Company Quick10K Filing
Royal Energy Resources
Price-0.00 EPS-1
Shares18 P/E0
MCap-0 P/FCF0
Net Debt26 EBIT-28
TEV26 TEV/EBIT-1
TTM 2019-09-30, in MM, except price, ratios
10-Q 2019-09-30 Filed 2019-11-13
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-14
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-14
10-K 2017-12-31 Filed 2018-04-17
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-04-03
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-16
10-Q 2015-11-30 Filed 2016-01-14
10-K 2015-08-31 Filed 2015-11-30
10-Q 2015-05-31 Filed 2015-07-15
10-Q 2015-02-28 Filed 2015-04-16
10-Q 2014-11-30 Filed 2015-01-08
10-K 2014-08-31 Filed 2014-12-11
10-Q 2014-05-31 Filed 2014-07-15
10-Q 2014-02-28 Filed 2014-04-03
10-Q 2013-11-30 Filed 2014-01-13
10-K 2013-08-31 Filed 2013-11-27
10-Q 2013-02-28 Filed 2013-04-08
10-Q 2012-11-30 Filed 2013-01-11
10-K 2012-08-31 Filed 2012-12-14
10-Q 2012-05-31 Filed 2012-07-25
10-Q 2012-02-29 Filed 2012-04-13
10-Q 2011-11-30 Filed 2012-01-13
10-K 2011-08-31 Filed 2011-12-07
10-Q 2011-05-31 Filed 2011-07-14
10-Q 2011-02-28 Filed 2011-04-13
10-Q 2010-11-30 Filed 2011-01-06
10-K 2010-08-31 Filed 2010-12-14
10-Q 2010-05-31 Filed 2010-07-15
10-Q 2010-02-28 Filed 2010-04-16
10-Q 2009-11-30 Filed 2010-01-14
8-K 2020-03-27 Other Events
8-K 2020-01-06 Enter Agreement
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

ROYE 10Q Quarterly Report

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 2019-09-30

Balance SheetIncome StatementCash Flow
3202551911276302012201420172020
Assets, Equity
1158861347-202012201420172020
Rev, G Profit, Net Income
3020100-10-202012201420172020
Ops, Inv, Fin

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: September 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 of   (Commission   (I.R.S. Employer
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)

 

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 (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 [  ]

 

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 November 7, 2019, the registrant had 18,079,293 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

 

Cautionary Note Regarding Forward-Looking Statements 3
PART I – FINANCIAL INFORMATION  
     
ITEM 1: Financial Statements 4
    Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 4
  Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2019 and 2018 5
  Condensed Consolidated Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2019 and 2018 6
  Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2019 and December 31, 2018 7
  Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and 2018 8
  Notes to Condensed Consolidated Financial Statements 9
     
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
     
ITEM 4: Controls and Procedures 43
     
PART II - OTHER INFORMATION  
     
Item 1: Legal Proceedings 44
     
ITEM 1A: Risk Factors 45
     
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds 46
     
ITEM 3: Defaults upon Senior Securities. 46
     
ITEM 4: Mine Safety Disclosures. 46
     
ITEM 5: Other Information. 46
     
ITEM 6: Exhibits 47
     
SIGNATURES 48

 

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)

 

