NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016, AUGUST 31, 2015 AND 2014
AND
THE FOUR MONTHS ENDED DECEMBER 31, 2015
1.
ORGANIZATION AND BASIS OF PRESENTATION
Basis
of Presentation and Principles of Consolidation
—The accompanying consolidated financial statements include the accounts
of Royal Energy Resources, Inc. (“Royal”) and its wholly owned subsidiaries, Rhino GP LLC (“Rhino GP”),
Blaze Minerals, LLC (“Blaze Minerals”), a West Virginia limited liability company and Blue Grove Coal, LLC (“Blue
Grove”), a West Virginia limited liability company and its majority owned subsidiary Rhino Resource Partners LP (“Rhino”)(the
“Partnership”)(OTCQB:RHNO), a Delaware limited partnership (collectively the “Company”). Rhino GP is the
general partner of Rhino.
Intercompany
transactions and balances have been eliminated in consolidation.
On
January 21, 2016, the board of directors of the Company elected to change the Company’s fiscal year end to December 31,
from August 31. Accordingly, the company filed a transition report on Form 10-Q containing unaudited financial statements for
the period from September 1, 2015 to December 31, 2015, together with comparative statements for the period from September 1,
2014 to December 31, 2014, in accordance with Rule 13a-10(c). The audit of this period is included herein.
Organization
and nature of business
Royal
is a Delaware corporation which was incorporated on March 22, 1999, under the name Webmarketing, Inc. On July 7, 2004, the Company
revived its charter and changed its name to World Marketing, Inc. In December 2007 the Company changed its name to Royal Energy
Resources, Inc. Since 2007, the Company pursued gold, silver, copper and rare earth metal mining concessions in Romania and mining
leases in the United States. Commencing in January 2015, the Company began a series of transactions to sell all of its existing
assets, undergo a change in ownership control and management and repurpose itself as a North American energy recovery company,
planning to purchase a group of synergistic, long-lived energy assets, but taking advantage of favorable valuations for mergers
and acquisitions in the current energy markets. On April 13, 2015, the Company executed an agreement for the first acquisition
in furtherance of its change in principal operations.
Blaze
Minerals is the owner of 40,976 net acres of coal and coalbed methane mineral interest in 22 counties across West Virginia.
Blue
Grove is a licensed mine operator based in McDowell County, West Virginia and is currently under contract to operate a mine owned
by GS Energy, LLC.
Rhino
was formed on April 19, 2010 to acquire Rhino Energy LLC (the “Operating Company”). The Operating Company
and its wholly owned subsidiaries produce and market coal from surface and underground mines in Kentucky, Ohio, West Virginia
and Utah. The majority of sales are made to domestic utilities and other coal-related organizations in the United States.
Royal
Energy Resources, Inc. Acquisition of Rhino
On
January 21, 2016, a definitive agreement (“Definitive Agreement”) was completed between Royal and Wexford Capital
whereby Royal acquired 676,911 issued and outstanding common units of Rhino from Wexford Capital for $3.5 million. The Definitive
Agreement also included the committed acquisition by Royal within sixty days from the date of the Definitive Agreement of all
of the issued and outstanding membership interests of the General Partner, as well as 945,525 issued and outstanding subordinated
units of Rhino from Wexford Capital for $1.0 million.
On
March 17, 2016, Royal completed the acquisition of all of the issued and outstanding membership interests of the General Partner
as well as the 945,525 issued and outstanding subordinated units from Wexford Capital. Royal obtained control of, and a majority
limited partner interest, in Rhino with the completion of this transaction.
On
March 21, 2016, Royal and Rhino entered into a securities purchase agreement (the “Securities Purchase Agreement”)
pursuant to which Rhino issued 6,000,000 common units to Royal in a private placement at $1.50 per common unit for an aggregate
purchase price of $9.0 million. Royal paid the Partnership $2.0 million in cash and delivered a promissory note payable to Rhino
in the amount of $7.0 million (the “Rhino Promissory Note”). The promissory note was payable in three installments:
(i) $3.0 million on July 31, 2016; (ii) $2.0 million on or before September 30, 2016 and (iii) $2.0 million on or before December
31, 2016.
As
a result of these transactions, Rhino became a majority owned subsidiary of Royal. See Note 3.
Option
Agreement
On
December 30, 2016, Rhino entered into an option agreement (the “Option Agreement”) with Royal, Rhino Resources Partners
Holdings, LLC (“Rhino Holdings”), an entity wholly owned by certain investment partnerships managed by Yorktown Partners
LLC (“Yorktown”), and Rhino GP. Upon execution of the Option Agreement, Rhino received an option (the “Call
Option”) from Rhino Holdings to acquire substantially all of the outstanding common stock of Armstrong Energy, Inc. (“Armstrong
Energy”) that is currently owned by investment partnerships managed by Yorktown, which currently represents approximately
97% of the outstanding common stock of Armstrong Energy. The Option Agreement stipulates that Rhino can exercise the Call Option
no earlier than January 1, 2018 and no later than December 31, 2019. In exchange for Rhino Holdings granting Rhino the Call Option,
Rhino issued 5.0 million common units, representing limited partner interests in the Partnership (the “Call Option Premium
Units”) to Rhino Holdings upon the execution of the Option Agreement. The Option Agreement stipulates Rhino can exercise
the Call Option and purchase the common stock of Armstrong Energy in exchange for a number of common units to be issued to Rhino
Holdings, which when added with the Call Option Premium Units, will result in Rhino Holdings owning 51% of the fully diluted common
units of Rhino. The purchase of Armstrong Energy through the exercise of the Call Option would also require Royal to transfer
a 51% ownership interest in the Rhino GP to Rhino Holdings. Rhino’s ability to exercise the Call Option is conditioned upon
(i) sixty (60) days having passed since the entry by Armstrong Energy into an agreement with its bondholders to restructure its
bonds and (ii) the amendment of Rhino’s revolving credit facility to permit the acquisition of Armstrong Energy. The percentage
ownership of Armstrong Energy represented by the Armstrong Shares as of the date the Call Option is exercised is subject to dilution
based upon the terms under which Armstrong Energy restructures its indebtedness, the terms of which have not been determined yet.
