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 nine months ended September 30, 2019, we generated revenues from continuing operations of approximately $42.3 million
and $140.5 million, respectively, and we generated net losses from continuing operations of approximately $9.2 million and $14.7
million for the three and nine months ended September 30, 2019, respectively. For the three months ended September 30, 2019, we
produced approximately 0.8 million tons of coal from continuing operations and sold approximately 0.7 million tons of coal from
continuing operations, of which approximately 85% were sold pursuant to supply contracts. For the nine months ended September
30, 2019, we produced approximately 2.5 million tons of coal from continuing operations and sold approximately 2.3 million tons
of coal from continuing operations, of which approximately 87% were sold pursuant to supply contracts.
Current
Liquidity and Outlook
As
of September 30, 2019, our available liquidity was $8.3 million. We also have a delayed draw term loan commitment in the amount
of $25 million contingent upon the satisfaction of certain conditions precedent specified in our financing agreement discussed
below.
On
December 27, 2017, we entered into a financing agreement (“Financing Agreement”), which provides us with a multi-draw
loan in the original 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 a $40 million additional commitment that
was contingent upon the satisfaction of certain conditions precedent specified in the Financing Agreement. We have utilized $15
million of the $40 million additional commitment, which results in $25 million of the additional commitment remaining. We used
approximately $17.3 million of the initial Financing Agreement net proceeds to repay all amounts outstanding and terminate the
amended and restated credit agreement with PNC Bank, National Association, as Administrative Agent. The Financing Agreement initially
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. For more information about our Financing Agreement, please read “— Liquidity and Capital
Resources—Financing Agreement.”
Beginning
in the latter part of the third quarter of 2019, we have experienced weak market demand and have seen prices move lower for the
qualities of met and steam coal we produce. If we continue to experience weak demand and prices continue to lower for our met
and steam coal, we may not be able to continue to give the required representations or meet all of the covenants and restrictions
included in our Financing Agreement. If we violate any of the covenants or restrictions in our Financing Agreement, including
the fixed-charge coverage ratio, some or all of our indebtedness may become immediately due and payable, and our lenders may not
be willing to make any loans under the additional commitment available under our Financing Agreement. If we are unable to give
a required representation or we violate a covenant or restriction, then we will need a waiver from our lenders under our Financing
Agreement. Although we believe our lenders are well secured under the terms of our Financing Agreement, there is no assurance
that the lenders would agree to any such waiver. Failure to obtain financing or to generate sufficient cash flow from operations
could cause us to further curtail our operations and reduce spending and alter our business plan. We may also be required to consider
other options, such as selling additional 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.
We
continue to take measures, including the suspension of cash distributions on our common and subordinated units and 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
Pennyrile
Mine Complex (“Pennyrile”) Asset Purchase Agreement
On
September 6, 2019, we entered into an Asset Purchase Agreement (the “Pennyrile APA”) with Alliance Coal, LLC (“Buyer”)
and Alliance Resource Partners, L.P. (“Buyer Parent”) pursuant to which we sold to Buyer all of the real property,
permits, equipment and inventory and certain other assets associated with Pennyrile in exchange for approximately $3.7 million,
subject to certain adjustments.
Pursuant
to the Pennyrile APA, we retain 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 Buyer shall have the right to conduct diligence
on the Pennyrile 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 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 Pennyrile.
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, we entered into an Asset Purchase Agreement with the Buyer and Buyer Parent for the sale and assignment of
certain coal supply agreements associated with Pennyrile (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.
Discontinued
Operations
The
Pennyrile operating results for the three and nine months ended September 30, 2019 and 2018 are recorded as discontinued operations,
including a $28.0 million impairment loss associated with the sale.
Blackjewel
Assignment Agreement
On
August 14, 2019, our new wholly-owned subsidiary Jewell Valley Mining LLC, 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 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 our
option. We are in the process of hiring employees and refurbishing the assets before we begin mining operations. We plan to resume
mining operations at one of the mines in the fourth quarter of 2019
Financing
Agreement
On
September 6, 2019, we entered into a fifth amendment (the “Fifth Amendment”) to the Financing Agreement originally
executed on December 27, 2017 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”). 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 us 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 the certain definitions and concepts to account
for our 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 7.0% of the amount of term loans made under the Financing
Agreement that is payable at the maturity of the Financing Agreement.