   September 30, 2019   December 31, 2018 
         
Assets          
CURRENT ASSETS          
Cash and cash equivalents  $8,316   $6,628 
Restricted cash   88    - 
Accounts receivable, net of allowance for doubtful accounts ($-0- and $0.7 million as of September 30, 2019 and December 31, 2018, respectively.)   11,887    12,831 
Receivable – other   2,960    - 
Inventories   18,410    6,118 
Investment in equity securities   -    1,872 
Advance royalties, current portion   4    8 
Prepaid expenses and other assets   3,182    2,660 
Current assets held for sale   1,602    3,748 
Total current assets   46,449    33,865 
PROPERTY, PLANT AND EQUIPMENT:          
Coal properties, mine development and construction costs   213,844    199,543 
Less accumulated depreciation, depletion and amortization   (82,086)   (60,482)
Net property, plant and equipment   131,758    139,061 
Operating lease right-of-use assets, net   11,926    - 
Advance royalties, net of current portion   6,644    6,588 
Other non-current assets   32,896    33,510 
Non-current assets held for sale   6,517    42,935 
TOTAL ASSETS  $236,190   $255,959 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable  $21,822   $10,340 
Accrued expenses and other   12,196    9,146 
Accrued distributions   900    3,210 
Current portion of operating lease liabilities   3,260    - 
Notes payable - related party   514    514 
Current portion of long-term debt, net   5,945    3,174 
Current portion of asset retirement obligations   465    465 
Related party advances and accrued interest payable   56    46 
Current liabilities held for sale   6,921    5,229 
Total current liabilities   52,079    32,124 
NON-CURRENT LIABILITIES:          
Long-term debt, net   28,421    23,932 
Deferred tax liability, net   18,704    25,711 
Asset retirement obligations, net of current portion   18,078    14,602 
Operating lease liabilities, net of current portion   8,300    - 
Other non-current liabilities   38,318    37,091 
Non-current liabilities held for sale   -    522 
Total non-current liabilities   111,821    101,858 
Total liabilities   163,900    133,982 
COMMITMENTS AND CONTINGENCIES          
STOCKHOLDERS’ EQUITY          
           
Preferred stock: $0.00001 par value; authorized 5,000,000 shares; 51,000 issued and outstanding at September 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 September 30, 2019 and December 31, 2018   1    1 
Additional paid-in capital   48,139    48,139 
Treasury stock   (4,176)   (4,176)
Accumulated earnings   42,305    65,946 
Total stockholders’ equity owned by common shareholders   86,269    109,910 
Non-controlling interest   (13,979)   12,067 
Total stockholders’ equity   72,290    121,977 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $236,190   $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     Nine Months  
    Ended September 30,     Ended September 30,  
    2019     2018     2019     2018  
REVENUES:                                
Coal sales   $ 41,821     $ 59,337     $ 138,687     $ 142,635  
Other revenues     444       1,253       1,834       2,459  
Total revenues     42,265       60,590       140,521       145,094  
COSTS AND EXPENSES:                                
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     37,966       46,771       123,976       120,282  
Freight and handling costs     1,372       5,850       4,305       8,226  
Depreciation, depletion and amortization     6,433       6,287       19,543       18,198  
Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above)     5,542       3,025       12,259       11,111  
Loss/(gain) on sale/disposal of assets—net     26       (325 )     (6,981 )     (183 )
Total costs and expenses     51,339       61,608       153,102       157,634  
(LOSS) FROM OPERATIONS     (9,074 )     (1,018 )     (12,581 )     (12,540 )
INTEREST AND OTHER (EXPENSE)/INCOME:                                
Interest expense     (1,941 )     (2,937 )     (5,576 )     (7,015 )
Interest income and other income     9       13       9       26  
Gain on sale of equity securities     -       -       433       6,498  
Total interest and other (expense)/income     (1,932 )     (2,924 )     (5,134 )     (491 )
NET INCOME (LOSS)/FROM CONTINUING OPERATIONS BEFORE INCOME TAX     (11,006 )     (3,942 )     (17,715 )     (13,031 )
Income tax (provision) benefit     1,854       2,240       2,993       3,402  
NET INCOME/(LOSS) FROM CONTINUING OPERATIONS     (9,152 )     (1,702 )     (14,722 )     (9,629 )
DISCONTINUED OPERATIONS (NOTE 4)                                
Loss from discontinued operations     (29,524 )     (2,570 )     (34,065 )     (5,719 )
NET INCOME (LOSS)     (38,676 )     (4,272 )     (48,787 )     (15,348 )
                                 
Less net income/(loss) attributable to non-controlling interest     (20,166 )     (3,978 )     (26,046 )     (8,501 )
Preferred distribution on subsidiary     (300 )     (1,179 )     (900 )     (1,788 )
Net Income/(Loss) attributable to Company’s Stockholders   $ (18,810 )   $ (1,473 )   $ (23,641 )   $ (8,635 )
                                 
Net (loss)/income per share, basic and diluted                                
Continuing operations   $ (0.24 )   $ (0.03 )   $ (0.41 )   $ (0.35 )
Discontinued operations     (0.82 )     (0.06 )     (0.93 )     (0.14 )
    $ (1.06 )   $ (0.09 )   $ (1.34 )   $ (0.49 )
Weighted average shares outstanding, basic and diluted     17,664,496       17,188,284       17,664,496       17,608,940  

 

See notes to unaudited condensed consolidated financial statements.

