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.
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.
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
|
|
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.
|
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.
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.
|
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.
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.
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.
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”).
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.
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%).
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.
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.