The
Option Agreement also contains an option (the “Put Option”) granted by Rhino to Rhino Holdings whereby Rhino Holdings
has the right, but not the obligation, to cause Rhino to purchase substantially all of the outstanding common stock of Armstrong
Energy from Rhino Holdings under the same terms and conditions discussed above for the Call Option. The exercise of the Put Option
is dependent upon (i) the entry by Armstrong Energy into an agreement with its bondholders to restructure its bonds and (ii) the
termination and repayment of any outstanding balance under Rhino’s revolving credit facility. In the event either the Partnership
or Rhino GP fail to perform their obligations in the event Rhino Holdings exercises the Put Option, then Rhino Holdings and the
Partnership each have the right to terminate the Option Agreement, in which event no party thereto shall have any liability to
any other party under the Option Agreement, although Rhino Holdings shall be allowed to retain the Call Option Premium Units.
Rhino
Series A Preferred Unit Purchase Agreement
On
December 30, 2016, Rhino entered into a Series A Preferred Unit Purchase Agreement (the “Preferred Unit Agreement”)
with Weston Energy LLC (“Weston”), an entity wholly owned by certain investment partnerships managed by Yorktown,
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 the Partnership (“Series A Preferred Units”) 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
the Fourth Amended and Restated Agreement of Limited Partnership of the Partnership, Weston and Royal paid cash of $11.0 million
and $2.0 million, respectively, to the Partnership and Weston assigned to the Partnership a $2.0 million note receivable from
Royal originally dated September 30, 2016 (the “Weston Promissory Note”).
The
Preferred Unit Agreement contains customary representations, warrants and covenants, which include among other things, that, for
as long as the Series A preferred units are outstanding, the Partnership will cause CAM Mining, LLC (“CAM Mining”),
which comprises the partnership’s Central Appalachia segment, to conduct its business in the ordinary course consistent
with past practice and use reasonable best efforts to maintain and preserve intact its current organization, business and franchise
and to preserve the rights, franchises, goodwill and relationships of its employees, customers, lenders, suppliers, regulators
and others having business relationships with CAM Mining.
The
Preferred Unit Agreement stipulates that upon the request of the holder of the majority of the Partnership’s common units
following their conversion from Series A preferred units, as outlined in the Amended and Restated Partnership Agreement, the Partnership
will enter into a registration rights agreement with such holder. Such majority holder has the right to demand two shelf registration
statements and registration statements on Form S-1, as well as piggyback registration rights.
Fourth
Amended and Restated Agreement of Limited Partnership of Rhino Resource Partners LP
On
December 30, 2016, the 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
Series A preferred units are a new class of equity security that rank senior to all classes or series of equity securities of
the Partnership with respect to distribution rights and rights upon liquidation. The holders of the Series A preferred units shall
be 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 the Amended and Restated Partnership Agreement as (i) the total revenue of the Partnership’s Central
Appalachia business segment, minus (ii) the cost of operations (exclusive of depreciation, depletion and amortization) for the
Partnership’s 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 the Partnership from its Central Appalachia business segment. If the Partnership 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 the Partnership 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. The Series A preferred units will be liquidated in accordance with their capital
accounts and upon liquidation will be entitled to distributions of property and cash in accordance with the balances of their
capital accounts prior to such distributions to equity securities that rank junior to the Series A preferred units.
The
Series A preferred units will vote on an as-converted basis with the common units, and the Partnership will be restricted from
taking certain actions without the consent of the holders of a majority of the Series A preferred units, including: (i) the issuance
of additional Series A preferred units, or securities that rank senior or equal to the Series A preferred units; (ii) the sale
or transfer of CAM Mining or a material portion of its assets; (iii) the repurchase of common units, or the issuance of rights
or warrants to holders of common units entitling them to purchase common units at less than fair market value; (iv) consummation
of a spin off; (v) the incurrence, assumption or guaranty indebtedness for borrowed money in excess of $50.0 million except indebtedness
relating to entities or assets that are acquired by the Partnership or its affiliates that is in existence at the time of such
acquisition or (vi) the modification of CAM Mining’s accounting principles or the financial or operational reporting principles
of the Partnership’s Central Appalachia business segment, subject to certain exceptions.
The
Partnership 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.
Debt
Classification
— The Company evaluated the Partnership’s amended and restated senior secured credit facility
at December 31, 2016 to determine whether this debt liability should be classified as a long-term or current liability on the
Company’s consolidated balance sheet. On May 13, 2016, the Partnership entered into a fifth amendment (the “Fifth
Amendment”) of its amended and restated agreement that initially extended the term of the senior secured credit facility
to July 31, 2017. Per the Fifth Amendment, the term of the credit facility automatically extended to December 31, 2017 when the
revolving credit commitments were reduced to $55 million or less as of December 31, 2016. As of December 31, 2016, the Partnership
has met the requirements to extend the maturity date of the credit facility to December 31, 2017. Since the credit facility has
an expiration date of December 2017, the Partnership determined that its credit facility debt liability of $10.0 million at December
31, 2016 should be classified as a current liability on its consolidated balance sheet. The classification of the credit facility
balance as a current liability raises substantial doubt of the Company’s ability to continue as a going concern for the
next twelve months. The Company is considering alternative financing options that could result in a new long-term credit facility.
Since the credit facility has an expiration date of December 31, 2017, the Company will have to secure alternative financing to
replace its credit facility by the expiration date of December 31, 2017 in order to continue its normal business operations and
meet its obligations as they come due. The financial statements do not include any adjustments relating to the recoverability
and classification of assets carrying amounts or the amount of and classification of liabilities that may result should the Company
be unable to continue as a going concern.
Discontinued
Operations
- The Company’s majority owned subsidiary, Rhino, sold its Elk Horn operation in August 2016. The Company
valued the Elk Horn assets at their sale value and recognized no gain or loss on the sale. Discontinued operations includes the
earnings from operations since the acquisition date.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL
Trade
Receivables and Concentrations of Credit Risk.
See Note 20 for discussion of major customers. The Company does not require
collateral or other security on accounts receivable. The credit risk is controlled through credit approvals and monitoring procedures.
Cash
and Cash Equivalents.
The Company considers all highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Inventories.
Inventories are stated at the lower of cost, based on a three month rolling average, or market. Inventories primarily
consist of coal contained in stockpiles.