 

5
 

 

ROYAL ENERGY RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and Nine Months ended September 30, 2019 and 2018

(in thousands, except per unit data)

 

   Three Months   Nine Months 
   Ended September 30,   Ended September 30, 
   2019   2018   2019   2018 
NET INCOME/(LOSS)  $(38,676)  $(4,272)  $(48,787)  $(15,348)
Less net income/(loss) attributable to non-controlling interest   (20,166)   (3,978)   (26,046)   (8,501)
Preferred distribution on subsidiary   (300)   (1,179)   (900)   (1,788)
OTHER COMPREHENSIVE INCOME (LOSS):                    
Fair market value adjustment for available-for-sale investment, net of tax benefit ($0, $62,$0, and $(502))   -    (444)   -    3,360 
Reclass for disposition, net of tax expense ($0, $0, $0, and $(858))   -    -    -    (5,751)
Less other comprehensive earnings attributable to non-controlling interest   -    (249)   -    (1,263)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMPANY’S STOCKHOLDERS  $(18,810)  $(1,668)  $(23,641)  $(9,763)

 

See notes to unaudited condensed consolidated financial statements.

 

6
 

 

ROYAL ENERGY RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months ended September 30, 2019 and 2018

(in thousands, except shares)

 

   Preferred stock   Common stock   Additional
Paid In
   Treasury   Accumulated Earnings   Non-
Controlling
     
   Shares   Amt.   Shares   Amt.   Capital   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 
Rhino preferred distributions   -    -    -    -    -    -    (300)   -    (300)
Net loss   -    -    -         -    -    -    (18,510)   (20,166)   (38,676)
Balance September 30, 2019   51,000   $-    18,579,293   $1   $48,139   $(4,176)  $42,305   $(13,979)  $72,290 

 

   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 
Stock option granted   -    -    -    -    174    -    -    -    -    174 
Mark-to-market investment, net of tax   -    -    -    -    -    (195)   -    -    (249)   (444)
Rhino preferred distributions   -    -    -    -    -    -    -    (1,179)   -    (1,179)
Net loss   -    -    -    -    -    -    -    (294)   (3,978)   (4,272)
Balance September 30, 2018   51,000   $-    18,579,293   $1   $48,139   $314   $(4,176)  $70,035   $14,758   $129,071 

 

See notes to unaudited condensed consolidated financial statements.

 

7
 

 

ROYAL ENERGY RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Nine Months Ended September 30, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(48,787)  $(15,348)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Deferred tax benefit   (7,007)   (4,233)
Depreciation, depletion and amortization   24,575    23,226 
Accretion on asset retirement obligations   981    957 
Amortization of advance royalties   1,534    502 
Amortization of debt issuance costs and warrants   1,943    1,793 
Loss on impairment of assets   27,988    - 
Loss (gain) on sale/disposal of assets—net   (6,983)   (179)
(Gain) on sale of equity securities   (433)   (6,498)
Equity-based compensation   -    1,880 
Loss on retirement of advance royalties   244    294 
Provision for doubtful accounts   -    108 
Changes in assets and liabilities:          
Accounts receivable and receivable-other   5,767    (5,455)
Inventories   (11,837)   3,319 
Advance royalties   (2,380)   (904)
Prepaid expenses and other assets   (814)   (1,910)
Accounts payable   9,207    9,161 
Related party payables   9    9 
Accrued expenses and other liabilities   2,803    (353)
Asset retirement obligations   (66)   (259)
Net cash (used in) provided by operating activities   (3,256)   6,110 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from sale of investment   2,304    11,887 
Additions to property, plant, and equipment   (9,263)   (20,550)
Asset acquisition   (1,385)   - 
Proceeds from sales of property, plant, and equipment   2,604    4,802 
Proceeds from business sale   7,263    - 
Net cash provided by (used in) investing activities   1,523    (3,861)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment on long-term debt   (1,125)   (10,208)
Proceeds from issuance of other debt   1,772    1,622 
Repayments on other debt   (2,224)   (540)
Repayment on finance lease   (3)   - 
Proceeds from financing agreement   10,000    5,000 
Payments on debt issuance costs   (2,113)   (879)
(Deposit)/recovery for worker’s compensation program   323    (8,209)
Preferred distributions paid   (3,210)   (6,039)
Net cash provided by (used in) financing activities   3,420    (19,253)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH   1,687    (17,004)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period   6,717    23,159 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—End of period  $8,404   $6,155 
           
