caused by a number of factors, including, but not limited to: our ability to maintain adequate cash flow and to obtain financing necessary to fund our capital expenditures, meet working capital needs and maintain and grow our operations; our future levels of indebtedness and compliance with debt covenants; sustained depressed levels of or further decline in coal prices, which depend upon several factors such as the supply of domestic and foreign coal, the demand for domestic and foreign coal, governmental regulations, price and availability of alternative fuels for electricity generation and prevailing economic conditions; declines in demand for electricity and coal; current and future environmental laws and regulations, which could materially increase operating costs or limit our ability to produce and sell coal; extensive government regulation of mine operations, especially with respect to mine safety and health, which imposes significant actual and potential costs; difficulties in obtaining and/or renewing permits necessary for operations; a variety of operating risks, such as unfavorable geologic conditions, adverse weather conditions and natural disasters, mining and processing equipment unavailability, failures and unexpected maintenance problems and accidents, including fire and explosions from methane; poor mining conditions resulting from the effects of prior mining; the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives; fluctuations in transportation costs or disruptions in transportation services, which could increase competition or impair our ability to supply coal; a shortage of skilled labor, increased labor costs or work stoppages; our ability to secure or acquire new or replacement high-quality coal reserves that are economically recoverable; material inaccuracies in our estimates of coal reserves and non-reserve coal deposits; existing and future laws and regulations regulating the emission of sulfur dioxide and other compounds, which could affect coal consumers and reduce demand for coal; federal and state laws restricting the emissions of greenhouse gases; our ability to acquire or failure to maintain, obtain or renew surety bonds used to secure obligations to reclaim mined property; our dependence on a few customers and our ability to find and retain customers under favorable supply contracts; changes in consumption patterns by utilities away from the use of coal, such as changes resulting from low natural gas prices; changes in governmental regulation of the electric utility industry; defects in title in properties that we own or losses of any of our leasehold interests; our ability to retain and attract senior management and other key personnel; material inaccuracy of assumptions underlying reclamation and mine closure obligations; and weakness in global economic conditions. Other factors that could cause our actual results to differ from our projected results are described elsewhere in (1) this Form 10-Q, (2) our Annual Report on Form 10-K for the year ended December 31, 2018, (3) our reports and registration statements filed from time to time with the Securities and Exchange Commission and (4) other announcements we make from time to time. In addition, we may be subject to unforeseen risks that may have a materially adverse effect on us. Accordingly, no assurances can be given that the actual events and results will not be materially different from the anticipated results described in the forward-looking statements.

 

The forward-looking statements speak only as of the date made, and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 3 
 

 

PART I.—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ROYAL ENERGY RESOURCES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

   June 30, 2019   December 31, 2018 
         
Assets          
CURRENT ASSETS          
Cash and cash equivalents  $1,879   $6,629 
Restricted cash   88    - 
Accounts receivable, net of allowance for doubtful accounts ($-0- and $0.7 million as of June 30, 2019 and December 31, 2018, respectively.)   22,688    15,475 
Receivable – other   7,000    - 
Inventories   11,747    6,573 
Investment in equity securities   -    1,872 
Advance royalties, current portion   1,118    548 
Prepaid expenses and other assets   3,504    2,768 
Total current assets   48,024    33,865 
PROPERTY, PLANT AND EQUIPMENT:          
Coal properties, mine development and construction costs   257,988    255,320 
Less accumulated depreciation, depletion and amortization   (91,643)   (75,206)
Net property, plant and equipment   166,345    180,114 
Operating lease right-of-use assets, net   12,759    - 
Advance royalties, net of current portion   7,973    8,026 
Other non-current assets   33,151    33,954 
TOTAL ASSETS  $268,252   $255,959 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable  $26,347   $14,112 
Accrued expenses and other   12,330    10,603 
Accrued distributions   600    3,210 
Current portion of operating lease liabilities   3,211    - 
Notes payable - related party   514    514 
Current portion of long-term debt, net   6,532    3,174 
Current portion of asset retirement obligations   465    465 
Related party advances and accrued interest payable   52    46 
Total current liabilities   50,051    32,124 
NON-CURRENT LIABILITIES:          
Long-term debt, net   20,664    23,932 
Deferred tax liability, net   23,623    25,711 
Asset retirement obligations, net of current portion   15,702    15,124 
Operating lease liabilities, net of current portion   9,181    - 
Other non-current liabilities   37,765    37,091 
Total non-current liabilities   106,935    101,858 
Total liabilities   156,986    133,982 
COMMITMENTS AND CONTINGENCIES          
STOCKHOLDERS’ EQUITY          
           
Preferred stock: $0.00001 par value; authorized 5,000,000 shares; 51,000 issued and outstanding at June 30, 2019 and December 31, 2018   -    - 
Common stock: $0.00001 par value; authorized 25,000,000 shares; 18,579,293 shares issued and 17,664,496 outstanding at both June 30, 2019 and December 31, 2018   1    1 
Additional paid-in capital   48,139    48,139 
Treasury stock   (4,176)   (4,176)
Accumulated earnings   61,115    65,946 
Total stockholders’ equity owned by common shareholders   105,079    109,910 
Non-controlling interest   6,187    12,067 
Total stockholders’ equity   111,266    121,977 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $268,252   $255,959 

 

See notes to unaudited condensed consolidated financial statements.

 

 4 
 

 

 ROYAL ENERGY RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit data)

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2019   2018   2019   2018 
REVENUES:                
Coal sales  $65,092   $54,245   $122,955   $108,517 
Other revenues   497    625    1,390    1,206 
Total revenues   65,589    54,870    124,345    109,723 
COSTS AND EXPENSES:                    
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)   59,722    49,378    114,139    98,892 
Freight and handling costs   1,778    1,472    2,933    2,376 
Depreciation, depletion and amortization   8,130    7,739    16,484    15,275 
Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above)   3,725    3,266    6,795    8,167 
Loss/(gain) on sale/disposal of assets—net   (7,787)   87    (7,009)   142 
Total costs and expenses   65,568    61,942    133,342    124,852 
(LOSS) FROM OPERATIONS   21    (7,072)   (8,997)   (15,129)
INTEREST AND OTHER (EXPENSE)/INCOME:                    
Interest expense   (1,828)   (2,019)   (3,635)   (4,078)
Interest income and other income   -    -    -    13 
Gain on sale of equity securities   -    3,592    433    6,498 
Total interest and other (expense)/income   (1,828)   1,573    (3,202)   2,433 
NET INCOME (LOSS)/FROM CONTINUING OPERATIONS BEFORE INCOME TAX   (1,807)   (5,499)   (12,199)   (12,696)
Income tax (provision) benefit   (42)   847    2,088    1,620 
NET INCOME/(LOSS)   (1,849)   (4,652)   (10,111)   (11,076)
                     
Less net income/(loss) attributable to non-controlling interest   (1,150)   (1,327)   (5,880)   (4,523)
Preferred distribution on subsidiary   (300)   (309)   (600)   (609)
Net Income/(Loss) attributable to Company’s Stockholders  $(999)  $(3,634)  $(4,831)  $(7,162)
                     
Net (loss)/income per share, basic and diluted  $(0.06)   (0.21)   (0.27)   (0.41)
                     
Weighted average shares outstanding, basic and diluted   17,664,496    17,664,496    17,664,496    17,581,163 

 

See notes to unaudited condensed consolidated financial statements.

 

 5 
 

 

ROYAL ENERGY RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and Six Months ended June 30, 2019 and 2018

(in thousands, except per unit data)

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2019   2018   2019   2018 
NET INCOME/(LOSS)  $(1,849)  $(4,652)  $(10,111)  $(11,076)
Less net income/(loss) attributable to non-controlling interest   (1,150)   (1,327)   (5,880)   (4,523)
Preferred distribution on subsidiary   (300)   (309)   (600)   (609)
OTHER COMPREHENSIVE INCOME (LOSS):                    
Fair market value adjustment for available-for-sale investment, net of tax benefit ($0, $3,$0, and $576)   -    195    -    3,804 
Reclass for disposition, net of tax expense ($0, $(508), $0, and $(870))   -    (3,469)   -    (5,751)
Less other comprehensive earnings attributable to non-controlling interest   -    (1,710)   -    (1,014)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMPANY’S STOCKHOLDERS  $(999)  $(5,198)  $(4,831)  $(8,095)

 

See notes to unaudited condensed consolidated financial statements.

 

 6 
 

 

ROYAL ENERGY RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six Months ended June 30, 2019 and 2018

(in thousands, except shares)

 

   Preferred stock   Common stock   Additional
Paid In
   Accumulated Other Comprehensive   Treasury   Accumulated Earnings   Non-Controlling     
   Shares   Amt.   Shares   Amt.   Capital   Income (Loss)   Stock   (Deficit)   Interest   Total 
Balance December 31, 2018   51,000   $-    18,579,293   $1   $48,139   $-   $(4,176)  $65,946   $12,067   $121,977 
Rhino preferred distributions   -    -    -    -    -    -    -    (300)   -    (300)
Net loss   -    -    -    -    -    -    -    (3,532)   (4,730)   (8,262)
Balance March 31, 2019   51,000   $-    18,579,293   $1   $48,139   $-   $(4,176)  $62,114   $7,337   $113,415 
Rhino preferred distributions   -    -    -    -    -    -    -    (300)   -    (300)
Net loss   -    -    -    -    -    -    -    (699)   (1,150)   (1,849)
Balance June 30, 2019   51,000   $-    18,579,293   $1   $48,139   $ -   $(4,176)  $61,115   $6,187   $111,266 

 

   Preferred stock   Common stock   Additional
Paid In
   Accumulated Other Comprehensive   Treasury   Accumulated Earnings   Non-Controlling     
   Shares   Amt.   Shares   Amt.   Capital   Income (Loss)   Stock   (Deficit)   Interest   Total 
Balance December 31, 2017   51,000   $-    18,079,293   $1   $46,315   $1,442   $(4,176)  $78,670   $24,203   $146,455 
Stock compensation   -    -    500,000    -    1,650    -    -    -    -    1,650 
Rhino units as financing cost   -    -    -    -    -    -    -    -    89    89 
Mark-to-market investment, net of tax   -    -    -    -    -    631    -    -    696    1,327 
Rhino preferred distributions   -    -    -    -    -    -    -    (300)   -    (300)
Net loss   -    -    -    -    -    -    -    (3,228)   (3,196)   (6,424)
Balance March 31, 2018   51,000   $-    18,579,293   $1   $47,965   $2,073   $(4,176)  $75,142   $21,792   $142,797 
Stock compensation   -    -    -    -    -    -    -    -    230    230 
Mark-to-market investment, net of tax   -    -    -    -    -    (1,564)   -    -    (1,710)   (3,274)
Rhino preferred distributions   -    -    -    -    -    -    -    (309)   -    (309)
Net loss   -    -    -    -    -    -    -    (3,325)   (1,327)   (4,652)
Balance June 30,2018   51,000   $-    18,579,293   $1   $47,965   $509   $(4,176)  $71,508   $18,985   $134,792 

 

See notes to unaudited condensed consolidated financial statements.

 

 7 
 

 

ROYAL ENERGY RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Six Months Ended June 30, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(10,111)  $(11,076)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Deferred tax benefit   (2,088)   (1,620)
Depreciation, depletion and amortization   16,484    15,275 
Accretion on asset retirement obligations   654    638 
Amortization of advance royalties   1,032    378 
Amortization of debt issuance costs and warrants   1,314    1,056 
Loss on retirement of advance royalties   225    108 
Loss (gain) on sale/disposal of assets—net   (7,009)   142 
(Gain) on sale of equity securities   (433)   (6,498)
Equity-based compensation   -    1,880 
Changes in assets and liabilities:          
Accounts receivable and receivable-other   (7,279)   4,987 
Inventories   (5,174)   (3,001)
Advance royalties   (1,774)   (843)
Prepaid expenses and other assets   (1,110)   (1,376)
Other long-term assets   648    - 
Accounts payable   11,137    4,129 
Related party payables   6    - 
Accrued expenses and other liabilities   2,397    1,312 
Asset retirement obligations   (76)   (158)
Net cash (used in) provided by operating activities   (1,157)   5,333 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from sale of investment   2,483    11,887 
Additions to property, plant, and equipment   (4,260)   (16,000)
Proceeds from sales of property, plant, and equipment   2,305    4,014 
Net cash provided by (used in) investing activities   528    (99)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment on long-term debt   (1,750)   (10,222)
Proceeds from issuance of other debt   1,772    1,329 
Repayments on other debt   (527)   (134)
Repayment on finance lease   (2)   - 
Payments on debt issuance costs   (727)   (629)
(Deposit)/recovery for worker’s compensation program   323    (5,209)
Preferred distributions paid   (3,210)   (6,039)
Net cash used in financing activities   (4,121)   (20,904)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH   (4,750)   (15,670)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period   6,717    23,159 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—End of period  $1,967   $7,489 
           
Summary Balance Sheets information:          
Cash and cash equivalents  $1,879   $3,837 
Restricted cash- current portion   88    3,652 
Total  $1,967   $7,489 

 

See notes to unaudited condensed consolidated financial statements.