On
August 16, 2019, we entered into a fourth amendment (the “Fourth Amendment”) to the Financing Agreement originally
executed on December 27, 2017 with the Lenders. The Fourth Amendment provides a $5.0 million term loan provided by the Lenders
to us 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
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
increased 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.
(NASDAQ: TUSK)(“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 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.
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 our Central Appalachia 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.
We recorded a gain of $6.9 million during the second quarter of 2019 related to this settlement agreement.
Distribution
Suspension
Pursuant
to the Partnership’s limited partnership agreement, our 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 September 30, 2019, we have suspended the cash distribution on our common units. For each of the quarters ended
September 30, 2014, December 31, 2014 and March 31, 2015, we announced cash distributions per common unit at levels lower than
the minimum quarterly distribution. We have not paid any distribution on our subordinated units for any quarter after the quarter
ended March 31, 2012. As of September 30, 2019, we had accumulated arrearages of $848.7 million.
Recent
Developments - Royal
Sale
of Royalty Interest
Per
an agreement 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, and Subsequent Litigation
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. Hugh’s removal from the Company’s board was effective as of June 20, 2019.
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 consequential damages.
On
September 17, 2019, Mr. Hughs filed a complaint in the Delaware Court of Chancery seeking advancement of expenses in regard to
attorneys he hired arising out of an audit/conflicts committee investigation into certain issues surrounding the Partnership’s
sale of Sands Hill Mining, LLC in 2017. Mr. Hughs also sought advance 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.
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 September 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
|
|
|
2019
Q4
|
|
|
762
|
|
|
|
13
|
|
|
2020
|
|
|
838
|
|
|
|
3
|
|
|
2021
|
|
|
120
|
|
|
|
1
|
|
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 September 30, 2019 Compared to Three Months Ended September 30, 2018
Revenues.
The following table presents revenues and coal revenues per ton for the three months ended September 30, 2019 and 2018:
|
|
|
Three
months
|
|
|
Three
months
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in
millions, except per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam
coal revenue
|
|
$
|
27.6
|
|
|
$
|
29.5
|
|
|
$
|
(1.9
|
)
|
|
|
(6.2
|
)%
|
|
Met
coal revenue
|
|
|
14.3
|
|
|
|
29.9
|
|
|
|
(15.6
|
)
|
|
|
(52.3
|
)%
|
|
Total
coal revenues
|
|
|
41.9
|
|
|
|
59.4
|
|
|
|
(17.5
|
)
|
|
|
(29.4
|
)%
|
|
Other
revenues
|
|
|
0.4
|
|
|
|
1.2
|
|
|
|
(0.8
|
)
|
|
|
(66.7
|
)%
|
|
Total
revenues
|
|
$
|
42.3
|
|
|
$
|
60.6
|
|
|
$
|
(18.3
|
)
|
|
|
(30.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam
tons sold
|
|
|
591.3
|
|
|
|
671.8
|
|
|
|
(80.5
|
)
|
|
|
(12.0
|
)%
|
|
Met
tons sold
|
|
|
147.4
|
|
|
|
264.0
|
|
|
|
(116.6
|
)
|
|
|
(44.2
|
)%
|
|
Total
tons sold (in thousands except %)
|
|
|
738.7
|
|
|
|
935.8
|
|
|
|
(197.1
|
)
|
|
|
(30.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
revenues per steam ton
|
|
$
|
46.59
|
|
|
$
|
43.73
|
|
|
$
|
2.85
|
|
|
|
6.5
|
%
|
|
Coal
revenues per met ton
|
|
|
96.75
|
|
|
|
113.16
|
|
|
|
(16.41
|
)
|
|
|
(14.5
|
)%
|
|
Coal
revenues per ton*
|
|
$
|
56.61
|
|
|
$
|
63.41
|
|
|
$
|
(6.80
|
)
|
|
|
(10.7