Summary Balance Sheets information:          
Cash and cash equivalents  $8,316   $6,155 
Restricted cash- current portion   88    - 
Total  $8,404   $6,155 

 

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 (the Company, together with its subsidiaries, are sometimes referred to collectively as “we” or “us”). 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 September 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 nine months ended September 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.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL

 

Revenue Recognition. The Company follows Accounting Standards Codification (“ASC”), 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, control 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 September 30, 2019 and December 31, 2018. The effective interest rate for the nine months ended September 30, 2019 and 2018 was 21.07% and 24.14%, respectively.

 

Recently Issued Accounting Standards. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 policy for accounting for land easements as executory contracts. The standard had a material impact on the unaudited condensed Consolidated Balance Sheets, but did not have an impact on the unaudited condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Please refer to Note 17 for disclosures related to the new standard.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480), I. Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” Part I of ASU 2017-11 will result in freestanding equity-linked financial instruments, such as warrants, and conversion options in convertible debt or preferred stock to no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification. The amendments in Part II do not require any transition guidance as the amendments do not have an accounting effect. The amendments in ASU 2017-11 will be effective on January 1, 2020, and the Part I amendments must be applied retrospectively. Early application is permitted. The Company early adopted ASU 2017-11, which did not have any material impact.

 

10
 

 

Other Comprehensive Income. In accordance with ASU 2016-01, Financial Instruments, 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.

 

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

 

Segment assets (1)  September 30, 2019   December 31, 2018 
   (in thousands) 
Primary  $194,890   $213,504 
Corporate, unallocated   41,300    42,455 
Total assets  $236,190   $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. ACQUISTION

 

Blackjewel Assignment Agreement

 

On August 14, 2019, Jewell Valley Mining LLC (“Jewell Valley”), a wholly owned subsidiary of the Partnership, entered into a general assignment and assumption agreement and bill of sale (the “Assignment Agreement”) with Blackjewel L.L.C., Blackjewel Holdings L.L.C., Revelation Energy Holdings, LLC, Revelation Management Corp., Revelation Energy, LLC, Dominion Coal Corporation, Harold Keene Coal Co. LLC, Vansant Coal Corporation, Lone Mountain Processing LLC, Powell Mountain Energy, LLC, and Cumberland River Coal LLC (together, “Blackjewel”) to purchase certain assets from Blackjewel for cash consideration of $850,000 plus an additional royalty of $250,000 that is payable within one year from the date of the purchase, as well as the assumption of associated reclamation obligations. The transaction costs associated with the Assignment Agreement were $103,577. The assets that are subject of the Assignment Agreement consist of three underground mines in Virginia that were actively producing coal prior to Blackjewel’s filing for relief under Chapter 11 of the United States Bankruptcy Code, along with a preparation plant, rail loadout facility, related mineral and surface rights and infrastructure and certain purchase contracts to be assumed at Jewell Valley’s option.

 

As of September 30, 2019, the Partnership is still in the process of hiring qualified personnel to operate the assets purchased from Blackjewel since the Partnership did not retain any of the existing Blackjewel workforce. The Partnership is also still refurbishing the assets before resuming mining operations. The Partnership plans to resume mining operations at one of the mines in the fourth quarter of 2019. The Company reviewed the appropriate guidance regarding ASU 2017-01, Business Combinations (Topic 805) and determined that this transaction was an asset purchase.