 

 8 
 

 

ROYAL ENERGY RESOURCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION AND ORGANIZATION

 

Basis of presentation and Principles of Consolidation. The accompanying unaudited condensed consolidated financial statements include the accounts of Royal Energy Resources, Inc. (the “Company,” “Royal,”) and its wholly owned subsidiary Rhino GP LLC (“Rhino GP” or “General Partner”), and its majority owned subsidiary Rhino Resource Partners LP (“Rhino” or the “Partnership”) (OTCQB:RHNO), a Delaware limited partnership. Rhino GP is the general partner of Rhino. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Cash, Cash Equivalents and Restricted Cash. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

 

Unaudited Interim Financial Information—The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The condensed consolidated balance sheet as of June 30, 2019, condensed consolidated statements of operations, condensed consolidated statements of comprehensive income (loss), the condensed consolidated statements of cash flows, and condensed consolidated statements of stockholders’ equity for the six months ended June 30, 2019 and 2018 include all adjustments that the Company considers necessary for a fair presentation of the financial position, operating results, cash flows and stockholders’ equity for the periods presented. The condensed consolidated balance sheet as of December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). The Company filed its Annual Report on Form 10-K for the year ended December 31, 2018 with the Securities and Exchange Commission (“SEC”), which included all information and notes necessary for such presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year or any future period. These unaudited interim financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.

 

Organization and nature of business

 

Royal is a Delaware corporation which was incorporated on March 22, 1999, under the name Webmarketing, Inc. On July 7, 2004, the Company revived its charter and changed its name to World Marketing, Inc. In December 2007 the Company changed its name to Royal Energy Resources, Inc. Starting in 2007, the Company pursued gold, silver, copper and rare earth metal mining concessions in Romania and mining leases in the United States. Commencing in January 2015, the Company began a series of transactions to sell all of its existing assets, undergo a change in ownership control and management and repurpose itself as a North American energy recovery company, planning to purchase a group of synergistic, long-lived energy assets, but taking advantage of favorable valuations for mergers and acquisitions in the current energy markets. On April 13, 2015, the Company executed an agreement for the first acquisition in furtherance of its change in principal operations.

 

Through a series of transactions completed in the first quarter of 2016, the Company acquired a majority ownership and control of the Partnership and 100% ownership of the Partnership’s general partner.

 

Rhino was formed on April 19, 2010 to acquire Rhino Energy LLC (the “Operating Company”). The Operating Company and its wholly owned subsidiaries produce and market coal from surface and underground mines in Kentucky, Ohio, West Virginia, and Utah. The majority of Rhino’s sales are made to domestic utilities and other coal-related organizations in the United States.

 

 9 
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL

 

Revenue Recognition. The Company follows Accounting Standards Codification (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), in recognizing revenue. Most of the revenue is generated under coal sales contracts with electric utilities, coal brokers, domestic and non-U.S. steel producers, industrial companies or other coal-related organizations. Revenue is recognized and recorded when shipment or delivery to the customer has occurred, prices are fixed or determinable, the title or risk of loss has passed in accordance with the terms of the sales agreement and collectability is reasonably assured. Under the typical terms of these agreements, risk of loss transfers to the customers at the mine or port, when the coal is loaded on the rail, barge, truck or other transportation source that delivers coal to its destination. Advance payments received are deferred and recognized in revenue as coal is shipped and title passes.

 

Freight and handling costs paid directly to third-party carriers and invoiced separately to coal customers are recorded as freight and handling costs and freight and handling revenues, respectively. Freight and handling costs billed to customers as part of the contractual per ton revenue of customer contracts is included in coal sales revenue.

 

Other revenues generally consist of coal royalty revenues, coal handling and processing revenues, rebates and rental income. With respect to other revenues recognized in situations unrelated to the shipment of coal, the Partnership carefully reviews the facts and circumstances of each transaction and does not recognize revenue until the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.

 

Debt Issuance Costs. Debt issuance costs reflect fees incurred to obtain financing and are amortized (included in interest expense) using the straight line method which approximates the effective interest method over the life of the related debt. Debt issuance costs are presented as a direct deduction from long-term debt as of June 30, 2019 and December 31, 2018. The effective interest rate for the six months ended June 30, 2019 and 2018 was 22% and 20%, respectively.

 

Recently Issued Accounting Standards. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that lessees recognize all leases (other than leases with a term of twelve months or less) on the balance sheet as lease liabilities, based upon the present value of the lease payments, with corresponding right of use assets. ASU 2016-02 also makes targeted changes to other aspects of current guidance, including identifying a lease and lease classification criteria as well as the lessor accounting model, including guidance on separating components of a contract and consideration in the contract. In July 2018, the FASB issued additional authoritative guidance providing companies with an optional prospective transition method to apply the provisions of this guidance. The Company adopted ASU 2016-02 in the first quarter of 2019 and elected the transition method to apply the standard prospectively and also elected the “package of practical expedients” within the standard which permits the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs. Additionally, the Company made an election to not separate lease and non-lease components for all leases, and will not use hindsight. Finally, the Company will continue its current policy for accounting for land easements as executory contracts. The standard had a material impact on our unaudited condensed consolidated balance sheets, but did not have an impact on the unaudited condensed consolidated statements of operations. Please refer to Note 15 for disclosures related to the new standard.

 

Other Comprehensive Income. In accordance with ASU 2016-01, which was effective for fiscal years that began after December 15, 2017, the Company ceased recording fair market adjustments for the shares it owned in Mammoth Energy Services, Inc. (NASDAQ: TUSK) (“Mammoth Inc.”) in Other Comprehensive Income during the fourth quarter of 2018; however, the Company did not push back this change to previous 2018 quarters as not deemed material.

 

Segment Information. The Company has to identify the level at which its most senior executive decision-maker makes regular reviews of sales and operating income. These levels are defined as segments. The Company’s most senior executive decision-maker is the company’s Chief Executive Officer (“CEO”). The regular internal reporting of income to the CEO, which fulfills the criteria to constitute a segment, is done for the coal group as a whole, and therefore the total coal group is the Company’s only primary segment.

 

 10 
 

 

A reconciliation of the consolidated assets to the total of the coal segment assets is provided below as of June 30, 2019 and December 31, 2018:

 

Segment assets (1)  June 30, 2019   December 31, 2018 
   (in thousands) 
Primary  $233,134   $213,504 
Corporate, unallocated   35,118    42,455 
Total assets  $268,252   $255,959 

 

(1) Segment assets include accounts receivable, due from affiliates, prepaid and other current assets, inventory, intangible assets and property, plant and equipment — net; the remaining assets are unallocated corporate assets.

 

3. RECEIVABLE - OTHER

 

On June 28, 2019, the Company entered into a settlement agreement with a third party which allowed the third-party to maintain certain pipelines pursuant to designated permits at certain operations. The agreement required the third party to pay the Company $7.0 million in consideration. The Company received $4.2 million on July 3, 2019 with the balance of $2.8 million due on or before February 29, 2020. At June 30, 2019, the $7.0 million receivable was recorded in receivable – other on the Company’s unaudited condensed consolidated balance sheets and a gain of $6.9 million was recorded on the Company’s unaudited condensed consolidated statements of operations.

 

4. PROPERTY

 

Property, plant and equipment, including coal properties and mine development and construction costs, as of June 30, 2019 and December 31, 2018 are summarized by major classification as follows:

 

   Useful Lives  June 30, 2019   December 31, 2018 
       (in thousands)      
Land and land improvements     $7,046   $9,406 
Mining and other equipment and related facilities  2-20 Years   208,819    204,605 
Mine development costs  1-15 Years   7,627    6,714 
Coal properties  1-15 Years   31,329    31,396 
Construction work in process      3,167    3,199 
Total      257,988    255,320 
Less accumulated depreciation, depletion and amortization      (91,643)   (75,206)
Net     $166,345   $180,114 

 

Depreciation expense for mining and other equipment and related facilities, depletion expense for coal properties, amortization expense for mine development costs, and amortization expense for intangible assets for the six and three months ended June 30, 2019 and 2018 were as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
   (in thousands)   (in thousands) 
Depreciation expense-mining and other equipment and related facilities  $7,805   $7,578   $15,888   $14,851 
Depletion expense for coal properties   186    111    326    336 
Amortization of mine development costs   124    50    241    88 
Amortization of other assets   15    -    29    - 
Total depreciation, depletion and amortization  $8,130   $7,739   $16,484   $15,275 

 

 11 
 

 

Per agreements dated April 24, 2019, the Company sold its coal royalty interest in a West Virginia property to a third party for $850,000 and recognized a gain during the second quarter of 2019 of approximately $850,000.

 

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities as of June 30, 2019 and December 31, 2018 consisted of the following:

 

   June 30, 2019   December 31, 2018 
   (in thousands) 
Payroll, bonus and vacation expense  $2,595   $2,151 
Non income taxes   3,156    2,317 
Royalty expenses   2,230    1,669 
Accrued interest   70    152 
Health claims   857    868 
Workers’ compensation & pneumoconiosis   1,900    1,900 
Income taxes (Note 10)   134    134 
Other   1,388    1,412 
Total  $12,330   $10,603 

 

6. NOTES PAYABLE – RELATED PARTY

 

Related party notes payable consist of the following at June 30, 2019 and December 31, 2018.

 

   June 30, 2019   December 31, 2018 
   (in thousands) 
Demand note payable dated March 6, 2015; owed E-Starts Money Co., a related party; interest at 6% per annum  $204   $204 
Demand note payable dated June 11, 2015; owed E-Starts Money Co., a related party; non-interest bearing   200    200 
Demand note payable dated September 22, 2016; owed E-Starts Co., a related party; non-interest bearing   50    50 
Demand note payable dated December 8, 2016; owed to E-Starts Money Co., a related party; non-interest bearing   50    50 
Demand note payable dated April 26, 2017; owed to E-Starts Money Co., a related party; non-interest bearing   10    10 
Total related party notes payable  $514   $514 

 

The related party notes payable have accrued interest of $52 thousand at June 30, 2019 and $46 thousand at December 31, 2018. The Company expensed $6 and $3 thousand in interest related to the related party loan in the six and three months, respectively, ended June 30 in both 2019 and 2018.

 

7. DEBT

 

Debt as of June 30, 2019 and December 31, 2018 consisted of the following:

 

   June 30, 2019   December 31, 2018 
   (in thousands) 
Note payable- Financing Agreement  $28,298   $29,048 
Note payable- other debt   1,772    522 
Note payable to Cedarview   1,500    2,500 
Finance lease obligation   7    - 
Net unamortized debt issuance costs   (3,749)   (4,121)
Unamortized original issue discount   (632)   (843)
Total   27,196    27,106 
Current portion   (6,532)   (3,174)
Long-term debt  $20,664   $23,932 

 

 12 
 

 

Financing Agreement

 

On December 27, 2017, the Operating Company, a wholly-owned subsidiary of the Partnership, certain of the Operating Company’s subsidiaries identified as Borrowers (together with the Operating Company, the “Borrowers”), the Partnership and certain other Operating Company subsidiaries identified as Guarantors (together with the Partnership, the “Guarantors”), entered into a Financing Agreement (the “Financing Agreement”) with Cortland Capital Market Services LLC, as Collateral Agent and Administrative agent, CB Agent Services LLC, as Origination Agent and the parties identified as Lenders therein (the “Lenders”), pursuant to which the Lenders agreed to provide the Borrowers with a multi-draw term loan in the original aggregate principal amount of $80 million, subject to the terms and conditions set forth in the Financing Agreement. The total principal amount is divided into a $40 million commitment, the conditions of which were satisfied at the execution of the Financing Agreement (the “Effective Date Term Loan Commitment”) and an additional $35 million commitment that is contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement (“Delayed Draw Term Loan Commitment”). Loans made pursuant to the Financing Agreement are secured by substantially all of the Borrowers’ and Guarantors’ assets. The Financing Agreement terminates on December 27, 2020.