|
)%
|
|
*
|
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 September 30, 2019 decreased to $41.9 million from $59.4 million on
September 30, 2018, a decrease of $17.5 million or 29.4%. Coal revenues per ton was $56.61 for the three months ended September
30, 2019, a decrease of $6.80, or 10.7%, from $63.41 per ton for the three months ended September 30, 2018. The decrease in coal
revenues and coal revenues per ton was primarily the result of fewer tons sold and lower contracted sale prices for coal sold
from our coal operations during the third 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 September 30, 2019 and 2018:
|
|
|
Three
months
|
|
|
Three
months
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in
millions, except per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations (exclusive of depreciation, depletion and amortization shown separately below)
|
|
$
|
38.0
|
|
|
$
|
46.8
|
|
|
$
|
(8.8
|
)
|
|
|
(18.8
|
)%
|
|
Freight
and handling costs
|
|
|
1.4
|
|
|
|
5.9
|
|
|
|
(4.5
|
)
|
|
|
(76.5
|
)%
|
|
Depreciation,
depletion and amortization
|
|
|
6.4
|
|
|
|
6.3
|
|
|
|
0.1
|
|
|
|
2.3
|
%
|
|
Selling,
general and administrative
|
|
|
5.5
|
|
|
|
3.0
|
|
|
|
2.5
|
|
|
|
83.2
|
%
|
|
Loss/(gain)
on sale/disposal of assets-net
|
|
|
-
|
|
|
|
(0.3
|
)
|
|
|
0.3
|
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons
sold
|
|
|
738.7
|
|
|
|
935.8
|
|
|
|
(197.1
|
)
|
|
|
(21.1
|
)%
|
|
Cost
of operations per ton*
|
|
$
|
51.40
|
|
|
$
|
49.98
|
|
|
$
|
1.42
|
|
|
|
2.8
|
%
|
|
*
|
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 $38.0 million for the three months ended September 30, 2019 as compared to
$46.8 million for the three months ended September 30, 2018. Our cost of operations per ton was $51.40 for the three months ended
September 30, 2019, an increase of $1.40, or 2.8%, from the three months ended September 30, 2018. The decrease in total cost
of operations was primarily due to fewer tons produced and sold from our coal operations during the third quarter of 2019 compared
to the same period in 2018. Cost of operations per ton increased as fewer tons were sold resulting in fixed costs being allocated
to fewer tons sold during the current period.
Freight
and Handling. Total freight and handling cost decreased to $1.4 million for the three months ended September 30, 2019
as compared to $5.9 million for the three months ended September 30, 2018. The decrease in freight and handling costs was primarily
the result of fewer export sales that require us to pay railroad transportation to the port of export during the third quarter
of 2019. We also incurred $0.9 million in demurrage charges during the three months ended September 30, 2018.
Depreciation,
Depletion and Amortization. Total DD&A expense for the three months ended September 30, 2019 was $6.4 million as compared
to $6.3 million for the three months ended September 30, 2018. The increase was due to depreciation of fixed assets put in service
since the third quarter of 2018.
Selling,
General and Administrative. SG&A expense for the three months ended September 30, 2019 increased to $5.5 million as
compared to $3.0 million for the three months ended September 30, 2018 as we experienced an increase to corporate overhead expense.
SG&A was also impacted by a $2.0 million expense recorded as the result of an agreement reached with a third-party to assume
the surety bonds associated with Sands Hill Mining LLC that had not been transferred from our bond portfolio by the purchaser
of Sands Hill Mining LLC as required by the sale agreement executed with the purchaser in November 2017.
Loss/(gain)
on sale/disposal of assets-net. In the third quarter of 2019 we recorded an immaterial gain as compared to a gain of $0.3
million in 2018.