Advance
Royalties.
The Company is required, under certain royalty lease agreements, to make minimum royalty payments whether or
not mining activity is being performed on the leased property. These minimum payments may be recoupable once mining begins on
the leased property. The Company capitalizes the recoupable minimum royalty payments and amortizes the deferred costs once mining
activities begin on the units-of-production method or expenses the deferred costs when the Company has ceased mining or has made
a decision not to mine on such property.
Property,
Plant and Equipment.
Property, plant, and equipment, including coal properties, oil and natural gas properties, mine development
costs and construction costs, are recorded at cost, which includes construction overhead and interest, where applicable. Expenditures
for major renewals and betterments are capitalized, while expenditures for maintenance and repairs are expensed as incurred. Mining
and other equipment and related facilities are depreciated using the straight-line method based upon the shorter of estimated
useful lives of the assets or the estimated life of each mine. Coal properties are depleted using the units-of-production method,
based on estimated proven and probable reserves. Mine development costs are amortized using the units-of-production method, based
on estimated proven and probable reserves. The Company assumes zero salvage values for the majority of its property, plant and
equipment when depreciation and amortization are calculated. Gains or losses arising from sales or retirements are included in
current operations.
Stripping
costs incurred in the production phase of a mine for the removal of overburden or waste materials for the purpose of obtaining
access to coal that will be extracted are variable production costs that are included in the cost of inventory produced and extracted
during the period the stripping costs are incurred. The Company defines a surface mine as a location where the Company utilizes
operating assets necessary to extract coal, with the geographic boundary determined by property control, permit boundaries, and/or
economic threshold limits. Multiple pits that share common infrastructure and processing equipment may be located within a single
surface mine boundary, which can cover separate coal seams that typically are recovered incrementally as the overburden depth
increases. In accordance with the accounting guidance for extractive mining activities, the Company defines a mine in production
as one from which saleable minerals have begun to be extracted (produced) from an ore body, regardless of the level of production;
however, the production phase does not commence with the removal of de minimis saleable mineral material that occurs in conjunction
with the removal of overburden or waste material for the purpose of obtaining access to an ore body. The Company capitalizes only
the development cost of the first pit at a mine site that may include multiple pits.
Asset
Impairments for Coal Properties, Mine Development Costs and Other Coal Mining Equipment and Related Facilities.
The Company
follows the accounting guidance in Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment, on
the impairment or disposal of property, plant and equipment for its coal mining assets, which requires that projected future cash
flows from use and disposition of assets be compared with the carrying amounts of those assets when potential impairment is indicated.
When the sum of projected undiscounted cash flows is less than the carrying amount, impairment losses are recognized. In determining
such impairment losses, the Company must determine the fair value for the coal mining assets in question in accordance with the
applicable fair value accounting guidance. Once the fair value is determined, the appropriate impairment loss must be recorded
as the difference between the carrying amount of the coal mining assets and their respective fair values. Also, in certain situations,
expected mine lives are shortened because of changes to planned operations or changes in coal reserve estimates. When that occurs
and it is determined that the mine’s underlying costs are not recoverable in the future, reclamation and mine closing obligations
are accelerated and the mine closing accrual is increased accordingly. To the extent it is determined that coal asset carrying
values will not be recoverable during a shorter mine life, a provision for such impairment is recognized.
Debt
Issuance Costs.
Debt issuance costs reflect fees incurred to obtain financing and are amortized (included in interest
expense) using the effective interest method over the life of the related debt. Debt issuance costs are included in prepaid expenses
and other current assets as of December 31, 2016 since the Company classified its credit facility balance as a current liability.
Asset
Retirement Obligations.
The accounting guidance for asset retirement obligations addresses asset retirement obligations
that result from the acquisition, construction or normal operation of long-lived assets. This guidance requires companies to recognize
asset retirement obligations at fair value when the liability is incurred or acquired. Upon initial recognition of a liability,
an amount equal to the liability is capitalized as part of the related long-lived asset and allocated to expense over the useful
life of the asset. The Company has recorded the asset retirement costs for its mining operations in coal properties.
The
Company estimates its future cost requirements for reclamation of land where it has conducted surface and underground mining operations,
based on its interpretation of the technical standards of regulations enacted by the U.S. Office of Surface Mining, as well as
state regulations. These costs relate to reclaiming the pit and support acreage at surface mines and sealing portals at underground
mines. Other reclamation costs are related to refuse and slurry ponds, as well as holding and related termination/exit costs.
The
Company expenses contemporaneous reclamation which is performed prior to final mine closure. The establishment of the end of mine
reclamation and closure liability is based upon permit requirements and requires significant estimates and assumptions, principally
associated with regulatory requirements, costs and recoverable coal reserves. Annually, the Company reviews its end of mine reclamation
and closure liability and makes necessary adjustments, including mine plan and permit changes and revisions to cost and production
levels to optimize mining and reclamation efficiency. When a mine life is shortened due to a change in the mine plan, mine closing
obligations are accelerated, the related accrual is increased and the related asset is reviewed for impairment, accordingly.
The
adjustments to the liability from annual recosting reflect changes in expected timing, cash flow and the discount rate used in
the present value calculation of the liability. Each respective year includes a range of discount rates that are dependent upon
the timing of the cash flows of the specific obligations. Changes in the asset retirement obligations for the year ended December
31, 2016 were calculated with discount rates that ranged from 7.0% to 9.1%. The discount rates may change in each respective year
due to changes in applicable market indicators that are used to arrive at an appropriate discount rate. Other recosting adjustments
to the liability are made annually based on inflationary cost increases or decreases and changes in the expected operating periods
of the mines. The related inflation rate utilized in the recosting adjustments was 2.3 % for 2016.
Revenue
Recognition.
Most of the Company’s revenues are generated under long-term coal sales contracts with electric utilities,
industrial companies or other coal-related organizations, primarily in the eastern United States. Revenue is recognized and recorded
when shipment or delivery to the customer has occurred, prices are fixed or determinable and the title or risk of loss has passed
in accordance with the terms of the sales agreement. Under the typical terms of these agreements, risk of loss transfers to the
customers at the mine or port, when the coal is loaded on the rail, barge, truck or other transportation source that delivers
coal to its destination. Advance payments received are deferred and recognized in revenue as coal is shipped and title has passed.