 

Loans made pursuant to the Financing Agreement are, at the Operating Company’s option, either “Reference Rate Loans” or “LIBOR Rate Loans.” Reference Rate Loans bear interest at the greatest of (a) 4.25% per annum, (b) the Federal Funds Rate plus 0.50% per annum, (c) the LIBOR Rate (calculated on a one-month basis) plus 1.00% per annum or (d) the Prime Rate (as published in the Wall Street Journal) or if no such rate is published, the interest rate published by the Federal Reserve Board as the “bank prime loan” rate or similar rate quoted therein, in each case, plus an applicable margin of 9.00% per annum (or 12.00% per annum if the Operating Company has elected to capitalize an interest payment pursuant to the PIK Option, as described below). LIBOR Rate Loans bear interest at the greater of (x) the LIBOR for such interest period divided by 100% minus the maximum percentage prescribed by the Federal Reserve for determining the reserve requirements in effect with respect to eurocurrency liabilities for any Lender, if any, and (y) 1.00%, in each case, plus 10.00% per annum (or 13.00% per annum if the Borrowers have elected to capitalize an interest payment pursuant to the PIK Option). Interest payments are due on a monthly basis for Reference Rate Loans and one-, two- or three-month periods, at the Operating Company’s option, for LIBOR Rate Loans. If there is no event of default occurring or continuing, the Operating Company may elect to defer payment on interest accruing at 6.00% per annum by capitalizing and adding such interest payment to the principal amount of the applicable term loan (the “PIK Option”).

 

Commencing December 31, 2018, the principal for each loan made under the Financing Agreement will be payable on a quarterly basis in an amount equal to $375,000 per quarter, with all remaining unpaid principal and accrued and unpaid interest due on December 27, 2020. In addition, the Borrowers must make certain prepayments over the term of any loans outstanding, including: (i) the payment of 25% of Excess Cash Flow (as that term is defined in the Financing Agreement) of the Partnership and its subsidiaries for each fiscal year, commencing with respect to the year ending December 31, 2019, (ii) subject to certain exceptions, the payment of 100% of the net cash proceeds from the dispositions of certain assets, the incurrence of certain indebtedness or receipts of cash outside of the ordinary course of business, and (iii) the payment of the excess of the outstanding principal amount of term loans outstanding over the amount of the Collateral Coverage Amount (as that term is defined in the Financing Agreement). In addition, the Lenders are entitled to (i) certain fees, including 1.50% per annum of the unused Delayed Draw Term Loan Commitment for as long as such commitment exists, (ii) for the 12-month period following the execution of the Financing Agreement, a make-whole amount equal to the interest and unused Delayed Draw Term Loan Commitment fees that would have been payable but for the occurrence of certain events, including among others, bankruptcy proceedings or the termination of the Financing Agreement by the Operating Company, and (iii) audit and collateral monitoring fees and origination and exit fees.

 

 13 
 

 

The Financing Agreement requires the Borrowers and Guarantor to comply with several affirmative covenants at any time loans are outstanding, including, among others: (i) the requirement to deliver monthly, quarterly and annual financial statements, (ii) the requirement to periodically deliver certificates indicating, among other things, (a) compliance with terms of the Financing Agreement and ancillary loan documents, (b) inventory, accounts payable, sales and production numbers, (c) the calculation of the Collateral Coverage Amount (as that term is defined in the Financing Agreement), (d) projections for the Partnership and its subsidiaries and (e) coal reserve amounts; (iii) the requirement to notify the Administrative Agent of certain events, including events of default under the Financing Agreement, dispositions, entry into material contracts, (iv) the requirement to maintain insurance, obtain permits, and comply with environmental and reclamation laws (v) the requirement to sell up to $5.0 million of shares in Mammoth Energy Services Inc. and use the net proceeds therefrom to prepay outstanding term loans, which was completed during the first half of 2018 and (vi) establish and maintain cash management services and establish a cash management account and deliver a control agreement with respect to such account to the Collateral Agent. The Financing Agreement also contains negative covenants that restrict the Borrowers and Guarantors ability to, among other things: (i) incur liens or additional indebtedness or make investments or restricted payments, (ii) liquidate or merge with another entity, or dispose of assets, (iii) change the nature of their respective businesses; (iv) make capital expenditures in excess, or, with respect to maintenance capital expenditures, lower than, specified amounts, (v) incur restrictions on the payment of dividends, (vi) prepay or modify the terms of other indebtedness, (vii) permit the Collateral Coverage Amount to be less than the outstanding principal amount of the loans outstanding under the Financing Agreement or (viii) permit the trailing six month Fixed Charge Coverage Ratio of the Partnership and its subsidiaries to be less than 1.20 to 1.00 commencing with the six-month period ending June 30, 2018.

 

The Financing Agreement contains customary events of default, following which the Collateral Agent may, at the request of lenders, terminate or reduce all commitments and accelerate the maturity of all outstanding loans to become due and payable immediately together with accrued and unpaid interest thereon and exercise any such other rights as specified under the Financing Agreement and ancillary loan documents. The Partnership entered into a warrant agreement with certain parties that are also parties to the Financing Agreement discussed above.

 

On April 17, 2018, Rhino amended its Financing Agreement to allow for certain activities including a sale leaseback of certain pieces of equipment, the extension of the due date for lease consents required under the Financing Agreement to June 30, 2018 and the distribution to holders of the Series A preferred units of $6.0 million (accrued in the consolidated financial statements at December 31, 2017). Additionally, the amendments provided that the Partnership could sell additional shares of Mammoth Energy Services Inc. stock and retain 50% of the proceeds with the other 50% used to reduce debt. The Partnership reduced its outstanding debt by $3.4 million with proceeds from the sale of Mammoth Energy Services Inc. stock in the second quarter of 2018.

 

On July 27, 2018, the Partnership entered into a consent with its Lenders related to the Financing Agreement. The consent included the lenders agreement to make a $5 million loan from the Delayed Draw Term Loan Commitment, which was repaid in full on October 26, 2018 pursuant to the terms of the consent. The consent also included a waiver of the requirements relating to the use of proceeds of any sale of the shares of Mammoth Inc. set forth in the consent to the Financing Agreement, dated as of April 17, 2018 and also waived any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge Coverage Ratio for the six months ended June 30, 2018.

 

On November 8, 2018, the Partnership entered into a consent with its Lenders related to the Financing Agreement. The consent includes the lenders agreement to waive any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge Coverage Ratio for the six months ended September 30, 2018.

 

On December 20, 2018, the Partnership, entered into a limited waiver and consent (the “Waiver”) to the Financing Agreement. The Waiver relates to the sales by the Partnership of certain real property in Western Colorado, the net proceeds of which are required to be used to reduce the Partnership’s debt under the Financing Agreement. As of the date of the Waiver, the Partnership had sold 9 individual lots in smaller transactions. On December 31, 2018, the Partnership used the sale proceeds of approximately $379,000 to reduce the debt. Rather than transmitting net proceeds with respect to each individual transaction, the Partnership and Lenders agreed in principle to delay repayment until an aggregate payment could be made at the end of 2018. The Waiver (i) contains a ratification by the Lenders of the sale of the individual lots to date and waives the associated technical defaults under the Financing Agreement for not making immediate payments of net proceeds therefrom, (ii) permits the sale of certain specified additional lots and (iii) subject to Lender consent, permits the sale of other lots on a going forward basis. The net proceeds of future sales will be held by the Partnership until a later date to be determined by the Lenders.

 

 14 
 

 

On February 13, 2019, the Partnership entered into a second amendment (the “Amendment”) to the Financing Agreement. The Amendment provided the Lender’s consent for the Partnership to pay a one-time cash distribution on February 14, 2019 to the Series A Preferred Unitholders not to exceed approximately $3.2 million. The Amendment allowed the Partnership to sell its remaining shares of Mammoth Energy Services, Inc. and utilize the proceeds for payment of the one-time cash distribution to the Series A Preferred Unitholders and waived the requirement to use such proceeds to prepay the outstanding principal amount outstanding under the Financing Agreement.

 

The Amendment also waived any Event of Default that has or would otherwise arise under Section 9.01(c) of the Financing Agreement solely by reason of the Borrowers failing to comply with the Fixed Charge Coverage Ratio covenant in Section 7.03(b) of the Financing Agreement for the fiscal quarter ended December 31, 2018. The Amendment includes an amendment fee of approximately $0.6 million payable by the Partnership on May 13, 2019 and an exit fee equal to 1% of the principal amount of the term loans made under the Financing Agreement that is payable on the earliest of (w) the final maturity date of the Financing Agreement, (x) the termination date of the Financing Agreement, (y) the acceleration of the obligations under the Financing Agreement for any reason, including, without limitation, acceleration in accordance with Section 9.01 of the Financing Agreement, including as a result of the commencement of an insolvency proceeding and (z) the date of any refinancing of the term loan under the Financing Agreement. The Amendment amended the definition of the Make-Whole Amount under the Financing Agreement to extend the date of the Make-Whole Amount period to December 31, 2019.

 

On May 8, 2019, the Partnership entered into a third amendment (“Third Amendment”) to the Financing Agreement. The Third Amendment includes the lenders agreement to waive any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge Coverage Ratio for the six months ended March 31, 2019. The Third Amendment increases the original exit fee of 3.0% to 6.0%. The original exit fee of 3% was included in the Financing Agreement at the execution date and the increase of the total exit fee to 6% was included as part of the amendment dated February 13, 2019 discussed above and this Third Amendment. The exit fee is applied to the principal amount of the loans made under the Financing Agreement that is payable on the earliest of (a) the final maturity date, (b) the termination date of the Financing agreement for any reason, (c) the acceleration of the obligations in the Financing Agreement for any reason and (d) the date of any refinancing of the term loan under the Financing Agreement.

 

At June 30, 2019, the Company had $28.3 million of borrowings outstanding at a variable interest rate of Libor plus 10.00% (12.41%).

 

Cedarview

 

On June 12, 2017, the Company entered into a Secured Promissory Note dated May 31, 2017 with Cedarview Opportunities Master Fund, L.P. (the “Lender”), under which the Company borrowed $2,500,000 from the Lender. The loan bears non-default interest at the rate of 14%, and default interest at the rate of 17% per annum. The Company and the Lender simultaneously entered into a Pledge and Security Agreement dated May 31, 2017, under which the Company pledged 5,000,000 Common Units in the Partnership as collateral for the loan. The loan was originally payable through quarterly payments of interest only until May 31, 2019, at which time all principal and interest was due and payable. On March 5, 2019, the Company modified the terms of the Cedarview note to modify the maturity date, with $1.0 million of the note balance due by May 31, 2019 and the remaining balance of $1.5 million and associated accrued interest due May 31, 2020. The Company paid a $45,000 loan extension fee to execute this agreement. All other terms of the note remain the same.

 

 15 
 

 

8. ASSET RETIREMENT OBLIGATIONS

 

The changes in asset retirement obligations for the six months ended June 30, 2019 and the year ended December 31, 2018 are as follows:

 

   Six Months Ended
June 30, 2019
   Year Ended
December 31, 2018
 
    (in thousands)      
Balance at beginning of period, including current portion  $15,589   $15,994 
Accretion expense   654    1,277 
Adjustments to the liability from annual recosting          
and other   -    (1,383)
Liabilities settled   (76)   (299)
Balance at end of period   16,167    15,589 
Less current portion   (465)   (465)
Non-current portion  $15,702   $15,124 

 

9. STOCKHOLDERS’ EQUITY

 

Royal Activity

 

At June 30, 2019, the authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, par value $0.00001 per share, and 5,000,000 shares of Preferred Stock, par value $0.00001 per share. The Company did not issue or cancel any shares of capital stock during the six months ended June 30, 2019.