Interest
and other expense/(income): The following table presents interest and other (income) expense for the three months ended September
30, 2019 and 2018:
|
|
|
Three
Months Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
INTEREST
AND OTHER (EXPENSE)/INCOME:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(1.9
|
)
|
|
$
|
(2.9
|
)
|
|
Gain
on sale of equity securities
|
|
|
-
|
|
|
|
-
|
|
|
Total
interest and other (expense)/income
|
|
$
|
(1.9
|
)
|
|
$
|
(2.9
|
)
|
Interest
Expense. Interest expense for the three months ended September 30, 2019 decreased to $1.9 million as compared to $2.9
million for the three months ended September 30, 2018. This decrease was primarily due to the lower average outstanding debt balance
during the three months ended September 30, 2019 compared to the same period in 2018.
Net
Loss From Continuing Operations. Net loss from continuing operations was $9.2 million for the three months ended September
30, 2019 compared to net loss of $1.7 million for the three months ended September 30, 2018. The increase in net loss was primarily
due to the decrease in coal revenue as discussed above.
Adjusted
EBITDA. Adjusted EBITDA from continuing operations for the three months ended September 30, 2019 decreased by $8.5
million to $(2.7) million from $5.8 million for the three months ended September 30, 2018. The decrease was primarily
due to the decrease in net income for the three months ended September 30, 2019. Including net loss from discontinued operations
of approximately $29.5 million, which related to the assets sold at our Pennyrile operation in September 2019, our net
loss was $38.7 million and Adjusted EBITDA was $(5.6) million for the three months ended September 30, 2019. Including
net loss from discontinued operations of approximately $2.6 million, which also relates to Pennyrile, our net loss was
$4.3 million and Adjusted EBITDA was $4.3 million for the three months ended September 30, 2018. Please read “—Reconciliations
of Adjusted EBITDA” for reconciliations of Adjusted EBITDA to net income/(loss).
Nine
months Ended September 30, 2019 Compared to Nine months Ended September 30, 2018
Revenues.
The following table presents revenues and coal revenues per ton for the nine months ended September 30, 2019 and 2018:
|
|
|
Nine
months
|
|
|
Nine
months
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in
millions, except per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam
coal revenues
|
|
$
|
82.3
|
|
|
$
|
78.6
|
|
|
$
|
3.6
|
|
|
|
4.6
|
%
|
|
Met
coal revenues
|
|
|
56.4
|
|
|
|
64.0
|
|
|
|
(7.6
|
)
|
|
|
(11.9
|
)%
|
|
Total
coal revenues
|
|
|
138.7
|
|
|
|
142.6
|
|
|
|
(3.9
|
)
|
|
|
(2.8
|
)%
|
|
Other
revenues
|
|
|
1.8
|
|
|
|
2.5
|
|
|
|
(0.7
|
)
|
|
|
(28.0
|
)%
|
|
Total
revenues
|
|
$
|
140.5
|
|
|
$
|
145.1
|
|
|
$
|
(4.7
|
)
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam
tons sold
|
|
|
1,755.1
|
|
|
|
1,835.7
|
|
|
|
(80.6
|
)
|
|
|
(4.4
|
)%
|
|
Met
tons sold
|
|
|
523.1
|
|
|
|
628.2
|
|
|
|
(105.1
|
)
|
|
|
(16.7
|
)%
|
|
Total
tons sold (in thousands except %)
|
|
|
2,278.2
|
|
|
|
2,463.9
|
|
|
|
(185.7
|
)
|
|
|
(7.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
revenues per steam ton
|
|
$
|
46.88
|
|
|
$
|
42.84
|
|
|
$
|
4.04
|
|
|
|
9.4
|
%
|
|
Coal
revenues per met ton
|
|
|
107.81
|
|
|
|
101.88
|
|
|
|
5.93
|
|
|
|
5.8
|
%
|
|
Coal
revenues per ton*
|
|
$
|
60.88
|
|
|
$
|
57.89
|
|
|
$
|
2.99
|
|
|
|
5.2
|
%
|
|
*
|
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 nine months ended September 30, 2019 decreased by approximately $3.9 million, or 2.8%, to approximately
$138.7 million from approximately $142.6 million for the nine months ended September 30, 2018. Coal revenues per ton were $60.88
for the nine months ended September 30, 2019, an increase of $2.99, or 5.2%, from $57.89 per ton for the nine months ended September
30, 2018. The decrease in coal revenues was primarily the result of fewer tons of coal sold during the nine months ended September