 

11
 

 

The Assignment Agreement was funded by borrowings from the Partnership’s delayed draw feature of the Financing Agreement (see Note 9). The following table summarizes the assets acquired and liabilities assumed as of the acquisition date:

 

   (in thousands) 
Property, plant and equipment  $3,853 
Land   378 
Asset retirement obligation   (2,596)
Net assets acquired  $1,635 
Initial cash consideration  $850 
Mineral cure payments   431 
Transaction costs   104 
Cash consideration   1,385 
Royalty payable   250 
Total consideration  $1,635 

 

4. DISCONTINUED OPERATIONS

 

Pennyrile Asset Purchase Agreement

 

On September 6, 2019, the Partnership and Alliance Coal, LLC (“Buyer”) and Alliance Resource Partners, L.P. (“Buyer Parent”) entered into an Asset Purchase Agreement (the “Pennyrile APA”) pursuant to which the Partnership sold to Buyer all of the real property, permits, equipment and inventory and certain other assets associated with its Pennyrile mine complex, as well as the buyer’s assumption of the Pennyrile reclamation obligation in exchange for approximately $3.7 million, subject to certain adjustments.

 

Pursuant to the Pennyrile APA, the Partnership retains liability for certain employee claims, subsidence claims arising from pre-closing mining operations, MSHA liabilities and certain other matters. The Pennyrile APA also provides that the Buyer shall have the right to conduct diligence on the Pennyrile mine complex and may contest the fair market value of the purchased assets or the estimate of the costs of the assumed liabilities following such diligence investigation. In the event the Buyer does contest such amounts, the parties will attempt to resolve the dispute and to the extent they cannot, will submit the matter to a third party to make a final determination with respect to such matters, and will adjust the purchase price accordingly.

 

The parties have made customary representations, warranties and covenants in the Pennyrile APA. The closing of the transactions contemplated by the Asset Purchase Agreement are subject to a number of closing conditions, including, among others, the performance of applicable covenants and accuracy of representations and warranties and absence of material adverse changes in the condition of the Pennyrile mine complex. Subject to the satisfaction of closing conditions, the transaction contemplated by the Pennyrile APA is expected to close in the fourth quarter of 2019.

 

Coal Supply Asset Purchase Agreement

 

On September 6, 2019, the Partnership, the Buyer and the Buyer Parent entered into an Asset Purchase Agreement for the sale and assignment of certain coal supply agreements associated with the Pennyrile mine complex (the “Coal Supply APA”) in exchange for approximately $7.3 million. The Coal Supply APA includes customary representations of the parties thereto, and indemnification for losses arising from the breaches of such representations and for liabilities arising during the period in which the relevant parties were not party to the coal supply agreements. The transactions contemplated by the Coal Supply APA closed upon the execution thereof.

 

12
 

 

Discontinued Operations

 

The Pennyrile operating results for the three and nine months ended September 30, 2019 and 2018 are recorded as discontinued operations on the Company’s unaudited condensed consolidated statements of operations including a $28.0 million impairment loss for the three and nine months ended September 30, 2019 associated with the sale. The current and non-current assets and liabilities previously related to Pennyrile have been reclassified to the appropriate held for sale categories on the Company’s unaudited condensed consolidated balance sheets at September 30, 2019 and December 31, 2018.

 

Major assets and liabilities of discontinued operations for Pennyrile Energy LLC

as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

   September 30, 2019   December 31, 2018 
   (in thousands) 
Carrying amount of major classes of assets included as part of discontinued operations:          
Cash and cash equivalents  $-   $1 
Accounts receivable   1,428    2,645 
Accounts receivable-other   174    - 
Inventories   -    455 
Advance royalties   -    540 
Prepaid expenses and other   -    107 
Total current assets of the disposal group classified as held for sale in the consolidated balance sheets  $1,602   $3,748 
           
Property and equipment (net)  $6,517   $41,054 
Advance royalties, net of current portion   -    1,438 
Other non-current assets   -    443 
Total non-current assets of the disposal group classified as held for sale in the consolidated balance sheets  $6,517   $42,935 
           
Carrying amount of major classes of liabilities included as part of discontinued operations:          
Accounts payable  $3,389   $3,772 
Accrued expenses and other   1,332    1,457 
Asset retirement obligations, current portion   2,200    - 
Total current liabilities of the disposal group classified as held for sale in the consolidated balance sheets  $6,921   $5,229 
                        