 

Rhino Activity

 

During the first quarter of 2019, Rhino paid $3.2 million to the holders of Series A preferred units for distributions earned for the year ended December 31, 2018. During the first quarter of 2018, Rhino paid the holders of Series A preferred units $6.0 million in distributions earned for the year ended December 31, 2017. Rhino accrued approximately $0.6 million for distributions to holders of the Series A preferred units for each of the six months ended June 30, 2019 and 2018.

 

10. INCOME TAXES

 

See Note 11 for discussion of income tax contingencies impacting the Company.

 

The Company’s effective tax rates for the six months ended June 30, 2019 and 2018 were 17% and 13%, respectively.

 

The Company performed a reforecast of expected 2019 operating results which caused a change in the annual effective tax rate during the second quarter which caused a decline from the tax rate used during the first quarter of 2019.

 

11. COMMITMENTS AND CONTINGENCIES

 

Coal Sales Contracts and Contingencies—As of June 30, 2019, the Company had commitments under sales contracts to deliver annually scheduled base quantities of coal as follows:

 

Year  Tons (in thousands)   Number of customers 
2019 Q3-Q4   2,192    18 
2020   2,180    7 
2021   920    3 

 

Some of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.

 

Purchased Coal Expenses—The Company incurs purchased coal expense from time to time related to coal purchase contracts. In addition, the Company incurs expense from time to time related to coal purchased on the over-the-counter market (“OTC”). The Company incurred no purchase coal expense from coal purchase contracts or expense from OTC purchases for the three and six months ended June 30, 2019 and 2018.

 

 16 
 

 

Leases—The Company leases various mining, transportation and other equipment under operating leases. Please read Note 15 for additional discussion of leases. The Company also leases coal reserves under agreements that call for royalties to be paid as the coal is mined. Lease and royalty expense for the three and six months ended June 30, 2019 and 2018 are included in Cost of operations in the Company’s unaudited condensed consolidated statements of operations was as follows:

 

   Three Months Ended June 30,   Six months ended June 30, 
   2019   2018   2019   2018 
   (in thousands)         
Lease expense  $1,302   $976   $2,556   $1,406 
Royalty expense  $4,289   $3,467   $8,182   $7,111 

 

Guarantees/Indemnifications and Financial Instruments with Off-Balance Sheet Risk— In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. No liabilities related to these arrangements are reflected in the unaudited condensed consolidated balance sheets. The Company had no outstanding letters of credit at June 30, 2019. The Company had outstanding surety bonds with third parties of $39.2 million as of June 30, 2019 to secure reclamation and other performance commitments, which are secured by $3.0 million in cash collateral on deposit with the Company’s surety bond provider. Of the $39.2 million, approximately $0.4 million relates to surety bonds for Deane Mining LLC, which have not been transferred or replaced by the buyer of Deane Mining LLC as was agreed to by the parties as part of the transaction. The Company can provide no assurances that a surety company will underwrite the surety bonds of the purchaser of Deane Mining LLC, nor is the Company aware of the actual amount of reclamation at any given time. Further, if there was a claim under these surety bonds prior to the transfer or replacement of such bonds by the buyer of Deane Mining LLC, the Company may be responsible to the surety company for any amounts it pays in respect of such claim. While the buyer is required to indemnify the Company for damages, including reclamation liabilities, pursuant the agreements governing the sales of this entity, the Company may not be successful in obtaining any indemnity or any amounts received may be inadequate. Of the $39.2 million in outstanding surety bonds, approximately $3.4 million related to surety bonds for Sands Hill Mining LLC, which are to be replaced by a third party pursuant to an agreement dated July 9, 2019 (see Note 17. Subsequent Events, for additional discussion).

 

Income Tax Contingency

 

The Company has filed federal but not all of its required state income tax returns for 2014, 2015, 2016 and 2017, and failed to timely file an application for a change in tax year when it changed its reporting year for external reporting purposes from August 31st to December 31st in 2015. In March 2019, the Company received correspondence from the Internal Revenue Service (“IRS”) that it could not process its 2017 federal income tax filing due to the use of an improper year–end reporting period. The Company has begun communications with the IRS to resolve this matter. In addition, management and third-party specialists have identified certain transactions which are highly complex from an income tax perspective and have not completed the necessary analysis to bring these matters to conclusion. In preparing the financial statements for the six months ended June 30, 2019 and as of and for the year ended December 31, 2018, management has used its best estimates to compute the Company’s provision for federal and state income taxes based on available information; however, the resolution of certain of the complex tax matters, the ultimate completion of returns for all open tax years and tax positions taken could materially impact management’s estimates. Therefore, the ultimate tax obligations could be materially different from that reflected in the accompanying condensed consolidated balance sheets at June 30, 2019 and December 31, 2018 once these issues are resolved.

 

 17 
 

 

12. MAJOR CUSTOMERS

 

The Company had sales or receivables from the following major customers that in each period equaled or exceeded 10% of revenues:

 

   June 30, 2019
Receivable Balance
  

December 31, 2018
Receivable

Balance

   Six months ended
June 30, 2019 Sales
   Six months ended
June 30, 2018 Sales
 
   (in thousands) 
Javelin Global  $3,816   $4,347   $24,527   $16,554 
Integrity Coal   -    937    3,939    11,364 
Dominion Energy   683    -    3,826    14,013 

 

13. REVENUE

 

The Company adopted ASC Topic 606 on January 1, 2018, using the modified retrospective method. The adoption of Topic 606 has no impact on revenue amounts recorded on the Company’s financial statements. The disclosures required by ASC Topic 606, as applicable, are presented below. The majority of the Company’s revenues are generated under coal sales contracts. Coal sales accounted for approximately 99.0% of the Company’s total revenues for the three and six months ended June 30, 2019 and 2018. Other revenues generally consist of coal royalty revenues, coal handling and processing revenues, rebates and rental income, which accounted for approximately 1.0% of the Company’s total revenues for the three and six months ended June 30, 2019 and 2018.

 

The majority of the Company’s coal sales contracts have a single performance obligation (shipment or delivery of coal according to terms of the sales agreement) and as such, the Company is not required to allocate the contract’s transaction price to multiple performance obligations. All of the Company’s coal sales revenue is recognized when shipment or delivery to the customer has occurred, the title or risk of loss has passed in accordance with the terms of the coal sales agreement, prices are fixed or determinable and collectability is reasonably assured. With respect to other revenues recognized in situations unrelated to the shipment of coal, the Company carefully reviews the facts and circumstances of each transaction and does not recognize revenue until the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured.

 

The following table disaggregates revenue by type for the six and three months ended June 30, 2019 and 2018:

 

   Three months ended June 30,   Six months ended June 30, 
   2019   2018   2019   2018 
   (in thousands)         
Coal sales:                    
Steam coal  $39,655   $39,368   $80,820   $74,388 
Met coal   25,437    14,877    42,135    34,129 
Other revenue   497    625    1,390    1,206 
Total  $65,589   $54,870    124,345    109,723 

 

14. FAIR VALUE MEASUREMENTS

 

The Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions of what market participants would use.

 

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The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below:

 

Level One - Quoted prices for identical instruments in active markets.

 

Level Two - The fair value of the assets and liabilities included in Level 2 are based on standard industry income approach models that use significant observable inputs.

 

Level Three - Unobservable inputs significant to the fair value measurement supported by little or no market activity.

 

In those cases when the inputs used to measure fair value meet the definition of more than one level of the fair value hierarchy, the lowest level input that is significant to the fair value measurement in its totality determines the applicable level in the fair value hierarchy.

 

The book values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values because of the immediate short-term maturity of these financial instruments. The fair value of the Company’s Financing Agreement was determined based upon a market approach and approximates the carrying value at June 30, 2019. The fair value of the Company’s Financing Agreement is a Level 2 measurement.

 

As of December 31, 2018, the Company had a recurring fair value measurement relating to its investment in Mammoth Inc. As discussed in Note 7, the Company sold the balance of its Mammoth Inc. shares (104,100 shares) during the first quarter of 2019. The Company’s shares of Mammoth Inc. were classified as an investment on the Company’s unaudited condensed consolidated balance sheets as of December 31, 2018. Based on the availability of a quoted price, the recurring fair value measurement of the Mammoth Inc. shares was a Level 1 measurement.

 

15. LEASES

 

The Company leases various mining, transportation and other equipment under operating and finance leases. The leases have remaining lease terms of 1 year to 9 years, some of which include options to extend the leases for up to 15 years. The Company determines if an arrangement is a lease at inception. Some of the leases include both lease and non-lease components which are accounted for as a single lease component as the Company has elected the practical expedient to combine these components for all leases. Operating leases are included in operating lease right-of-use (“ROU”) assets, current liabilities and non-current liabilities. Finance leases are included in plant, property and equipment, current liabilities and long-term liabilities.

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments related to the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company utilizes the implicit rate in the lease, if determinable, at the commencement date of the lease to determine the present value of the lease payments. If the implicit rate is not determinable, the Company utilizes its incremental borrowing rate at the commencement date of the lease to determine the present value of the lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

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Supplemental information related to leases was as follows:

 

   Six months
ended
June 30, 2019
 
    (in thousands) 
Operating leases     
Operating lease right-of use assets  $12,759 
      
Operating lease liabilities-current  $3,211 
Operating lease liabilities-long-term   9,181 
Total operating lease liabilities  $12,392 
      
Finance leases     
Property. Plant and Equipment, gross  $10 
Accumulated depreciation   (2)
Total Property, Plant and Equipment, net  $8 
      
Finance leases - current portion  $4 
Finance leases - noncurrent portion   3 
Total finance lease obligation  $7 

 

Weighted Average Discount Rates and Lease Terms     
    Six months
ended
June 30, 2019
 
Weighted Average Discount Rate     
      
Operating leases   7.0%
Finance leases   7.0%
      
Weighted Average Lease Term     
Operating leases    5.45 years 
Finance leases   2.25 years 

 

Supplemental cash flow information related to leases was as follows:

 

   Six months
ended
June 30, 2019
 
    (in thousands) 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows for operating leases  $1,950 
Operating cash flows for finance leases  $- 
Financing cash flows for finance leases  $2 
      
Right-of-use assets obtained in exchange for lease obligations:     
Operating leases  $13,896 
Finance leases  $10 

 

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Maturities of lease liabilities are as follows:

 

   Operating leases   Finance leases 
  (in thousands) 
Year ending December 31,    
2019(excluding the six months ended June 30, 2019)  $2,011   $3 
2020   3,444    4 
2021   2,561    - 
2022   1,031    - 
2023   912    - 
Thereafter   2,878    - 
Total lease payments   12,837    7 
Less imputed interest   445    - 
Total  $12,392   $7 

 

The components of lease expense were as follows:

 

   Three months
ended
June 30, 2019
   Six months
ended
June 30, 2019
 
   (in thousands)      
           
Operating lease cost  $983   $1,966 
           
Finance lease cost:          
Amortization of right-of-use assets  $1   $2 
Interest on lease liabilities   -    - 
Total finance lease cost  $1   $2 

 

16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

Cash payments for interest were $2.4 million and $3.1 million for the six months ended June 30, 2019 and 2018, respectively.

 

The unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2019 and 2018 excludes approximately $2.3 million and $1.6 million, respectively, of property, plant and equipment additions which are recorded in accounts payable.

 

17. SUBSEQUENT EVENTS

 

On July 9, 2019, the Company entered into an agreement with a third party for the replacement of the Company’s existing surety bond obligations with respect to Sands Hill Mining LLC. The Company agreed to pay the third party $2.0 million for the Company’s release of the surety bond obligations. At the time of closing, the third party delivered to the Company confirmation from its surety underwriter evidencing the release and removal of the Company, its affiliates and guarantors, from the surety bond obligations and all related obligations under the Company’s bonding agreements related to Sands Hill Mining LLC, which includes a release of all applicable collateral for the surety bond obligations. Further, such confirmation from the surety underwriter was specifically provided for their acceptance of the third party as a replacement obligor.

 

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ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless the context clearly indicates otherwise, references in this report to “we,” “our,” “us” or similar terms refer to Royal Energy Resources, Inc., Rhino GP LLC, Rhino Resource Partners LP and its subsidiaries, in total. References to “Rhino” or “the Partnership” refer to Rhino Resource Partners LP. References to “general partner” refer to Rhino GP LLC, the general partner of Rhino Resource Partners LP. The following discussion of the historical financial condition and results of operations should be read in conjunction with the historical audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 and the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in such Annual Report on Form 10-K.