Freight
and handling costs paid directly to third-party carriers and invoiced to coal customers are recorded as freight and handling costs
and freight and handling revenues, respectively.
Other
revenues generally consist of coal royalty revenues, limestone sales, coal handling and processing, oil and natural gas royalty
revenues, rebates and rental income. With respect to other revenues recognized in situations unrelated to the shipment of coal,
the Company carefully reviews the facts and circumstances of each transaction and does not recognize revenue until the following
criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s
price to the buyer is fixed or determinable and collectability is reasonably assured. Advance payments received are deferred and
recognized in revenue when earned.
Equity-Based
Compensation.
The Company applies the provisions of ASC Topic 718 to account for any stock/unit awards granted to employees,
directors or consultants. This guidance requires that all share-based payments to employees or directors, including grants of
stock options, be recognized in the financial statements based on their fair value. Royal has granted stock awards to officers
and consultants and Rhino GP has granted restricted units to directors and certain employees of Rhino GP and Rhino that contain
only a service condition. The fair value of each stock grant and each restricted unit award was calculated using the closing price
of Rhino’s common units on the date of grant.
Expense
related to unit awards is recorded in the selling, general and administrative line of the Company’s consolidated statements
of operations and comprehensive income.
Derivative
Financial Instruments.
On occasion, the Company has used diesel fuel contracts to manage the risk of fluctuations in the
cost of diesel fuel. The diesel fuel contracts have met the requirements for the normal purchase normal sale (“NPNS”)
exception prescribed by the accounting guidance on derivatives and hedging, based on management’s intent and ability to
take physical delivery of the diesel fuel. The Company had one diesel fuel contract as of December 31, 2016 to purchase approximately
1.0 million gallons of diesel fuel at fixed prices through December 2017.
Investments
in Joint Ventures.
Investments in joint ventures are accounted for using the equity method or cost basis depending upon
the level of ownership, the Company’s ability to exercise significant influence over the operating and financial policies
of the investee and whether the Company is determined to be the primary beneficiary of a variable interest entity. Equity investments
are recorded at original cost and adjusted periodically to recognize the Company’s proportionate share of the investees’
net income or losses after the date of investment. Any losses from the Company’s equity method investment are absorbed by
the Company based upon its proportionate ownership percentage. If losses are incurred that exceed the Company’s investment
in the equity method entity, then the Company must continue to record its proportionate share of losses in excess of its investment.
Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred.
Income
Taxes.
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740
“Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable
for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized
in an entity’s financial statements or tax returns. Deferred taxes and liabilities are measured using enacted tax rates
or expected tax rates to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if,
based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred
tax assets will not be realized.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
Loss
Contingencies.
In accordance with the guidance on accounting for contingencies, the Company records loss contingencies
at such time that an unfavorable outcome becomes probable and the amount can be reasonably estimated. When the reasonable estimate
is a range, the recorded loss is the best estimate within the range. If no amount in the range is a better estimate than any other
amount, the minimum amount of the range is recorded. The Company discloses information concerning loss contingencies for which
an unfavorable outcome is probable. See Note 19, “Commitments and Contingencies,” for a discussion of such matters.
Management’s
Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently
Issued Accounting Standards.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”).
ASU 2014-09 clarifies the principles for recognizing revenue and establishes a common revenue standard for U.S. financial reporting
purposes. The guidance in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or
services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other
standards (for example, insurance contracts or lease contracts). ASU 2014-09 supersedes the revenue recognition requirements in
ASC 605, Revenue Recognition, and most industry-specific accounting guidance. Additionally, ASU 2014-09 supersedes some cost guidance
included in ASC 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements
for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example,
assets within the scope of ASC 360, Property, Plant, and Equipment, and intangible assets within the scope of ASC 350, Intangibles—Goodwill
and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue)
in ASU 2014-09. In July 2015, the FASB approved to defer the effective date of ASU 2014-09 by one year. Accordingly, ASU 2014-09
will be effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein.
The Company is currently evaluating the requirements of this new accounting guidance.
In
August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern
(“ASU 2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether
there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.
ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter
with early adoption permitted. The adoption of ASU 2014-15 did not have a material impact on the Company’s consolidated
financial statements.
In
January 2015, the FASB issued ASU 2015-01, “Income Statement-Extraordinary and Unusual Items”. ASC 225-20, Income
Statement—Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary
events and transactions. ASU 2015-01 eliminates the concept of extraordinary items. The amendments in ASU 2015-01 are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply
the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented
in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal
year of adoption. The effective date is the same for both public business entities and all other entities. The adoption of ASU
2015-01 on January 1, 2016 has not had a material impact on the Company’s financial statements.
In
February 2015, the FASB issued ASU 2015-02, “Consolidation”. ASU 2015-02 affects reporting entities that are required
to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised
consolidation model. Specifically, the amendments of ASU 2015-02: a) modify the evaluation of whether limited partnerships and
similar legal entities are variable interest entities (VIEs) or voting interest entities, b) eliminate the presumption that a
general partner should consolidate a limited partnership, c) affect the consolidation analysis of reporting entities that are
involved with VIEs, particularly those that have fee arrangements and related party relationships and d) provide a scope exception
from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate
in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money
market funds. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2015. A reporting entity may apply the amendments in this Update using a modified retrospective
approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting
entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 on January 1, 2016 did not have a material impact
on the Company’s financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires that lessees recognize all
leases (other than leases with a term of twelve months or less) on the balance sheet as lease liabilities, based upon the present
value of the lease payments, with corresponding right of use assets. ASU 2016-02 also makes targeted changes to other aspects
of current guidance, including identifying a lease and lease classification criteria as well as the lessor accounting model, including
guidance on separating components of a contract and consideration in the contract. The amendments in ASU 2016-02 will be effective
for the Company on January 1, 2019 and will require modified retrospective application as of the beginning of the earliest period
presented in the financial statements. Early application is permitted. The Company is currently evaluating this guidance.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments.” ASU 2016-15 provides guidance on eight cash flow issues, including debt prepayment or debt extinguishment
costs. ASU 2016-15 requires that cash payments related to debt prepayments or debt extinguishments, excluding accrued interest,
be classified as a financing activity rather than an operating activity even when the effects enter into the determination of
net income. The amendments in ASU 2016-15 will be effective on January 1, 2018 and must be applied retrospectively. Early application
is permitted. The Company is currently evaluating this guidance.