30, 2019. The increase in coal revenues per ton was primarily due to an increase in the contracted sale prices across all operations
for the nine months ended September 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 nine months ended September 30, 2019 and 2018:
|
|
|
Nine
months
|
|
|
Nine
months
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
ended
|
|
|
Increase/(Decrease)
|
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
$
|
|
|
%*
|
|
|
|
|
(in
millions, except per ton data and %)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations (exclusive of depreciation, depletion and amortization shown separately below)
|
|
$
|
124.0
|
|
|
$
|
120.3
|
|
|
$
|
3.7
|
|
|
|
3.1
|
%
|
|
Freight
and handling costs
|
|
|
4.3
|
|
|
|
8.2
|
|
|
|
(3.9
|
)
|
|
|
(47.7
|
)%
|
|
Depreciation,
depletion and amortization
|
|
|
19.5
|
|
|
|
18.2
|
|
|
|
1.3
|
|
|
|
7.4
|
%
|
|
Selling,
general and administrative
|
|
|
12.3
|
|
|
|
11.1
|
|
|
|
1.1
|
|
|
|
10.3
|
%
|
|
Loss/(gain)
on sale/disposal of assets-net
|
|
|
(7.0
|
)
|
|
|
(0.2
|
)
|
|
|
(6.8
|
)
|
|
|
3714.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons
sold
|
|
|
2,278.2
|
|
|
|
2,463.9
|
|
|
|
(185.7
|
)
|
|
|
(7.5
|
)%
|
|
Cost
of operations per ton*
|
|
$
|
54.42
|
|
|
$
|
48.82
|
|
|
$
|
5.60
|
|
|
|
11.5
|
%
|
|
*
|
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 increased by $3.7 million or 3.1% to $124.0 million for the nine months ended
September 30, 2019 as compared to $120.3 million for the nine months ended September 30, 2018. Our cost of operations per ton
was $54.42 for the nine months ended September 30, 2019, an increase of $5.60, or 11.5%, from the nine months ended September
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 nine months ended September 30, 2019 compared
to the same period in 2018.
Freight
and Handling. Total freight and handling cost decreased to $4.3 million for the nine months ended September 30, 2019 as
compared to $8.2 million for the nine months ended September 30, 2018. The decrease in freight and handling costs was primarily
the result of fewer export sales that require us to pay railroad transportation to the port of export during the nine months ended
September 30, 2019. We also incurred $1.1 million in demurrage charges during the nine months ended September 30, 2018.
Depreciation,
Depletion and Amortization. Total DD&A expense for the nine months ended September 30, 2019 was $19.5 million as compared
to $18.2 million for the nine months ended September 30, 2018. The increase was due to depreciation of fixed assets put in service
since the third quarter of 2018.
Selling,
General and Administrative. SG&A expense for the nine months ended September 30, 2019 increased to $12.3 million as
compared to $11.1 million for the nine months ended September 30, 2018. SG&A was impacted by a $2.0 million expense recorded
as the result of an agreement reached with a third-party to assume the surety bonds associated with Sands Hill Mining LLC that
had not been transferred from our bond portfolio by the purchaser of Sands Hill Mining LLC as required by the sale agreement executed
with the purchaser in November 2017. SG&A also decreased in 2019 due to stock compensation expense of approximately $1.7 million
in 2018 incurred through a certain severance agreement with a former executive.
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 nine months ended September
30, 2019 and 2018:
|
|
|
Nine
months Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
INTEREST
AND OTHER (EXPENSE)/INCOME:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(5.6
|
)
|
|
$
|
(7.0
|
)
|
|
Gain
on sale of equity securities
|
|
|
0.4
|
|
|
|
6.5
|
|
|
Total
interest and other (expense)/income
|
|
$
|
(5.2
|
)
|
|
$
|
(0.5
|
)
|
Interest
expense. Interest expense for the nine months ended September 30, 2019 decreased to $5.6 million as compared to $7.0 million
for the nine months ended September 30, 2018. This decrease was primarily due to the lower outstanding debt balance for the nine
months ended September 30, 2019 compared to the same period in 2018.