 

Overview

 

Current management acquired control of the Company in March 2015, with the goal of using the Company as a vehicle to acquire undervalued natural resource assets. The Company has raised approximately $8.5 million through the sale of shares of common stock in private placements, $6.4 million through issuance of notes payable and is currently evaluating a number of possible acquisitions of operating coal mines and non-operating coal assets. Despite recent distress in the coal industry, industry experts still predict that coal will supply a significant percentage of the nation’s energy needs for the foreseeable future, and thus overall demand for coal will remain significant. Also, demand for metallurgical coal has improved and metallurgical coal prices seem likely to stay in a range that will allow lower cost North American coal mines to produce profitably. Management believes there are a number of attractive acquisition candidates in the coal industry which can be operated profitably at current prices and under the current regulatory environment.

 

Overview after Rhino Acquisition

 

Through a series of transactions completed in the first quarter of 2016, the Company acquired a majority ownership and control of Rhino and 100% ownership of its general partner.

 

We are a diversified coal producing company formed in Delaware that is focused on coal and energy related assets and activities. We produce, process and sell high quality coal of various steam and metallurgical grades. We market our steam coal primarily to electric utility companies as fuel for their steam powered generators. Customers for our metallurgical coal are primarily steel and coke producers who use our coal to produce coke, which is used as a raw material in the steel manufacturing process.

 

As of December 31, 2018, we controlled an estimated 268.5 million tons of proven and probable coal reserves, consisting of an estimated 214.0 million tons of steam coal and an estimated 54.5 million tons of metallurgical coal. In addition, as of December 31, 2018, we controlled an estimated 164.1 million tons of non-reserve coal deposits.

 

Our principal business strategy is to safely, efficiently and profitably produce and sell both steam and metallurgical coal from our diverse asset base. In addition, we continue to seek opportunities to expand and potentially diversify our operations through strategic acquisitions, including the acquisition of long-term, cash generating natural resource assets. We believe that such assets will allow us to grow our cash and enhance stability of our cash flow.

 

For the three and six months ended June 30, 2019, we generated revenues of approximately $65.6 million and $124.3 million, respectively, and a net loss from operations of approximately $1.8 million and $10.1 million. For the three months ended June 30, 2019, we produced approximately 1.2 million tons of coal and sold approximately 1.1 million tons of coal, of which approximately 85% was sold pursuant to long-term supply contracts. For the three months ended June 30, 2019, we produced approximately 2.3 million tons of coal and sold approximately 2.2 million tons of coal, of which approximately 87% was sold pursuant to long-term supply contracts.

 

Current Liquidity and Outlook

 

As of June 30, 2019, our available liquidity was $1.9 million. We also have a delayed draw term loan commitment in the amount of $35 million contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement discussed below.

 

Royal is limited in obtaining funds from Rhino pursuant to the Financing Agreement to $1 million per year.

 

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We continue to take measures, including cost and productivity improvements, to enhance and preserve our liquidity so that we can fund our ongoing operations and necessary capital expenditures and meet our financial commitments and debt service obligations.

 

Recent Developments - Rhino

 

Settlement Agreement

 

On June 28, 2019, we entered into a settlement agreement with a third-party which allows the third-party to maintain certain pipelines pursuant to designated permits at certain operations. The agreement requires the third-party to pay us $7.0 million in consideration. We received $4.2 million on July 3, 2019 with the balance of $2.8 million due on or before February 29, 2020. At June 30, 2019, the $7.0 million receivable was recorded in Receivable –Other on our unaudited condensed consolidated balance sheets and a gain of $6.9 million was recorded on our unaudited condensed consolidated statements of operations.

 

Financing Agreement

 

On May 8, 2019, we entered into a third amendment (“Third Amendment”) to the Financing Agreement. The Third Amendment includes the lenders agreement to waive any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge Coverage Ratio for the six months ended March 31, 2019. The Third Amendment increases the original exit fee of 3.0% to 6.0%. The original exit fee of 3% was included in the Financing Agreement at the execution date and the increase of the total exit fee to 6% was included as part of the amendment dated February 13, 2019 discussed below and this Third Amendment. The exit fee is applied to the principal amount of the loans made under the Financing Agreement that is payable on the earliest of (a) the final maturity date, (b) the termination date of the Financing agreement for any reason, (c) the acceleration of the obligations in the Financing Agreement for any reason and (d) the date of any refinancing of the term loan under the Financing Agreement.

 

On February 13, 2019, we entered into a second amendment (“Amendment”) to the Financing Agreement. The Amendment provided the Lender’s consent for us to pay a one-time cash distribution on February 14, 2019 to the Series A Preferred Unitholders not to exceed approximately $3.2 million. The Amendment allowed us to sell our remaining shares of Mammoth Energy Services, Inc. and utilize the proceeds for payment of the one-time cash distribution to the Series A Preferred Unitholders and waived the requirement to use such proceeds to prepay the outstanding principal amount outstanding under the Financing Agreement. The Amendment also waived any Event of Default that has or would otherwise arise under Section 9.01(c) of the Financing Agreement solely by reason of us failing to comply with the Fixed Charge Coverage Ratio covenant in Section 7.03(b) of the Financing Agreement for the fiscal quarter ending December 31, 2018. The Amendment includes an amendment fee of approximately $0.6 million payable by us on May 13, 2019 and an exit fee equal to 1% of the principal amount of the term loans made under the Financing Agreement that is payable on the earliest of (w) the final maturity date of the Financing Agreement, (x) the termination date of the Financing Agreement, (y) the acceleration of the obligations under the Financing Agreement for any reason, including, without limitation, acceleration in accordance with Section 9.01 of the Financing Agreement, including as a result of the commencement of an insolvency proceeding and (z) the date of any refinancing of the term loan under the Financing Agreement. The Amendment amended the definition of the Make-Whole Amount under the Financing Agreement to extend the date of the Make-Whole Amount period to December 31, 2019.

 

Distribution Suspension

 

Pursuant to the Partnership agreement, Rhino’s common units accrue arrearages every quarter when the distribution level is below the minimum level of $4.45 per unit. Beginning with the quarter ended June 30, 2015 and continuing through the quarter ended March 31, 2019, Rhino has suspended the cash distribution on its common units. For each of the quarters ended September 30, 2014, December 31, 2014 and March 31, 2015, Rhino announced cash distributions per common unit at levels lower than the minimum quarterly distribution. Rhino has not paid any distribution on its subordinated units for any quarter after the quarter ended March 31, 2012. As of June 30, 2019, Rhino has accumulated arrearages of $790.2 million.

 

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Recent Developments - Royal

 

Sale of Royalty Interest

 

Per agreements dated April 24, 2019, we agreed to sell our coal royalty interest in a West Virginia property to a third party for $850,000. We had no book basis in this interest, so substantially all of the proceeds were recognized as a gain during the second quarter of 2019.

 

Termination of Officer and Removal of Director

 

On May 9, 2019, the Company terminated Brian Hughs, the Company’s chief commercial officer, for cause. On the same date, shareholders holding a majority of the voting power of the Company executed a written consent to remove Mr. Hughs as a director for cause. The written consent provided that the removal would be effective twenty-one (21) days after the Company sent an information statement to the shareholders pursuant to SEC Rule 14c-2. The information statement was sent on May 30, 2019. Therefore, Mr. Hughs removal from the Company’s board was effective as of June 20, 2019.

 

Cedarview Loan

 

On June 12, 2017, we entered into a Secured Promissory Note dated May 31, 2017 with Cedarview Opportunities Master Fund, L.P. (the “Cedarview”), under which we borrowed $2,500,000 from Cedarview. The loan bears non-default interest at the rate of 14%, and default interest at the rate of 17% per annum. We and Cedarview simultaneously entered into a Pledge and Security Agreement dated May 31, 2017, under which we pledged 5,000,000 common units in Rhino as collateral for the loan. The loan was payable at May 31, 2019; however, on March 5, 2019, the Company modified the terms of the Cedarview note. The Company paid $1.0 million of the note balance by May 31, 2019 with the remaining balance of $1.5 million and associated accrued interest due May 31, 2020. The Company paid a $45,000 loan extension fee to execute this agreement. All other terms of the note remain the same.

 

Factors That Impact Our Business

 

Our results of operations in the near term could be impacted by a number of factors, including (1) our ability to fund our ongoing operations and necessary capital expenditures, (2) the availability of transportation for coal shipments, (3) poor mining conditions resulting from geological conditions or the effects of prior mining, (4) equipment problems at mining locations, (5) adverse weather conditions and natural disasters or (6) the availability and costs of key supplies and commodities such as steel, diesel fuel and explosives.

 

On a long-term basis, our results of operations could be impacted by, among other factors, (1) our ability to fund our ongoing operations and necessary capital expenditures, (2) changes in governmental regulation, (3) the availability and prices of competing electricity-generation fuels, (4) the world-wide demand for steel, which utilizes metallurgical coal and can affect the demand and prices of metallurgical coal that we produce, (5) our ability to secure or acquire high-quality coal reserves and (6) our ability to find buyers for coal under favorable supply contracts.

 

We have historically sold a majority of our coal through long-term supply contracts, although we have starting selling a larger percentage of our coal under short-term and spot agreements. As of June 30, 2019, we had commitments under supply contracts to deliver annually scheduled base quantities of coal as follows

 

Year  Tons (in thousands)   Number of customers 
2018 Q3-Q4   2,192    18 
2020   2,180    7 
2021   920    3 

 

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Certain of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of factors and indices.

 

Evaluating Our Results of Operations

 

Our management uses a variety of non-GAAP financial measurements to analyze our performance, including (1) Adjusted EBITDA, (2) coal revenues per ton and (3) cost of operations per ton.

 

Adjusted EBITDA. The discussion of our results of operations below includes references to, and analysis of Adjusted EBITDA results. Adjusted EBITDA represents net income before deducting interest expense, income taxes and depreciation, depletion and amortization, while also excluding certain non-cash and/or non-recurring items. Adjusted EBITDA is used by management primarily as a measure of operating performance. Adjusted EBITDA should not be considered an alternative to net income, income from operations, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Because not all companies calculate Adjusted EBITDA identically, our calculation may not be comparable to similarly titled measures of other companies. Please read “—Reconciliations of Adjusted EBITDA” for reconciliations of Adjusted EBITDA to net income (loss) for each of the periods indicated.

 

Coal Revenues per Ton. Coal revenues per ton represents coal revenues divided by tons of coal sold. Coal revenues per ton is a key indicator of our effectiveness in obtaining favorable prices for our product.

 

Cost of Operations per Ton. Cost of operations per ton sold represents the cost of operations (exclusive of depreciation, depletion and amortization) divided by tons of coal sold. Management uses this measurement as a key indicator of the efficiency of operations.

 

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

 

Revenues. The following table presents revenues and coal revenues per ton for the three months ended June 30, 2019 and 2018:

 

   Three months   Three months         
   Ended   ended   Increase/(Decrease) 
   June 30, 2019   June 30, 2018   $   %* 
   (in millions, except per ton data and %) 
Total                
Coal revenues:                    
Steam coal revenue  $39.7   $39.4   $0.3    0.7%
Met coal revenue   25.4    14.9    10.5    71.0%
Total coal revenues   65.1    54.3    10.8    20.0%
Other revenues   0.5    0.6    (0.1)   (16.7)%
Total revenues  $65.6   $54.9   $10.7    19.4%
                     
Steam tons sold   896.6    951.2    (54.6)   (5.7)%
Met tons sold   226.6    151.6    75.0    49.5%
Total tons sold (in thousands except %)   1,123.2    1,102.8    20.4    1.8%
                     
Coal revenues per steam ton  $44.23   $41.39   $2.84    6.9%
Coal revenues per met ton   112.26    98.12    14.14    14.4%
Coal revenues per ton*  $57.95   $49.19   $8.76    17.8%

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

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Revenues. Our coal revenues for the three months ended June 30, 2019 increased to $65.1 million from $54.3 million on June 30, 2018, an increase of 10.8 million or 20.0%. Coal revenues per ton was $57.95 for the three months ended June 30, 2019, a increase of $8.76, or 17.8%, from $49.19 per ton for the three months ended June 30, 2018. This increase in coal revenues and coal revenues per ton was primarily the result of higher contracted sale prices for coal sold across all of our locations during the second quarter of 2019 compared to the same period in 2018.