Asset retirement obligations, net of current portion  $-   $522 
Total non-current liabilities of the disposal group classified as held for sale in the consolidated balance sheets  $-   $522 

 

13
 

 

Major components of net loss from discontinued operations for Pennyrile

Energy LLC for three and nine months ended September 30, 2019 and 2018 are summarized as follows:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2019     2018     2019     2018  
    (in thousands)              
Major line items constituting loss from discontinued operations for the Pennyrile Energy LLC disposal:                                
Coal sales   $ 8,920     $ 12,529     $ 35,009     $ 37,748  
Total revenues     8,920       12,529       35,009       37,748  
                                 
Cost of operations (exclusive of depreciation, depletion and amortization shown separately below)     11,796       13,724       39,925       39,105  
Depreciation, depletion and amortization     1,658       1,664       5,032       5,028  
Selling, general and administrative (exclusive of depreciation, depletion and amortization shown separately above)     52       80       130       161  
Asset impairment and related charges     27,988       -       27,988       -  
(Gain) on sale/disposal of assets, net     -       4       (2 )     4  
Total costs, expenses and other     41,494       15,472       73,073       44,298  
(Loss) from discontinued operations before income taxes for the Pennyrile Energy LLC disposal     (32,574 )     (2,943 )     (38,064 )     (6,550 )
Income tax benefit     3,050       373       3,999       831  
Net (loss) from discontinued operations   $ (29,524 )   $ (2,570 )   $ (34,065 )   $ (5,719 )

 

Cash Flows. The depreciation, depletion and amortization amounts for Pennyrile for each period presented are listed in the previous table. The Pennyrile capital expenditures for the nine months ended September 30, 2019 and 2018 were $1.4 million and $3.0 million, respectively. The asset impairment loss of $28.0 million is the only material non-cash operating item for all periods presented related to Pennyrile. Pennyrile did not have any material non-cash investing items for any periods presented.

 

5. 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 September 30, 2019, the $2.8 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.

 

14
 

 

6. PROPERTY

 

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

 

    Useful Lives   September 30, 2019     December 31, 2018  
          (in thousands)          
Land and land improvements       $ 6,915     $ 9,406  
Mining and other equipment and related facilities   2-20 Years     161,739       153,332  
Mine development costs   1-15 Years     7,546       5,954  
Coal properties   1-15 Years     27,586       27,652  
Construction work in process         10,058       3,199  
Total         213,844       199,543  
Less accumulated depreciation, depletion and amortization         (82,086 )     (60,482 )
Net       $ 131,758     $ 139,061  

 

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 three and nine months ended September 30, 2019 and 2018 were as follows:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2019     2018     2019     2018  
    (in thousands)     (in thousands)  
Depreciation expense-mining and other equipment and related facilities   $ 6,141     $ 6,063     $ 18,829     $ 17,689  
Depletion expense for coal properties     160       120       345       359  
Amortization of mine development costs     117       51       325       97  
Amortization of other assets     15       53       44       53  
Total depreciation, depletion and amortization   $ 6,433     $ 6,287     $ 19,543     $ 18,198  

 

Per an agreement 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.

 

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

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

 

    September 30, 2019     December 31, 2018  
    (in thousands)  
Payroll, bonus and vacation expense   $ 2,041     $ 1,529  
Non income taxes     2,874       1,943  
Royalty expenses     2,266       1,368  
Accrued interest     102       152  
Health claims     905       868  
Workers’ compensation & pneumoconiosis     1,900       1,900  
Income taxes (Note 12)     134       134  
Consent fee (Note 9)     1,000       -  
Other     974       1,252  
Total   $ 12,196     $ 9,146  

 

15
 

 

8. NOTES PAYABLE – RELATED PARTY

 

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

 

    September 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 September 30, 2019 and $46 thousand at December 31, 2018. The Company expensed $3 and $9 thousand in interest related to the related party loan in the three and nine months, respectively, ended September 30 in both 2019 and 2018.