Net
Loss From Continuing Operations. Net loss was $14.7 million for the nine months ended September 30, 2019 compared to net
loss of $9.6 million for the nine months ended September 30, 2018. Our net loss increased during the nine months ended September
30, 2019 compared to 2018 primarily due the decrease in tons sold and 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 nine months ended September 30, 2019 decreased by $6.2 million
to $8.2 million from $14.4 million for the nine months ended September 30, 2018. Adjusted EBITDA from continuing operations decreased
period over period primarily due to the increase in net loss as discussed above. Including net loss from discontinued operations
of approximately $34.1 million, which related to the assets sold at our Pennyrile operation in September 2019, our net
loss was $48.8 million and Adjusted EBITDA, which excludes the impairment loss, was $3.2 million for the nine months ended
September 30, 2019. Including net loss from discontinued operations of approximately $5.7 million, which also relates to
Pennyrile, our net loss was $15.4 million and Adjusted EBITDA was $12.8 million for the nine months ended September 30, 2018.
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
September
30, 2019
|
|
|
Three
Months
Ended
September 30, 2018
|
|
|
Nine
months
ended
September 30, 2019
|
|
|
Nine
months
ended
September 30, 2018
|
|
|
Net
income (loss)
|
|
$
|
(9.2
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
(14.7
|
)
|
|
$
|
(9.6
|
)
|
|
DD&A
|
|
|
6.4
|
|
|
|
6.3
|
|
|
|
19.5
|
|
|
|
18.2
|
|
|
Interest
expense
|
|
|
1.9
|
|
|
|
2.9
|
|
|
|
5.6
|
|
|
|
7.0
|
|
|
Income
tax provision (benefit)
|
|
|
(1.9
|
)
|
|
|
(2.2
|
)
|
|
|
(3.0
|
)
|
|
|
(3.4
|
)
|
|
EBITDA
from continuing operations†*
|
|
|
(2.8
|
)
|
|
|
5.3
|
|
|
|
7.4
|
|
|
|
12.2
|
|
|
Plus:
loss from sale of non-core assets (1)
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.8
|
|
|
|
-
|
|
|
Plus:
Provision for doubtful accounts
|
|
|
-
|
|
|
|
0.3
|
|
|
|
-
|
|
|
|
0.3
|
|
|
Stock
compensation
|
|
|
-
|
|
|
|
0.2
|
|
|
|
-
|
|
|
|
1.9
|
|
|
Adjusted
EBITDA from Continuing Operations†*
|
|
|
(2.7
|
)
|
|
|
5.8
|
|
|
|
8.2
|
|
|
|
14.4
|
|
|
Adjusted
EBITDA from discontinued operations
|
|
|
(30.9
|
)
|
|
|
(1.3
|
)
|
|
|
(33.0
|
)
|
|
|
(1.5
|
)
|
|
Plus:
Loss on impairment of assets (2)
|
|
|
28.0
|
|
|
|
-
|
|
|
|
28.0
|
|
|
|
-
|
|
|
Adjusted
EBITDA†
|
|
$
|
(5.6
|
)
|
|
$
|
4.3
|
|
|
$
|
3.2
|
|
|
$
|
12.8
|
|
|
|
(1)
|
During
the three and nine months ended September 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.
|
|
|
|
|
|
|
(2)
|
We
recorded an impairment loss of $28.0 million associated with the sale of our Pennyrile assets for the three and nine
months ended September 30, 2019. The impairment loss of $28.0 million is recorded in discontinued operations for the
three and nine months ended September 30, 2019.
|
*
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 September 30, 2019, our available liquidity was $8.3 million. We also have a delayed draw term loan commitment in the amount
of $25 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 original 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 a $40 million additional commitment that was contingent upon the satisfaction
of certain conditions precedent specified in the Financing Agreement. We have utilized $15 million of the $40 million additional
commitment, which results in $25 million of the additional commitment remaining. We used approximately $17.3 million of the initial
Financing Agreement net proceeds to repay all amounts outstanding and terminate the amended and restated credit agreement with
PNC Bank, National Association, as Administrative Agent. The Financing Agreement initially 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.