 

Costs and Expenses. The following table presents costs and expenses (including the cost of purchased coal) and cost of operations per ton for the three months ended June 30, 2019 and 2018:

 

   Three months   Three months         
   ended   ended   Increase/(Decrease) 
   June 30, 2019   June 30, 2018   $   %* 
   (in millions, except per ton data and %) 
Total                
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)  $59.7   $49.4   $10.3    20.9%
Freight and handling costs   1.8    1.5    0.3    20.0%
Depreciation, depletion and amortization   8.1    7.7    0.4    5.2%
Selling, general and administrative   3.7    3.3    0.4    12.1%
Loss/(gain) on sale/disposal of assets-net   (7.8)   0.1    (7.9)   (7,900.0)%
                     
Tons sold   1,123.2    1,102.8    20.4    1.8%
Cost of operations per ton*  $53.17   $44.78   $8.39    18.7%

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

Cost of Operations. Total cost of operations was $59.7 million for the three months ended June 30, 2019 as compared to $49.4 million for the three months ended June 30, 2018. Our cost of operations per ton was $53.17 for the three months ended June 30, 2019, an increase of $8.39, or 18.7%, from the three months ended June 30, 2018. The increase in total cost of operations and cost of operations per ton was primarily due to increases in the cost of labor, contract services and equipment maintenance at several of our operations in the second quarter of 2019 compared to the same period in 2018.

 

Freight and Handling. Total freight and handling cost increased to $1.8 million for the three months ended June 30, 2019 as compared to $1.5 million for the three months ended June 30, 2018. The increase in freight and handling costs was primarily the result of a new sales contract for coal shipped from our Northern Appalachia operation that requires us to pay the freight and handling to the customer’s destination.

 

Depreciation, Depletion and Amortization. Total DD&A expense for the three months ended June 30, 2019 was $8.1 million as compared to $7.7 million for the three months ended June 30, 2018. The increase was due to depreciation of fixed assets put in service since the second quarter of 2018.

 

Selling, General and Administrative. SG&A expense for the three months ended June 30, 2019 increased to $3.7 million as compared to $3.3 million for the three months ended June 30, 2018 as we experienced an increase in corporate overhead expense.

 

Loss/(gain) on sale/disposal of assets-net. In the second quarter of 2019 we recorded a gain of $6.9 million related to settlement previously discussed and a gain of $0.9 million from a disposal of a royalty interest.

 

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Interest and other expense/(income): The following table presents interest and other (income) expense for the three months ended June 30, 2019 and 2018:

 

   Three Months Ended
June 30,
 
   2019   2018 
INTEREST AND OTHER (EXPENSE)/INCOME:          
Interest expense  $(1.8)  $(2.0)
Gain on sale of equity securities   -    3.6 
Total interest and other (expense)/income  $(1.8)  $1.6 

 

Interest Expense. Interest expense for the three months ended June 30, 2019 decreased to $1.8 million as compared to $2.0 million for the three months ended June 30, 2018. This decrease was primarily due to the lower outstanding debt balance for the three months ended June 30, 2019 compared to the same period in 2018.

 

Net Loss. Net loss was $1.8 million for the three months ended June 30, 2019 compared to net loss of $4.7 million for the three months ended June 30, 2018. Our net loss decreased during the three months ended June 30, 2019 compared to 2018 primarily due to a gain of $6.9 million resulting from the settlement agreement discussed above but was negatively impacted by higher cost of operations discussed above. Net loss for the three months ended June 30, 2018 was positively impacted from a gain on sale of equity securities of $3.6 million.

 

Adjusted EBITDA. Adjusted EBITDA from continuing operations for the three months ended June 30, 2019 increased by $3.8 million to $8.2 million from $4.4 million for the three months ended June 30, 2018. The increase was primarily due to the decrease in net loss for the three months ended June 30, 2019. Please read “—Reconciliations of Adjusted EBITDA” for reconciliations of Adjusted EBITDA to net income/(loss).

 

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

Revenues. The following table presents revenues and coal revenues per ton for the six months ended June 30, 2019 and 2018:

 

   Six months   Six months         
   Ended   ended   Increase/(Decrease) 
   June 30, 2019   June 30, 2018   $   %* 
   (in millions, except per ton data and %) 
Total                
Coal revenues:                    
Steam coal revenues  $80.8   $74.4   $6.4    8.6%
Met coal revenues   42.1    34.1    8.0    23.5%
Total coal revenues   122.9    108.5    14.4    13.3%
Other revenues   1.4    1.2    0.2    15.8%
Total revenues  $124.3   $109.7   $14.6    13.3%
                     
Steam tons sold   1,824.8    1,811.2    13.6    0.8%
Met tons sold   375.7    364.2    11.5    3.2%
Total tons sold (in thousands except %)   2,200.5    2,175.4    25.1    1.2%
                     
Coal revenues per steam ton  $44.28   $41.08   $3.20    7.8%
Coal revenues per met ton   112.15    93.72    18.43    19.7%
Coal revenues per ton*  $55.88   $49.88   $6.00    12.0%

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

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Revenues. Our coal revenues for the six months ended June 30, 2019 increased by approximately $14.4 million, or 13.3%, to approximately $122.9 million from approximately $108.5 million for the six months ended June 30, 2018. The increase in coal revenues was primarily due to an increase in met and steam coal tons sold as well as higher prices for both met and steam coal as we saw increased demand for met and steam coal during the period. Coal revenues per ton was $55.88 for the six months ended June 30, 2019, an increase of $6.00, or 12.0%, from $49.88 per ton for the six months ended June 30, 2018. The increase in coal revenues and coal revenues per ton was primarily due to an increase in the contracted sale prices across all of our operations for the six months ended June 30, 2019 compared to the same period in 2018.

 

Costs and Expenses. The following table presents costs and expenses (including the cost of purchased coal) and cost of operations per ton for the six months ended June 30, 2019 and 2018:

 

   Six months   Six months         
   ended   ended   Increase/(Decrease) 
   June 30, 2019   June 30, 2018   $   %* 
   (in millions, except per ton data and %) 
Total                
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)  $114.1   $98.9   $15.2    15.4%
Freight and handling costs   2.9    2.4    0.5    20.8%
Depreciation, depletion and amortization   16.5    15.3    1.2    7.8%
Selling, general and administrative   6.8    8.2    (1.4)   (17.1)%
 Loss/(gain) on sale/disposal of assets-net   (7.0)   0.1    (7.1)   (7,100.0)%
                     
Tons sold   2,200.5    2,175.4    25.1    1.2%
Cost of operations per ton*  $51.87   $45.46   $6.41    14.1%

 

* Percentages and per ton amounts are calculated based on actual amounts and not the rounded amounts presented in this table.

 

Cost of Operations. Total cost of operations was $114.1 million for the six months ended June 30, 2019 as compared to $98.9 million for the six months ended June 30, 2018. Our cost of operations per ton was $51.87 for the six months ended June 30, 2019, an increase of $6.41, or 14.1%, from the six months ended June 30, 2018. The increase in cost of operations and cost of operations per ton was primarily due to increases in costs at several of our operations for labor, contract services and equipment maintenance for the six months ended June 30, 2019 compared to the same period in 2018.

 

Freight and Handling. Total freight and handling cost increased to $2.9 million for the six months ended June 30, 2019 as compared to $2.4 million for the six months ended June 30, 2018. The increase in freight and handling costs was primarily the result of a new sales contract for coal shipped from our Northern Appalachia operation that requires us to pay the freight and handling to the customer’s destination.

 

Depreciation, Depletion and Amortization. Total DD&A expense for the six months ended June 30, 2019 was $16.5 million as compared to $15.3 million for the six months ended June 30, 2018. The increase was due to depreciation of fixed assets put in service since the first quarter of 2018.

 

Selling, General and Administrative. SG&A expense for the six months ended June 30, 2019 decreased to $6.8 million as compared to $8.2 million for the six months ended June 30, 2018. The decrease in expense is primarily due to the stock compensation expense of approximately $1.7 million in 2018 incurred through a certain severance agreement with a former executive during 2018.

 

Loss/(gain) on sale/disposal of assets-net. In the second quarter of 2019 we recorded a gain of 6.9 million related to a settlement previously discussed and a gain of $0.9 million on a disposal of a royalty interest.

 

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Interest and other expense/(income): The following table presents interest and other (income) expense for the six months ended June 30, 2019 and 2018:

 

   Six Months Ended
June 30,
 
   2019   2018 
INTEREST AND OTHER (EXPENSE)/INCOME:          
Interest expense  $(3.6)  $(4.1)
Gain on sale of equity securities   0.4    6.5 
Total interest and other (expense)/income  $(3.2)  $2.4 

 

Interest expense. Interest expense for the six months ended June 30, 2019 decreased to $3.6 million as compared to $4.1 million for the six months ended June 30, 2018. This decrease was primarily due to the lower outstanding debt balance for the six months ended June 30, 2019 compared to the same period in 2018.

 

Net Loss. Net loss was $10.1 million for the six months ended June 30, 2019 compared to a net loss of $11.1 million for the six months ended June 30, 2018. Our net loss was positively impacted by significant gains on disposal of assets during 2019 along with a higher effective tax rate compared to the same period in 2018. Our net loss increased during the six months ended June 30, 2019 compared to 2018 primarily due to an increase in operating costs including labor, contract services and equipment maintenance at several of our operations.

 

Adjusted EBITDA. Adjusted EBITDA from continuing operations for the six months ended June 30, 2019 increased by $0.2 million to $8.7 million from $8.5 million for the six months ended June 30, 2018. Adjusted EBITDA increased period over period primarily due to the decline in net loss for the six months ended June 30, 2019. Please read “—Reconciliations of Adjusted EBITDA” for reconciliations of Adjusted EBITDA from continuing operations to net income/(loss) from continuing operations.

 

Reconciliations of Adjusted EBITDA

 

The following tables present reconciliations of Adjusted EBITDA to the most directly comparable GAAP financial measures for each of the periods indicated:

 

  

Three Months Ended

June 30, 2019

  

Three Months
Ended
June 30 , 2018

  

Six Months
ended
June 30, 2019

  

Six Months
ended
June 30, 2018

 
Net income (loss)  $(1.8)  $(4.7)  $(10.1)  $(11.1)
DD&A   8.1    7.7    16.5    15.3 
Interest expense   1.8    2.0    3.6    4.1 
Income tax provision (benefit)   -    (0.8)   (2.1)   (1.6)
EBITDA from continuing operations†*   8.1    4.2    7.9    6.7 
Plus: loss from sale of non-core assets (1)   0.1    -    0.8    - 
Stock compensation   -    0.2    -    1.9 
Adjusted EBITDA from Continuing Operations†*  $8.2    4.4   $8.7   $8.5 

 

(1) During the three and six months ended June 30, 2019, we sold parcels of land owned in western Colorado for proceeds less than our carrying value of the land that resulted in losses of approximately $0.1 million and $0.8 million, respectively. This land is a non-core asset that we chose to monetize despite the loss incurred. We believe that the isolation and presentation of this specific item to arrive at Adjusted EBITDA is useful because it enhances investors’ understanding of how we assess the performance of our business. We believe the adjustment of this item provides investors with additional information that they can utilize in evaluating our performance. Additionally, we believe the isolation of this item provides investors with enhanced comparability to prior and future periods of our operating results.

 

* Totals may not foot due to rounding.

† EBITDA is calculated based on actual amounts and not the rounded amounts presented in this table.

 

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Liquidity and Capital Resources

 

Liquidity

 

As of June 30, 2019, our available liquidity was $1.9 million. We also have a delayed draw term loan commitment in the amount of $35 million contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement discussed below.

 

On December 27, 2017, we entered into a Financing Agreement, which provides us with a multi-draw loan in the aggregate principal amount of $80 million. The total principal amount is divided into a $40 million commitment, the conditions for which were satisfied at the execution of the Financing Agreement and an additional $40 million commitment that is contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement. We used approximately $17.3 million of the net proceeds thereof to repay all amounts outstanding and terminate the Amended and Restated Credit Agreement with PNC Bank. The Financing Agreement terminates on December 27, 2020. For more information about our new Financing Agreement, please read “—Financing Agreement” below.