In
October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties that are Under
Common Control.” ASU 2016-17 amends the consolidation guidance on how a reporting entity that is the single decision maker
of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under
common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. ASU 2016-17 is effective
for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2016-17
is not expected to have a material impact on the Company’s financial statements.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805).” ASU 2017-01 clarifies the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. ASU is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company is currently evaluating this guidance.
3.
ACQUISITIONS
Acquisition
of Blaze Minerals, LLC
On
April 13, 2015 the Company entered into a Securities Exchange Agreement with Wastech, Inc. (“Wastech”), under which
the Company acquired all of the issued and outstanding membership units of Blaze Minerals, LLC (“Blaze Minerals”).
Blaze Minerals owns 40,976 net acres of coal and coalbed methane mineral rights in 22 counties in West Virginia (the “Mineral
Rights”). The Company acquired Blaze Minerals by the issuance of 2,803,621 shares of common stock. The shares were valued
at $7 million based upon a per share value of $2.50 per share, which was the price at which the Company issued its common stock
in a private placement at the time. The assets acquired and liabilities assumed as part of the acquisition were recognized at
their fair values at the acquisition date as follows:
|
|
(thousands)
|
|
Mineral
rights
|
|
$
|
7,066
|
|
Liabilities
assumed
|
|
|
57
|
|
Common
stock issued
|
|
$
|
7,009
|
|
Acquisition
of Blue Grove Coal, LLC
On
June 10, 2015, the Company, via a Securities Exchange Agreement, completed the acquisition of Blue Grove Coal, LLC (“Blue
Grove”) in exchange for 350,000 shares of its common stock from Ian and Gary Ganzer (the “Members”). Simultaneous
with the Company’s acquisition of Blue Grove, Blue Grove entered into an Operator Agreement with GS Energy, LLC, under which
Blue Grove has an exclusive right to mine the coal properties of GS Energy for a two year period. During the term of the Operator
Agreement, Blue Grove is entitled to all revenues from the sale of coal mined from GS Energy’s properties, and is responsible
for all costs associated with the mining of the properties or the properties themselves, including operating costs, lease, rental
or royalty payments, insurance and bonding costs, property taxes, licensing costs, etc. Simultaneous with the acquisition of Blue
Grove, Blue Grove also entered into a Management Agreement with Black Oak Resources, LLC (“Black Oak”), a company
owned by the Members. Under the Management Agreement, Blue Grove subcontracted all of its responsibilities under the Operator
Agreement with GS Energy to Black Oak. In consideration, Black Oak is entitled to 75% of all net profits generated by the mining
of the coal properties of GS Energy. Subsequently, the agreement with Black Oak was amended to provide that Black Oak was entitled
to 100% of the first $400,000 and 50% of the next $1,000,000, for a maximum of $900,000 of net profits generated by the mining
of the coal properties of GS Energy.
The
assets acquired as part of the acquisition were recognized at their fair values at the acquisition date as follows:
|
|
(thousands)
|
|
Cash
|
|
$
|
5
|
|
Intangible
assets
|
|
|
870
|
|
Common
stock issued
|
|
$
|
875
|
|
On
December 23, 2015, the Company and the Members entered into an Amendment to Securities Exchange Agreement (“Amendment”)
originally entered into on June 10, 2015 under which the Company acquired all of the membership interests of Blue Grove in exchange
for 350,000 shares of the Company’s common stock. Pursuant to the Amendment, the consideration for the acquisition of Blue
Grove was reduced from 350,000 shares of the Company’s common stock to 10,000 shares.
The
Company reduced additional paid-in capital by $533,821 and the investment in Blue Grove by the same amount when the shares were
returned to be cancelled. This left a value of $101,300 assigned to the intangible asset to be amortized over its remaining life.
Acquisition
of Rhino GP LLC and Rhino Resource Partners LP
On
January 21, 2016 Royal entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Wexford Capital,
LLC (“Wexford”), under which Royal agreed to purchase, and Wexford agreed to sell, a controlling interest in Rhino
in two separate transactions. Pursuant to the Purchase Agreement, Royal purchased 676,912 common units of Rhino from three holders
for total consideration of $3,500,000. The common units purchased by Royal represented approximately 40.0% of the issued and outstanding
common units of Rhino and 23.1% of the total outstanding common units and subordinated units. The subordinated units are convertible
into common units on a one for one basis upon the occurrence of certain conditions.
At
a second closing held on March 17, 2016, Royal purchased all of the membership interest of Rhino GP, and 945,526 subordinated
units of Rhino from two holders thereof, for aggregate consideration of $1,000,000. The subordinated units purchased by Royal
represented approximately 76.5% of the issued and outstanding subordinated units of Rhino, and when combined with the common units
already owned by Royal, resulted in Royal owning approximately 55.4% of the outstanding Units of Rhino. Rhino GP is the general
partner of Rhino, and in that capacity controls Rhino.
On
March 21, 2016, Royal entered into a Securities Purchase Agreement (the “SPA”) with Rhino, under which Royal purchased
6,000,000 newly issued common units of Rhino for $1.50 per common unit, for a total investment in Rhino of $9,000,000. Closing
under the SPA occurred on March 22, 2016. Royal paid the purchase by making a cash payment of $2,000,000 and by issuing a promissory
note in the amount of $7,000,000 to Rhino, which was payable without interest on the following schedule: $3,000,000 on or before
July 31, 2016; $2,000,000 on or before September 30, 2016; and $2,000,000 on or before December 31, 2016. On May 13, 2016 and
September 30, 2016, Royal paid the Partnership $3.0 million and $2.0 million, respectively, for the promissory note installments
that were due July 31, 2016 and September 30, 2016, respectively. The installment due December 31, 2016 was extended until December
31, 2018.
Rhino
has the right to rescind the note installments due on December 31, 2018 before such installment is paid in the event the disinterested
members of Rhino’s board conclude that Rhino does not need the capital that would be provided by the installment. If Rhino
elects to rescind the installment, Royal will be obligated to return for cancellation 1,333,334 common units. In the event Rhino
fails to exercise its rescission rights as to the installments due on December 31, 2018, Rhino will have an option to repurchase
the common units represented by those installments at a price of $3.00 per common unit, which option may only be exercised in
full and in cash as to the installment on or before December 31, 2017.