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.
Beginning
in the latter part of the third quarter of 2019, we have experienced weak market demand and have seen prices move lower for the
qualities of met and steam coal we produce. If we continue to experience weak demand and prices continue to lower for our met
and steam coal, we may not be able to continue to give the required representations or meet all of the covenants and restrictions
included in our Financing Agreement. If we violate any of the covenants or restrictions in our Financing Agreement, including
the fixed-charge coverage ratio, some or all of our indebtedness may become immediately due and payable, and our lenders’
may not be willing to make any loans under the additional commitment available under our Financing Agreement. If we are unable
to give a required representation or we violate a covenant or restriction, then we will need a waiver from our lenders under our
Financing Agreement. Although we believe our lenders are well secured under the terms of our Financing Agreement, there is no
assurance that the lenders would agree to any such waiver. Failure to obtain financing or to generate sufficient cash flow from
operations could cause us to further curtail our operations and reduce spending and alter our business plan. We may also be required
to consider other options, such as selling additional 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.
We
continue to take measures, including the suspension of cash distributions on our common and subordinated units and taking steps
to improve productivity and control costs, 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.
Cash
Flows
Net
cash used in operating activities was $3.3 million for the nine months ended September 30, 2019 as compared to net cash provided
by operating activities of $6.1 million for the nine months ended September 30, 2018. This decrease in cash provided by operating
activities was the result of a higher net loss and negative working capital changes primarily due to the increase in our inventory
during the nine months ended September 30, 2019.
Net
cash provided by investing activities was $1.5 million for the nine months ended September 30, 2019 as compared to net cash used
in investing activities of $3.9 million for the nine months ended September 30, 2018. The increase in cash provided by investing
activities was primarily due to an increase in proceeds from the sale of assets during the nine months ended September 30, 2019
and a decrease in capital expenditures during the first nine months of 2019 compared to the same period in 2018.
Net
cash provided by financing activities was $3.4 million for the nine months ended September 30, 2019 and net cash used in financing
activities was $19.3 million for the nine months ended September 30, 2018. Net cash provided by financing activities for the nine
months ended September 30, 2019 was primarily attributable to proceeds from our Financing Agreement. Net cash used in financing
activities for the nine months ended September 30, 2018 was primarily attributable to deposits paid on our workers’ compensation
and surety bond programs and repayments on our Financing Agreement. The periods ending September 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 nine months ended September 30, 2019 were approximately $6.3 million. This amount was
primarily used to rebuild, repair or replace older mining equipment. Expansion capital expenditures for the nine months ended
September 30, 2019 were approximately $4.3 million, which were primarily related to the construction of a new airshaft at our
Hopedale mining complex in Northern Appalachia and the purchase of the Virginia assets from Blackjewel that was discussed above.
Series
A Preferred Units
On
December 30, 2016, we entered into a Series A Preferred Unit Purchase Agreement (“Preferred Unit Agreement”) with
Weston Energy LLC (“Weston”) and Royal. Under the Preferred Unit Agreement, Weston and Royal agreed to purchase 1,300,000
and 200,000, respectively, of Series A preferred units representing limited partner interests in us at a price of $10.00 per Series
A preferred unit. The Series A preferred units have the preferences, rights and obligations set forth in our Fourth Amended and
Restated Agreement of Limited Partnership, which is described below. In exchange for the Series A preferred units, Weston and
Royal paid cash of $11.0 million and $2.0 million, respectively, to us and Weston assigned to us a $2.0 million note receivable
from Royal originally dated September 30, 2016. Through a series of transactions, Weston now owns all of the Series A preferred
units.