 

Our business is capital intensive and requires substantial capital expenditures for purchasing, upgrading and maintaining equipment used in developing and mining our reserves, as well as complying with applicable environmental and mine safety laws and regulations. Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time, and service our debt. Historically, our sources of liquidity included cash generated by our operations, cash available on our balance sheet and issuances of equity securities. Our ability to access the capital markets on economic terms in the future will be affected by general economic conditions, the domestic and global financial markets, our operational and financial performance, the value and performance of our equity securities, prevailing commodity prices and other macroeconomic factors outside of our control. Failure to maintain financing or to generate sufficient cash flow from operations could cause us to significantly reduce our spending and to alter our short- or long-term business plan. We may also be required to consider other options, such as selling assets or merger opportunities, and depending on the urgency of our liquidity constraints, we may be required to pursue such an option at an inopportune time.

 

Cash Flows

 

Net cash used in operating activities was $1.2 million for the six months ended June 30, 2019 as compared to $5.3 million provided by operating activities for the six months ended June 30, 2018. This decrease in cash provided by operating activities was the result of negative working capital changes primarily due to the increase in our inventory during the six months ended June 30, 2019.

 

Net cash provided by investing activities was $0.5 million for the three months ended June 30, 2019 as compared to net cash used in investing activities of $0.1 million for the six months ended June 30, 2018. The increase in cash provided by investing activities was primarily due to the proceeds from a royalty sale discussed previously during the six months ended June 30, 2019 and a decrease in capital expenditures during the first six months of 2019 compared to the same period in 2018. Additionally, the 2018 investing activities included $12 million of equity investment proceeds compared to $2.5 million of proceeds during the same period in 2019.

 

Net cash used in financing activities was $4.1 million and $20.9 million for the six months ended June 30, 2019 and 2018, respectively. Net cash used in financing activities for the six months ended June 30, 2018 was primarily attributable to repayments on our Financing Agreement and deposits paid on our workers’ compensation and surety bond programs. The periods ending June 30, 2019 and 2018 were both impacted by payment of the distribution on the Series A preferred units.

 

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Capital Expenditures

 

Our mining operations require investments to expand, upgrade or enhance existing operations and to meet environmental and safety regulations. Maintenance capital expenditures are those capital expenditures required to maintain our long-term operating capacity. For example, maintenance capital expenditures include expenditures associated with the replacement of equipment and coal reserves, whether through the expansion of an existing mine or the acquisition or development of new reserves, to the extent such expenditures are made to maintain our long-term operating capacity. Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of reserves, acquisition of equipment for a new mine or the expansion of an existing mine to the extent such expenditures are expected to expand our long-term operating capacity.

 

Actual maintenance capital expenditures for the six months ended June 30, 2019 were approximately $3.7 million. These amounts were primarily used to rebuild, repair or replace older mining equipment. Expansion capital expenditures for the six months ended June 30, 2019 were approximately $0.6 million, which were primarily related to the construction of a new airshaft at our Hopedale mining complex in Northern Appalachia.

 

Series A Preferred Units

 

On December 30, 2016, Rhino entered into a Series A Preferred Unit Purchase Agreement and its general partner entered into the Fourth Amended and Restated Agreement of Limited Partnership of the Partnership to create, authorize and issue the Series A preferred units.

 

The Series A preferred units rank senior to all classes or series of Rhino’s equity securities with respect to distribution rights and rights upon liquidation. The holders of the Series A preferred units are entitled to receive annual distributions equal to the greater of (i) 50% of the CAM Mining free cash flow (as defined) and (ii) an amount equal to the number of outstanding Series A preferred units multiplied by $0.80. If Rhino fails to pay any or all of the distributions in respect of the Series A preferred units, such deficiency will accrue until paid in full and Rhino will not be permitted to pay any distributions on its partnership interests that rank junior to the Series A preferred units, including its common units.

 

During the six months ended June 30, 2019 and 2018, we paid $3.2 million and $6.0 million in distributions earned for the year ended December 31, 2018 and 2017 to holders of Rhino’s Series A preferred units. We also accrued $0.6 million for distributions to holders of the Series A preferred units for the six months ended June 30, 2019 and 2018.

 

Financing Agreement

 

On December 27, 2017, we entered into a Financing Agreement with Cortland Capital Market Services LLC, as Collateral Agent and Administrative agent, CB Agent Services LLC, as Origination Agent and the parties identified as Lenders therein (the “Lenders”), pursuant to which Lenders have agreed to provide us with a multi-draw term loan in the original aggregate principal amount of $80 million, subject to the terms and conditions set forth in the Financing Agreement. The total principal amount is divided into a $40 million commitment, the conditions for which were satisfied at the execution of the Financing Agreement (the “Effective Date Term Loan Commitment”) and an additional $35 million commitment that is contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement (“Delayed Draw Term Loan Commitment”). Loans made pursuant to the Financing Agreement are secured by substantially all of our assets. The Financing Agreement terminates on December 27, 2020.

 

Loans made pursuant to the Financing Agreement are, at our option, either “Reference Rate Loans” or “LIBOR Rate Loans.” Reference Rate Loans bear interest at the greatest of (a) 4.25% per annum, (b) the Federal Funds Rate plus 0.50% per annum, (c) the LIBOR Rate (calculated on a one-month basis) plus 1.00% per annum or (d) the Prime Rate (as published in the Wall Street Journal) or if no such rate is published, the interest rate published by the Federal Reserve Board as the “bank prime loan” rate or similar rate quoted therein, in each case, plus an applicable margin of 9.00% per annum (or 12.00% per annum if we have elected to capitalize an interest payment pursuant to the PIK Option, as described below). LIBOR Rate Loans bear interest at the greater of (x) the LIBOR for such interest period divided by 100% minus the maximum percentage prescribed by the Federal Reserve for determining the reserve requirements in effect with respect to eurocurrency liabilities for any Lender, if any, and (y) 1.00%, in each case, plus 10.00% per annum (or 13.00% per annum if we have elected to capitalize an interest payment pursuant to the PIK Option). Interest payments are due on a monthly basis for Reference Rate Loans and one-, two- or three-month periods, at our option, for LIBOR Rate Loans. If there is no event of default occurring or continuing, we may elect to defer payment on interest accruing at 6.00% per annum by capitalizing and adding such interest payment to the principal amount of the applicable term loan (the “PIK Option”).

 

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Commencing December 31, 2018, the principal for each loan made under the Financing Agreement will be payable on a quarterly basis in an amount equal to $375,000 per quarter, with all remaining unpaid principal and accrued and unpaid interest due on December 27, 2020. In addition, we must make certain prepayments over the term of any loans outstanding, including: (i) the payment of 25% of Excess Cash Flow (as that term is defined in the Financing Agreement) for each fiscal year, commencing with respect to the year ending December 31, 2019, (ii) subject to certain exceptions, the payment of 100% of the net cash proceeds from the dispositions of certain assets, the incurrence of certain indebtedness or receipts of cash outside of the ordinary course of business, and (iii) the payment of the excess of the outstanding principal amount of term loans outstanding over the amount of the Collateral Coverage Amount (as that term is defined in the Financing Agreement). In addition, the Lenders are entitled to (i) certain fees, including 1.50% per annum of the unused Delayed Draw Term Loan Commitment for as long as such commitment exists, (ii) for the 12-month period following the execution of the Financing Agreement, a make-whole amount equal to the interest and unused Delayed Draw Term Loan Commitment fees that would have been payable but for the occurrence of certain events, including among others, bankruptcy proceedings or the termination of the Financing Agreement by us, and (iii) audit and collateral monitoring fees and origination and exit fees.

 

The Financing Agreement requires us to comply with several affirmative covenants at any time loans are outstanding, including, among others: (i) the requirement to deliver monthly, quarterly and annual financial statements, (ii) the requirement to periodically deliver certificates indicating, among other things, (a) compliance with terms of Financing Agreement and ancillary loan documents, (b) inventory, accounts payable, sales and production numbers, (c) the calculation of the Collateral Coverage Amount (as that term is defined in the Financing Agreement), (d) projections for the business and (e) coal reserve amounts; (iii) the requirement to notify the Administrative Agent of certain events, including events of default under the Financing Agreement, dispositions, entry into material contracts, (iv) the requirement to maintain insurance, obtain permits, and comply with environmental and reclamation laws (v) the requirement to sell up to $5.0 million of shares in Mammoth Inc. and use the net proceeds therefrom to prepay outstanding term loans and (vi) establish and maintain cash management services and establish a cash management account and deliver a control agreement with respect to such account to the Collateral Agent. The Financing Agreement also contains negative covenants that restrict our ability to, among other things: (i) incur liens or additional indebtedness or make investments or restricted payments, (ii) liquidate or merge with another entity, or dispose of assets, (iii) change the nature of our respective businesses; (iv) make capital expenditures in excess, or, with respect to maintenance capital expenditures, lower than, specified amounts, (v) incur restrictions on the payment of dividends, (vi) prepay or modify the terms of other indebtedness, (vii) permit the Collateral Coverage Amount to be less than the outstanding principal amount of the loans outstanding under the Financing Agreement or (viii) permit the trailing six month Fixed Charge Coverage Ratio to be less than 1.20 to 1.00 commencing with the six-month period ended June 30, 2018.

 

The Financing Agreement contains customary events of default, following which the Collateral Agent may, at the request of lenders, terminate or reduce all commitments and accelerate the maturity of all outstanding loans to become due and payable immediately together with accrued and unpaid interest thereon and exercise any such other rights as specified under the Financing Agreement and ancillary loan documents.

 

On April 17, 2018, we amended our Financing Agreement to allow for certain activities, including a sale leaseback of certain pieces of equipment, the extension of the due date for lease consents required under the Financing Agreement to June 30, 2018 and the distribution to holders of the Series A preferred units of $6.0 million (accrued in the consolidated financial statements at December 31, 2017). Additionally, the amendments provided that the Partnership could sell additional shares of Mammoth Inc. stock and retain 50% of the proceeds with the other 50% used to reduce debt. The Partnership reduced its outstanding debt by $3.4 million with proceeds from the sale of Mammoth Inc. stock in the second quarter of 2018.

 

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On July 27, 2018, we entered into a consent with our Lenders related to the Financing Agreement. The consent included the lenders agreement to make a $5 million loan from the Delayed Draw Term Loan Commitment, which was repaid in full on October 26, 2018 pursuant to the terms of the consent. The consent also included a waiver of the requirements relating to the use of proceeds of any sale of the shares of Mammoth Inc. set forth in the consent to the Financing Agreement, dated as of April 17, 2018 and also waived any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge Coverage Ratio for the six months ended June 30, 2018.

 

On November 8, 2018, we entered into a consent with our Lenders related to the Financing Agreement. The consent includes the lenders agreement to waive any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge Coverage Ratio for the six months ended September 30, 2018.

 

On December 20, 2018, we entered into a limited consent and Waiver to the Financing Agreement. The Waiver relates to sales of certain real property in Western Colorado, the net proceeds of which are required to be used to reduce our debt under the Financing Agreement. As of the date of the Waiver, we had sold 9 individual lots in smaller transactions. Rather than transmitting net proceeds with respect to each individual transaction, we agreed with the Lenders in principle to delay repayment until an aggregate payment could be made at the end of 2018. On December 18, 2018, we used the sale proceeds of approximately $379,000 to reduce the debt. The Waiver (i) contains a ratification by the Lenders of the sale of the individual lots to date and waives the associated technical defaults under the Financing Agreement for not making immediate payments of net proceeds therefrom, (ii) permits the sale of certain specified additional lots and (iii) subject to Lender consent, permits the sale of other lots on a going forward basis. The net proceeds of future sales will be held by us until a later date to be determined by the Lenders.