Royal
has the right to cancel any installment and return the common units represented by the installment to Rhino for cancellation in
the event certain conditions are not true as of the time any installment of the note is due. Such conditions are that all representations
and warranties in the SPA remain true and correct, Rhino has entered into an agreement to extend its Credit Facility to December
31, 2017, and that Rhino is not then in default under the Credit Facility.
The
promissory note is secured by a first lien on 1,333,334 of the common units issued under the SPA. The installment due on July
31, 2016 was with full recourse to the Company, and the installment due on September 30, 2016 was nonrecourse to Royal. The installment
due on December 31, 2016 is nonrecourse to Royal, and Rhino’s only recourse is to cancel the common units in the event of
nonpayment of the promissory note, which has been extended until December 31, 2018.
On
April 13, 2016, Royal acquired 114,814 subordinated units for $115 in cash. After issuing other new units during the period, the
Company’s ownership became 84.5% of the common units and 85.8% of the subordinated units for a combined ownership of 84.6%
until December 30, 2016.
Rhino’s
common units currently trade on the OTCQB Marketplace under the symbol “RHNO.” Rhino’s common units previously
traded on the NYSE until December 17, 2015, when the NYSE suspended trading after Rhino failed to maintain an average global market
capitalization over a consecutive 30 trading-day period of at least $15 million for its common units.
Rhino
is a diversified energy limited partnership formed in Delaware that is focused on coal and energy related assets and activities,
including energy infrastructure investments. Rhino produces, processes and sells high quality coal of various steam and metallurgical
grades. Rhino markets its steam coal primarily to electric utility companies as fuel for their steam powered generators. Customers
for its metallurgical coal are primarily steel and coke producers who use its coal to produce coke, which is used as a raw material
in the steel manufacturing process. Rhino’s business includes investments in oilfield services for independent oil and natural
gas producers and land-based drilling contractors in North America. The investments provide completion and production services,
including pressure pumping, pressure control, flowback and equipment rental services, and also produce and sell natural sand for
hydraulic fracturing.
Rhino
has a geographically diverse asset base with coal reserves located in Central Appalachia, Northern Appalachia, the Illinois Basin
and the Western Bituminous region. As of December 31, 2015, Rhino controlled an estimated 363.6 million tons of proven and probable
coal reserves, consisting of an estimated 310.1 million tons of steam coal and an estimated 53.5 million tons of metallurgical
coal. In addition, as of December 31, 2015, Rhino controlled an estimated 436.8 million tons of non-reserve coal deposits. In
August 2016, Rhino sold their Elk Horn coal leasing business, as described further below, which controlled, as of December 31,
2015, an estimated 100.1 million tons of proven and probable coal reserves and an estimated 197.5 million tons of non-reserve
coal deposits.
At
December 31, 2016, the Company’s investment in Rhino consists of $13,500,215 in cash and $2,000,000 in notes payable. The
acquisition was completed in three steps as described above. The coal properties and the related asset retirement obligation have
been determined by an appraiser. The original provisional assets and liabilities have been adjusted as described below as information
became available. The Company will engage an appraiser to value the remaining assets and liabilities acquired, at which time the
value will be assigned to specific assets and liabilities. The appraisal will be completed within the one year measurement period.
The
following table summarizes the assets and liabilities reported by Rhino, acquired by the Company on March 17, 2016 and included
in the Company’s consolidated financial statements at December 31, 2016. The non-controlling interest in Rhino was valued
based on the trading price of their units on the closing date.
Royal
Energy Resources
Acquisition
of Rhino Resource Partners LP
(
in thousands)
|
|
Original
|
|
|
|
|
|
Revised
|
|
|
|
Provisional
|
|
|
|
|
|
Provisional
|
|
|
|
Amounts
|
|
|
Revisions
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
23,390
|
E
|
|
$
|
1,319
|
|
|
|
|
|
|
|
|
|
G
|
|
$
|
(1,592
|
)
|
|
$
|
23,117
|
|
Property,
plant and equipment
|
|
$
|
77,800
|
B
|
|
$
|
(13,800
|
)
|
|
|
|
|
|
|
|
|
C
|
|
$
|
690
|
|
|
|
|
|
|
|
|
|
H
|
|
$
|
2,122
|
|
|
$
|
66,812
|
|
Other
non-current assets
|
|
$
|
42,686
|
A
|
|
$
|
(2,639
|
)
|
|
$
|
40,047
|
|
Total
identifiable assets
|
|
$
|
143,876
|
|
|
|
|
|
|
$
|
129,976
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
64,473
|
D
|
|
$
|
(1,663
|
)
|
|
$
|
62,810
|
|
Long-term
debt less current portion
|
|
$
|
2,536
|
|
|
|
|
|
|
$
|
2,536
|
|
Asset
retirement obligations, net of current portion
|
|
$
|
27,108
|
|
|
|
|
|
|
$
|
27,108
|
|
Other
non-current liabilities
|
|
$
|
44,098
|
F
|
|
$
|
(7,006
|
)
|
|
$
|
37,092
|
|
Total
liabilities
|
|
$
|
138,215
|
|
|
|
|
|
|
$
|
129,546
|
|
Net
identifiable assets
|
|
$
|
5,661
|
|
|
|
|
|
|
$
|
430
|
|
Goodwill
|
|
$
|
2,363
|
A
|
|
$
|
2,639
|
|
|
$
|
7,594
|
|
|
|
|
|
B
|
|
$
|
13,800
|
|
|
|
|
|
|
|
|
|
C
|
|
$
|
(690
|
)
|
|
|
|
|
|
|
|
|
D
|
|
$
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
E
|
|
$
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
F
|
|
$
|
(7,006
|
)
|
|
|
|
|
|
|
|
|
G
|
|
$
|
1,592
|
|
|
|
|
|
|
|
|
|
H
|
|
$
|
(2,122
|
)
|
|
|
|
|
|
|
$
|
8,024
|
|
|
|
|
|
|
$
|
8,024
|
|
Non-controlling
shareholders
|
|
$
|
3,524
|
|
|
|
|
|
|
$
|
3,524
|
|
Total
consideration paid
|
|
$
|
4,500
|
|
|
|
|
|
|
$
|
4,500
|
|
The
columns above present the original estimates of the fair value of acquired assets and liabilities, and subsequent adjustments
to those estimates.