 

9. DEBT

 

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

 

    September 30, 2019     December 31, 2018  
    (in thousands)  
Note payable- Financing Agreement   $ 37,923     $ 29,048  
Note payable- other debt     1,070       522  
Note payable to Cedarview     1,500       2,500  
Finance lease obligation     7       -  
Net unamortized debt issuance costs     (5,607 )     (4,121 )
Unamortized original issue discount     (527 )     (843 )
Total     34,366       27,106  
Current portion     (5,945 )     (3,174 )
Long-term debt   $ 28,421     $ 23,932  

 

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 a $40 million additional commitment that was contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement (“Delayed Draw Term Loan Commitment”). The Partnership has utilized $15 million of the $40 million additional commitment, which results in $25 million of the additional commitment remaining. Loans made pursuant to the Financing Agreement are secured by substantially all of the Borrowers’ and Guarantors’ assets. The Financing Agreement originally had a termination date of December 27, 2020, which was amended to December 27, 2022 per the fifth amendment to the Financing Agreement discussed further below.

 

16
 

 

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 originally due on December 27, 2020 (see discussion of fifth amendment below). 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.

 

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 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 ended June 30, 2018.

 

17
 

 

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 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.

 

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.

 

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 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 ending 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.

 

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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.

 

On August 16, 2019, the Partnership entered into a fourth amendment (the “Fourth Amendment”) to the Financing Agreement. The Fourth Amendment provides a $5.0 million term loan provided by the Lenders to the Partnership under the delayed draw feature of the Financing Agreement, and extends the period by which an applicable premium payable to the Lenders will be calculated to the final maturity date.

 

On September 6, 2019, the Partnership entered into a fifth amendment (the “Fifth Amendment”) to the Financing Agreement. The Fifth Amendment (i) extends the maturity of the Financing Agreement to December 27, 2022, (ii) provides a $5.0 million term loan provided by the Lenders to the Partnership under the delayed draw feature of the Financing Agreement, (iii) extends the period by which an applicable premium payable to the Lenders will be calculated to December 31, 2021, (iv) modifies certain definitions and concepts to account for the Partnership’s recent acquisition of properties from Blackjewel, (v) permits the disposition of the Pennyrile mining complex and (viii) provides for the payment of additional fees to the Lenders, including a consent fee of $1.0 million, an amendment fee of $825,000 and an increase in the lender exit fee of 1.00% to a total exit fee of 7.00% of the amount of term loans made under the Financing Agreement that is payable at final maturity of the Financing Agreement.

 

At September 30, 2019, the Partnership had $27.9 million of borrowings outstanding at a variable interest rate of Libor plus 10.00% (12.13%), $5.0 million of borrowings outstanding at a variable interest rate of Libor plus 10.00% (12.17%) and $5.0 million of borrowings outstanding at a variable interest rate of Libor plus 10.00% (12.06%).

 

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.

 

19
 

 

10. ASSET RETIREMENT OBLIGATIONS

 

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

 

    Nine months
Ended
September 30, 2019
    Year Ended
December 31, 2018
 
      (in thousands)          
Balance at beginning of period, including current portion   $ 15,067     $ 15,994  
Accretion expense     981       1,277  
Adjustments to the liability from annual recosting and other     -       (1,383 )
Jewell Valley, LLC acquisition     2,596       -  
Reclassification to held for sale     (35 )     (522 )
Liabilities settled     (66 )     (299 )
Balance at end of period     18,543       15,067  
Less current portion     (465 )     (465 )
Non-current portion   $ 18,078     $ 14,602  

 

11. STOCKHOLDERS’ EQUITY

 

Royal Activity

 

At September 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 nine months ended September 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 $0.9 million and $1.8 million for distributions to holders of the Series A preferred units for each of the nine months ended September 30, 2019 and 2018.

 

12. INCOME TAXES

 

See Note 13 for discussion of income tax contingencies impacting the Company.

 

The Company’s effective tax rates for the nine months ended September 30, 2019 and 2018 for continuing operations were 17% and 26%, respectively. The effective tax rate increased in the third quarter of 2018 compared to the first two quarters of 2018 due to new tax information impacting the annual effective tax rate.