Fourth
Amended and Restated Partnership Agreement of Limited Partnership
On
December 30, 2016, our general partner entered into the Fourth Amended and Restated Agreement of Limited Partnership of the Partnership
(“Amended and Restated Partnership Agreement”) to create, authorize and issue the Series A preferred units.
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 below) and (ii) an amount equal to the number of outstanding Series A preferred units multiplied
by $0.80. “CAM Mining free cash flow” is defined in our partnership agreement as (i) the total revenue of our Central
Appalachia business segment, minus (ii) the cost of operations (exclusive of depreciation, depletion and amortization) for our
Central Appalachia business segment, minus (iii) an amount equal to $6.50, multiplied by the aggregate number of met coal and
steam coal tons sold by us from our Central Appalachia business segment. If we fail 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 we will not be permitted to pay any
distributions on our partnership interests that rank junior to the Series A preferred units, including our common units.
We
will have the option to convert the outstanding Series A preferred units at any time on or after the time at which the amount
of aggregate distributions paid in respect of each Series A preferred unit exceeds $10.00 per unit. Each Series A preferred unit
will convert into a number of common units equal to the quotient (the “Series A Conversion Ratio”) of (i) the sum
of $10.00 and any unpaid distributions in respect of such Series A Preferred Unit divided by (ii) 75% of the volume-weighted average
closing price of the common units for the preceding 90 trading days (the “VWAP”); provided however, that the VWAP
will be capped at a minimum of $2.00 and a maximum of $10.00. On December 31, 2021, all outstanding Series A preferred units will
convert into common units at the then applicable Series A Conversion Ratio.
During
the first quarter of 2019, we 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, we paid the holders of Series A preferred units $6.0 million in distributions
earned for the year ended December 31, 2017. We have accrued approximately $0.9 million for distributions to holders of the Series
A preferred units for the nine months ended September 30, 2019.
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 the Lenders 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 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”). We have 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 our 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.
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 originally due on December
27, 2020 (see discussion of fifth amendment below). 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 ending
June 30, 2018.
The
Financing Agreement contains customary events of default, following which the Collateral Agent may, at the request of lenders,
terminate or reduce all commitments and accelerate the maturity of all outstanding loans to become due and payable immediately
together with accrued and unpaid interest thereon and exercise any such other rights as specified under the Financing Agreement
and ancillary loan documents.
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 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.
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.
On
August 16, 2019, we entered into a fourth amendment (the “Fourth Amendment”) to the Financing Agreement originally
executed on December 27, 2017 with the Lenders. The Fourth Amendment provides a $5.0 million term loan provided by the Lenders
to us 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, we entered into a fifth amendment (the “Fifth Amendment”) to the Financing Agreement originally
executed on December 27, 2017 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”). The Fifth Amendment
(i) extends the maturity of the Financing Agreement to December 27, 2022, (ii) provides us with a $5.0 million term loan provided
by the Lenders 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 the certain definitions and concepts to account
for our 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 7.0% of the amount of term loans made under the Financing
Agreement that is payable upon the maturity of the Financing Agreement.
At
September 30, 2019, we 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%).
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 September 30, 2019, we had $7.9 million in cash collateral held by third-parties of which $3.0 million serves as collateral
for approximately $41.6 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 $41.6 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 buyers
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
buyer 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.
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 we sold Sands Hill Mining LLC to the buyer in November 2017. On July 9, 2019, we entered into an agreement with a third
party for the replacement of our existing surety bond obligations with respect to Sands Hill Mining LLC. We agreed to pay the
third party $2.0 million to assume our surety bond obligations related to Sands Hill Mining LLC. At the time of closing, the third
party delivered to us confirmation from its surety underwriter evidencing the release and removal of us, our affiliates and guarantors,
from the surety bond obligations and all related obligations under our 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.
We
had no letters of credit outstanding as of September 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. We adopted ASU 2014-09, Topic 606
on January 1, 2018, using the modified retrospective method. The adoption of Topic 606 has no impact on revenue amounts recorded
in our financial statements. There have been no other significant changes in these policies and estimates as of September 30,
2019.
We
adopted ASU 2016-02- Leases (Topic 842) 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 17 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.