A
- Asset impairments subsequent to 3/17/16 that should have had no value
B
- Loss on assets of discontinued operations that should have been adjusted to fair value at 3/17/16.
C
- Gain on sales and disposals of assets subsequent to the acquisition should have been part of the original asset valuation
D
- The gain from debt extinguishment should have been part of the original liability valuation
E
- Inventory step up
F
- Repurchase obligation
G
- Unamortized loan costs
H
- Property corrections
Operating
results for the Company, as if the acquisition of Rhino occurred at the beginning of each period, for the years ended December
31, 2016 and 2015 are as follows.
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
170,780
|
|
|
$
|
195,313
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)
|
|
$
|
(12,207
|
)
|
|
$
|
(10,074
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and fully diluted
|
|
$
|
(0.84
|
)
|
|
$
|
(0.81
|
)
|
Blaze
Mining Company, LLC Option Termination and Royalty Agreement
On
May 29, 2015, the Company entered into an Option Agreement with Blaze Energy Corp. (“Blaze Energy”) to acquire all
of the membership units of Blaze Mining Company, LLC (“Blaze Mining”), which is a wholly-owned subsidiary of Blaze
Energy. Under the Option Agreement, as amended, the Company had the right to complete the purchase through March 31, 2016 by the
issuance of 1,272,858 shares of the Company’s common stock and payment of $250,000 in cash. Blaze Mining controlled operations
for and had the right to acquire 100% ownership of Alpheus Coal Impoundment reclamation site in McDowell County, West Virginia
under a contract with Gary Partners, LLC, which owned the property. On February 22, 2016, the Company facilitated a series of
transactions wherein: (i) Blaze Mining and Blaze Energy entered into an Asset Purchase Agreement to acquire substantially all
of the assets of Gary Partners, LLC; (ii) Blaze Mining entered into an Assignment Agreement to assign its rights under the Asset
Purchase Agreement to a third party; and (iii) the Company and Blaze Energy entered into an Option Termination Agreement, as amended,
whereby the following royalties granted to Blaze Mining under the Assignment Agreement were assigned to the Company: a $1.25 per
ton royalty on raw coal or coal refuse mined or removed from the property, and a $1.75 per ton royalty on processed or refined
coal or coal refuse mined or removed from the property (the “Royalties”). Pursuant to the Option Termination Agreement,
the parties thereby agreed to terminate the Option Agreement by the issuance of 1,750,000 shares of the Company’s common
stock to Blaze Energy in consideration for the payment by Blaze Energy of $350,000 to the Company and the assignment by Blaze
Mining of the Royalties to the Company. The transactions closed on March 22, 2016.
Pursuant
to an Advisory Agreement with East Coast Management Group, LLC (“ECMG”), the Company agreed to compensate ECMG $200,000
in cash; $0.175 of the $1.25 royalty on raw coal or coal refuse; and $0.25 of the $1.75 royalty on processed or refined coal for
its services in facilitating the Option Termination Agreement.
The
transaction was initially valued based on the trading price of the Company’s common stock on March 22, 2016 as follows.
See Note 5.
|
|
(thousands)
|
|
Royalty
interests
|
|
$
|
21,113
|
|
Cash received
|
|
|
350
|
|
Cash
paid
|
|
|
(200
|
)
|
Common stock issued
|
|
$
|
21,263
|
|
4.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets as of December 31, 2016 and 2015 and August 31, 2015, consisted of the following:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Other prepaid
expenses
|
|
$
|
761
|
|
|
$
|
1
|
|
Debt issuance costs—net
|
|
|
981
|
|
|
|
-
|
|
Prepaid insurance
|
|
|
1,432
|
|
|
|
-
|
|
Prepaid leases
|
|
|
77
|
|
|
|
-
|
|
Supply inventory
|
|
|
614
|
|
|
|
-
|
|
Deposits
|
|
|
164
|
|
|
|
-
|
|
Available-for-sale
investment
|
|
|
3,532
|
|
|
|
-
|
|
Note
receivable-current portion
|
|
|
900
|
|
|
|
-
|
|
Total
|
|
$
|
8,461
|
|
|
$
|
1
|
|
Debt
issuance costs were included in prepaid expenses and other current assets for the year ended December 31, 2016 since the credit
facility balance was classified as a current liability. See Note 11 for further information on the amendments to the amended and
restated senior secured credit facility.
5.
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment, including coal properties and mine development and construction costs, as of December 31, 2016 and 2015 and
August 31, 2015 are summarized as follows:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in
thousands)
|
|
Coal
properties, mining and other equipment
|
|
$
|
69,684
|
|
|
$
|
7,066
|
|
Total
|
|
|
69,684
|
|
|
|
7,066
|
|
Less
accumulated depreciation, depletion and amortization
|
|
|
(4,572
|
)
|
|
|
-
|
|
|
|
$
|
65,112
|
|
|
$
|
7,066
|
|
Depreciation
expense for mining and other equipment and related facilities, depletion expense for coal and oil and natural gas properties,
amortization expense for mine development costs, amortization expense for intangible assets and amortization expense for asset
retirement costs for the years ended December 31, 2016, the four months ended December 31, 2015 and the years ended December 31,
2015 and 2014 was as follows:
|
|
December
31,
|
|
|
August
31,
|
|
|
August
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Depreciation
and amortization expense for coal properties, mining and other equipment and mine development costs
|
|
$
|
4,572
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Amortization expense
for intangible assets
|
|
|
67
|
|
|
|
145
|
|
|
|
91
|
|
|
|
-
|
|
Amortization
expense for asset retirement costs
|
|
|
(136
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
4,503
|
|
|
$
|
145
|
|
|
$
|
91
|
|
|
$
|
-
|
|
Asset
Impairments-2016
The
Company performed a comprehensive review of our current coal mining operations as well as potential future development projects
for the year ended December 31, 2016 to ascertain any potential impairment losses. Based on the impairment analysis, the Company
concluded that none of the coal properties, mine development costs or other coal mining equipment and related facilities was impaired
at December 31, 2016, except for the Blaze Mining royalty As production from this property had not begun at December 31, 2016,
the Company engaged a third-party engineer to provide an estimate of fair value. The specialist valued the royalty interests at
$4.4 million. Accordingly, the Company recorded an asset impairment loss of $16.7 million in the fourth quarter of 2016.