 

13. COMMITMENTS AND CONTINGENCIES

 

Coal Sales Contracts and Contingencies—As of September 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 Q4     762       13  
2020     838       3  
2021     120       1  

 

20
 

 

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 nine months ended September 30, 2019 and 2018.

 

Leases—The Company leases various mining, transportation and other equipment under operating leases. Please read Note 17 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 nine months ended September 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
September 30,
    Nine months ended
September 30,
 
    2019     2018     2019     2018  
    (in thousands)              
Lease expense   $ 1,239     $ 1,105     $ 3,621     $ 2,334  
Royalty expense   $ 3,150     $ 2,564     $ 9,602     $ 8,022  

 

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 September 30, 2019. The Company had outstanding surety bonds with third parties of $41.6 million as of September 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 $41.6 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 to 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.

 

Certain surety bonds for Sands Hill Mining LLC had not been transferred or replaced by the buyer of Sands Hill Mining LLC as was agreed to when the Company sold Sands Hill Mining LLC to the buyer in November 2017. 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 (recorded as selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2019) to assume the Company’s surety bond obligations related to Sands Hill Mining LLC. 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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Income Tax Contingency

 

The Company has filed federal but not all of its required state income tax returns for 2014, 2015, 2016, 2017, and 2018, 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 and subsequently filed a federal income tax return for the fiscal year ended February 28, 2018. 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 nine months ended September 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 September 30, 2019 and December 31, 2018 once these issues are resolved.

 

Litigation Settlement

 

On August 6, 2019, Ronald Phillips, a previous executive of the Company, filed a complaint against the Partnership in the Delaware Court of Chancery seeking indemnification and advancement of expenses in regard to attorney’s fees he had incurred and expected to incur in a lawsuit filed by us against Yorktown Partners, LLC, Weston Energy, LLC and related entities and individuals, including Mr. Phillips (the “Yorktown Litigation”). On September 23, 2019, a settlement agreement with Ronald Phillips was reached. Under the terms of the settlement, Mr. Phillips agreed to return up to 450,000 shares of Company stock and relinquish his rights to an additional 50,000 shares of Company stock, and the Partnership agreed to reimburse a portion of Mr. Phillips’ attorney’s fees. Following the return of the shares, Mr. Phillips agreed to dismiss the advancement case against the Partnership and the Partnerhsip agreed to dismiss all claims against Mr. Phillips in the Yorktown Litigation without prejudice to our claims against the remaining defendants. The Company expects to recognize a material amount of settlement income upon the realization of the settlement, which will be deemed to occur upon the actual receipt of the Company shares. After September 30, 2019, Mr. Phillips was able to procure the return of the shares, and the dismissals required by the settlement were filed with the appropriate courts.

 

Brian Hughs Litigation

 

On May 9, 2019, the Company terminated Brian Hughs, the Company’s chief commercial officer, for cause. On or about July 25, 2019, Mr. Hughs filed a complaint with the Occupational Safety and Hazard Board, wherein he alleges that his termination as an officer of the Company violated the anti-retaliation provisions of the Sarbanes-Oxley Act, 18 U.S.C. §1514A. In the complaint, Mr. Hughs seeks reinstatement, attorneys and other damages.

 

On September 17, 2019, Mr. Hughs filed a complaint in the Delaware Court of Chancery seeking indemnification and advancement of expenses in regard to attorneys he hired arising out of an audit/conflicts committee investigation that he requested into certain issues surrounding the Partnership’s sale of Sands Hill Mining, LLC in 2017. The committee has concluded its investigation and determined that no action was necessary. Mr. Hughs also sought advancement of expenses in relation to an allegation that the Federal Bureau of Investigation had contacted certain shareholders of the Company whom he had solicited to invest in the Company. The Company does not believe that Mr. Hughs is entitled to indemnification or advancement for those matters and is defending the case.

 

14. MAJOR CUSTOMERS

 

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

 

    September 30,
2019
Receivable
Balance
   

December 31,
2018
Receivable

Balance

    Nine months
ended
September 30,
2019 Sales
    Nine months
ended
September 30,
2018 Sales
 
    (in thousands)  
Javelin Global   $ 2,261