 

On February 13, 2019, we entered into a second amendment to the Financing Agreement. The Amendment provided the Lender’s consent for us to pay a one-time cash distribution on February 14, 2019 to the Series A Preferred Unitholders not to exceed approximately $3.2 million. The Amendment allowed us to sell our remaining shares of Mammoth Energy Services, Inc. and utilize the proceeds for payment of the one-time cash distribution to the Series A Preferred Unitholders and waived the requirement to use such proceeds to prepay the outstanding principal amount outstanding under the Financing Agreement. The Amendment also waived any Event of Default that has or would otherwise arise under Section 9.01(c) of the Financing Agreement solely by reason of us failing to comply with the Fixed Charge Coverage Ratio covenant in Section 7.03(b) of the Financing Agreement for the fiscal quarter ended December 31, 2018. The Amendment includes an amendment fee of approximately $0.6 million payable by us on May 13, 2019 and an exit fee equal to 1% of the principal amount of the term loans made under the Financing Agreement that is payable on the earliest of (w) the final maturity date of the Financing Agreement, (x) the termination date of the Financing Agreement, (y) the acceleration of the obligations under the Financing Agreement for any reason, including, without limitation, acceleration in accordance with Section 9.01 of the Financing Agreement, including as a result of the commencement of an insolvency proceeding and (z) the date of any refinancing of the term loan under the Financing Agreement. The Amendment amended the definition of the Make-Whole Amount under the Financing Agreement to extend the date of the Make-Whole Amount period to December 31, 2019.

 

On May 8, 2019, we entered into a third amendment (“Third Amendment”) to the Financing Agreement. The Third Amendment includes the lenders agreement to waive any Event of Default that arose or would otherwise arise under the Financing Agreement for failing to comply with the Fixed Charge Coverage Ratio for the six months ended March 31, 2019. The Third Amendment increases the original exit fee of 3.0% to 6.0%. The original exit fee of 3% was included in the Financing Agreement at the execution date and the increase of the total exit fee to 6% was included as part of the amendment dated February 13, 2019 discussed above and this Third Amendment. The exit fee is applied to the principal amount of the loans made under the Financing Agreement that is payable on the earliest of (a) the final maturity date, (b) the termination date of the Financing agreement for any reason, (c) the acceleration of the obligations in the Financing Agreement for any reason and (d) the date of any refinancing of the term loan under the Financing Agreement.

 

At June 30, 2019, we had $28.3 million of borrowings outstanding at a variable interest rate of LIBOR plus 10.00% (12.41%).

 

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Off-Balance Sheet Arrangements

 

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and surety bonds. No liabilities related to these arrangements are reflected in our consolidated statement of financial position, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.

 

Federal and state laws require us to secure certain long-term obligations related to mine closure and reclamation costs. We typically secure these obligations by using surety bonds, an off-balance sheet instrument. The use of surety bonds is less expensive for us than the alternative of posting a 100% cash bond or a bank letter of credit. We then provide cash collateral to secure our surety bonding obligations in an amount up to a certain percentage of the aggregate bond liability that we negotiate with the surety companies. To the extent that surety bonds become unavailable, we would seek to secure our reclamation obligations with letters of credit, cash deposits or other suitable forms of collateral.

 

As of June 30, 2019, we had $7.9 million in cash collateral held by third-parties of which $3.0 million serves as collateral for approximately $39.2 million in surety bonds outstanding that secure the performance of our reclamation obligations. The other $4.9 million serves as collateral for our self-insured workers’ compensation program. Of the $39.2 million in surety bonds, approximately $0.4 million relates to surety bonds for Deane Mining, LLC, which have not been transferred or replaced by the buyer of Deane Mining LLC as was agreed to by the parties as part of the transaction. We can provide no assurances that a surety company will underwrite the surety bonds of the purchaser of Deane Mining LLC, nor are we aware of the actual amount of reclamation at any given time. Further, if there was a claim under these surety bonds prior to the transfer or replacement of such bonds by the buyers of Deane Mining, LLC, then we may be responsible to the surety company for any amounts it pays in respect of such claim. While the buyer is required to indemnify us for damages, including reclamation liabilities, pursuant the agreements governing the sales of this entity, we may not be successful in obtaining any indemnity or any amounts received may be inadequate. Of the $39.2 million in outstanding surety bonds, approximately $3.4 million related to surety bonds for Sands Hill Mining LLC, which are to be replaced by a third party pursuant to an agreement dated July 9, 2019. Please refer to Note 17 of the notes to the unaudited condensed consolidated financial statements for further discussion of the agreement.

 

We had no letters of credit outstanding as of June 30, 2019.

 

Critical Accounting Policies and Estimates

 

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Nevertheless, actual results may differ from the estimates used and judgments made.

 

The accounting policies and estimates that we have adopted and followed in the preparation of our consolidated financial statements are fully described in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no other significant changes in these policies and estimates as of June 30, 2019.

 

We adopted ASU 2016-02 Leases (Topic 843) and all related clarification standards on January 1, 2019 using the transition method to apply the standard prospectively. The standard had a material impact on our unaudited condensed consolidated balance sheets, but did not have an impact on our unaudited condensed consolidated statements of operations. Please refer to Note 15 of the notes to the unaudited condensed consolidated financial statements for further discussion of the standard and the related disclosures.

 

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Income Taxes- Contingency

 

As discussed in Item 1A Risk Factors, we have failed to timely file certain federal and state tax returns. Additionally, we have failed to timely file the applicable Internal Revenue Service (“IRS”) form to change our tax year end from August 31 to December 31. We completed all the required SEC filings to change our reporting year end date from August 31 to December 31. Our income tax estimates are predicated on a December 31 year end. In March of 2019, the Company received correspondence from the IRS that it could not process its 2017 federal income tax filing due to use of improper year end. The Company has begun communications with the IRS to resolve this matter. If the IRS does not provide us relief for the non-timely filing of the tax year end change, it is possible our income tax expense, deferred tax liability and income tax obligations as presented in the accompanying unaudited condensed consolidated financial statements could be materially adjusted.

 

We are currently updating all of our tax filings which may identify new facts that could materially change our net financial position and operating results. We applied to the IRS for a tax year filing change to December and requested that it be approved due in part to the Partnership’s December year end. Since we have a controlling interest in the Partnership since March 2016, we believe this will help support approving our change in tax year retroactive to 2015; however, there are no guarantees that this relief will be provided. The ultimate resolution of these tax uncertainties could materially impact our accompanying unaudited condensed consolidated financial statements.

 

Recent Accounting Pronouncements

 

Refer to Part-I— Item 1. Financial Statements, Note 2 of the notes to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements, which is incorporated herein by reference. There are no known future impacts or material changes or trends of new accounting guidance beyond the disclosures provided in Note 2.

 

ITEM 4: Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the Company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were ineffective as of June 30, 2019 at the reasonable assurance level.

 

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(b) Changes in Internal Controls

 

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

The Company continues to have the following material weaknesses in internal control:

 

Audit Committee Oversight: Royal (other than the Partnership) does not have an audit committee. When a company does not have an audit committee, the entire board of directors is considered the audit committee under the Securities Exchange Act of 1934. Royal’s board of directors does not include any independent members. Royal does not have a member of the board of directors designated as our financial expert; nor does Royal have an audit charter or a whistleblower policy. Therefore, Royal does not have any independent oversight of our external financial reporting and internal control over financial reporting.

 

Tax Reporting Compliance: Royal has outsourced the preparation of its income tax returns. Royal has not filed state tax returns for the past four years. Management has attempted to adjust its book tax provision based on expected state income tax filings. It is possible the ultimate filings of these state tax returns could differ significantly from the book tax provision. Royal’s noncompliance with state tax reporting indicates inadequate oversight of its external financial reporting and internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1: Legal Proceedings

 

We may, from time to time, be involved in various legal proceedings and claims arising out of our operations in the normal course of business. While many of these matters involve inherent uncertainty, we do not believe that we are a party to any legal proceedings or claims that will have a material adverse impact on our business, financial condition or results of operations.

 

On May 3, 2019, we together with Rhino (the “Plaintiffs”) filed a complaint in the Court of Chancery in the State of Delaware against Rhino Resource Partners Holdings LLC (“Holdings”), Weston Energy LLC (“Weston”), Yorktown Partners LLC and certain Yorktown funds (collectively, the “Yorktown entities”), as well as Mr. Ronald Phillips, Mr. Bryan H. Lawrence and Mr. Bryan R. Lawrence.

 

The complaint alleges that Holdings violated certain representations and negative covenants under an option agreement, dated December 30, 2016 among Holdings, the Plaintiffs, and Weston (the “Option Agreement”), as a result of Holdings’ entry into a Restructuring Support Agreement with Armstrong Energy, Inc. (“Armstrong”), its creditors and certain other parties, which agreement was entered into in advance of Armstrong’s filing for bankruptcy relief under Chapter 11 of the United States Code in November 2017. The complaint further alleges that (i) Mr. Phillips violated fiduciary and contractual duties owed to the Plaintiffs and solicited, accepted and agreed to accept certain benefits from Holdings, Weston, the Yorktown entities and Messrs. Lawrence and Lawrence without the Plaintiff’s knowledge or consent and during a period in which Mr. Phillips was the President of Royal and a director on our board and (ii) Holdings, Weston, the Yorktown entities and Messrs. Lawrence and Lawrence aided and abetted Mr. Phillips’ breaches of his fiduciary duties, tortuously interfered with the observance of Mr. Phillips’ duties under the respective organizational agreements and conferred, offered to confer and agreed to confer benefits on Mr. Phillips without the Plaintiff’s knowledge or consent.

 

The Plaintiffs are seeking (i) the rescission of the Option Agreement, (ii) the return of all consideration thereunder, including 5,000,000 of our common units representing limited partner interests (iii) the cancellation of the Series A Preferred Purchase Agreement, dated December 30, 2016, among the Plaintiffs and Weston (the “Series A Preferred Purchase Agreement”), (iv) the invalidation of the Series A preferred units representing limited partner interests in us issued to Weston pursuant to the Series A Preferred Purchase Agreement and (v) unspecified monetary damages arising from Mr. Phillips’ breaches of fiduciary duties and the other defendants’ aiding and abetting of such breaches.

 

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ITEM 1A: Risk Factors

 

In addition to the other information set forth in this Report, you should carefully consider the risks under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which risks could materially affect our business, financial condition or future results. has been no material change in our risk factors from those described in the Annual Report on Form 10-K for the year ended December 31, 2018. These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations. We have updated certain income tax risks below due to the unique nature of these items.

 

Tax Risks to Rhino’s Common Unitholders

 

The tax treatment of publicly traded partnerships or an investment in Rhino’s common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

The present U.S. federal income tax treatment of publicly traded partnerships, including Rhino, or an investment in Rhino’s common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that would affect publicly traded partnerships, including elimination of partnership tax treatment for publicly traded partnerships. For example, the “Clean Energy for America Act”, which is similar to legislation that was commonly proposed during the Obama Administration, was introduced in the Senate on May 2, 2019. If enacted, this proposal would, among other things, repeal Section 7704(d)(1)(E) of the Internal Revenue Code upon which Rhino relies on for treatment as a partnership for U.S. federal income tax purposes. In addition, the Treasury Department has issued, and in the future may issue, regulations interpreting those laws that affect publicly traded partnerships. There can be no assurance that there will not be further changes to U.S. federal income tax laws or the Treasury Department’s interpretation of the qualifying income rules in a manner that could impact Rhino’s ability to qualify as a publicly traded partnership in the future.

 

Any modification to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the exception for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will ultimately be enacted. Any such changes could negatively impact the value of an investment in Rhino’s common units. You are urged to consult with your own tax advisor with respect to the status of regulatory or administrative developments and proposals and their potential effect on your investment.

 

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

ITEM 3: Defaults upon Senior Securities.

 

None

 

ITEM 4: Mine Safety Disclosures.

 

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K for the three months ended June 30, 2019 is included in Exhibit 95.1 to this report.

 

ITEM 5: Other Information.

 

None

 

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Item 6. Exhibits.

 

Exhibit Number   Description
     
31.1*   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241)
     
31.2*   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241)
     
32.1*   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
     
32.2*   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
     
95.1*   Mine Health and Safety Disclosure pursuant to §1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the three months ended June 30, 2019
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

The exhibits marked with the asterisk symbol (*) are filed or furnished (in the case of Exhibits 32.1 and 32.2) with this Form 10-Q.

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

  Royal Energy Resources. Inc.
     
Date: August 13, 2019 By: /s/ Richard A. Boone
    Richard A. Boone
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 13, 2019 By: /s/ W. Scott Morris
    W. Scott Morris
    Chief Financial Officer
    (Principal Financial Officer)

 

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