6.
GOODWILL AND INTANGIBLE ASSETS
ASC
Topic 350 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition.
Under the provisions of ASC Topic 350, goodwill and other intangible assets with indefinite useful lives are no longer amortized
but instead tested for impairment at least annually.
Goodwill
in the provisional amount of $7.6 million arose from the Company’s purchase of Rhino. See Note 3.
As
discussed in Note 1, Rhino and Rhino Holdings executed an Option Agreement in December 2016 where Rhino received a Call Option
from Rhino Holdings to acquire substantially all of the outstanding common stock of Armstrong Energy. In exchange for Rhino Holdings
granting the Call Option, Rhino issued 5.0 million common units to Rhino Holdings upon the execution of the Option Agreement.
The Call Option was valued at $21.8 million based upon the closing price of the Partnership’s publicly traded common units
on the date the Option Agreement was executed.
Intangible
assets as of December 31, 2016 and August 31, 2015 consist of the following:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Blue Grove
contract rights
|
|
$
|
101
|
|
|
$
|
870
|
|
Accumulated
amortization
|
|
|
(68
|
)
|
|
|
(91
|
)
|
|
|
$
|
33
|
|
|
$
|
779
|
|
The
contract intangible asset has a useful life of two years and is amortized over the useful life on a straight-line basis. See Note
3 for modification of purchase agreement.
7.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments
in other entities are accounted for using the consolidation, equity method or cost basis depending upon the level of ownership,
the Company’s ability to exercise significant influence over the operating and financial policies of the investee and whether
the Company is determined to be the primary beneficiary of a variable interest entity. Equity investments are recorded at original
cost and adjusted periodically to recognize the Company’s proportionate share of the investees’ net income or losses
after the date of investment. Any losses from the Company’s equity method investments are absorbed by the Company based
upon its proportionate ownership percentage. If losses are incurred that exceed the Company’s investment in the equity method
entity, then the Company must continue to record its proportionate share of losses in excess of its investment. Investments are
written down only when there is clear evidence that a decline in value that is other than temporary has occurred.
As
of December 31, 2016 and 2015, Rhino has recorded its investment in Mammoth of $1.9 million as a short-term asset, which Rhino
has classified as available-for-sale. In October 2016, Rhino contributed its limited partner interests in Mammoth to Mammoth Energy
Services, Inc. in exchange for 234,300 shares of common stock of Mammoth Energy Services, Inc. Rhino recorded a fair market value
adjustment of $1.6 million for the available-for-sale investment based on the market value of the shares at December 31, 2016,
which was recorded in Other Comprehensive Income.
In
September 2014, Rhino made an initial investment of $5.0 million in a new joint venture, Sturgeon Acquisitions LLC (“Sturgeon”),
with affiliates of Wexford Capital and Gulfport. The Company accounts for the investment in this joint venture and results of
operations under the equity method based upon its ownership percentage. The Company recorded its proportionate share of the operating
loss for this investment for the year ended December 31, 2016 of approximately $0.2 million. The Company has recorded its investment
in Sturgeon on the Investment in unconsolidated affiliates line of the Company’s consolidated balance sheet and in the Other
category for segment reporting purposes.
8.
OTHER NON-CURRENT ASSETS
Other
non-current assets as of December 31, 2016 and August 31, 2015 consisted of the following:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Deposits
and other
|
|
$
|
218
|
|
|
$
|
250
|
|
Non-current receivable
|
|
|
27,157
|
|
|
|
-
|
|
Deferred
expenses
|
|
|
216
|
|
|
|
-
|
|
|
|
$
|
27,591
|
|
|
$
|
250
|
|
As
of December 31 2016, the non-current receivable balance of $27.2 million consisted of the amount due from workers’ compensation
and black lung insurance providers for potential claims that are the primary responsibility of the Company’s, but are covered
under Rhino’s insurance policies. See Note 15 for discussion of the $27.2 million that is also recorded in other non-current
workers’ compensation liabilities.
9.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities as of December 31, 2016 and 2015 and August 31, 2015 consisted of the following:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Payroll,
bonus and vacation expense
|
|
$
|
1,721
|
|
|
$
|
17
|
|
Non-income taxes
|
|
|
2,669
|
|
|
|
29
|
|
Royalty expenses
|
|
|
1,617
|
|
|
|
-
|
|
Accrued interest
|
|
|
601
|
|
|
|
-
|
|
Health claims
|
|
|
630
|
|
|
|
-
|
|
Workers' compensation
& pneumoconiosis
|
|
|
2,450
|
|
|
|
-
|
|
Accrued insured litigation
claims
|
|
|
277
|
|
|
|
-
|
|
Other
|
|
|
867
|
|
|
|
10
|
|
Due
Rhino GP
|
|
|
573
|
|
|
|
-
|
|
|
|
$
|
11,405
|
|
|
$
|
56
|
|
The
$0.3 million accrued for insured litigation claims as of December 31, 2016 consists of probable and estimable litigation claims
that are the primary obligation of the Company. This amount is also due from the Company’s insurance providers and is included
in accounts receivable, net of allowance for doubtful accounts on the consolidated balance sheet. The Company presents this amount
on a gross asset and liability basis as a right of setoff does not exist per the accounting guidance in ASC Topic 210. This presentation
has no impact on the results of operations or cash flows.
10.
NOTES PAYABLE – RELATED PARTY
Related
party notes payable consist of the following at December 31, 2016 and August 31, 2015.
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Demand
note payable dated March 6, 2015; owed E-Starts Money Co., a related party; interest at 6% per annum
|
|
$
|
204
|
|
|
$
|
204
|
|
Demand note payable
dated June 11, 2015; owed E-Starts Money Co., a related party; non-interest bearing
|
|
|
200
|
|
|
|
200
|
|
Demand note payable
dated September 22, 2016; owed E-Starts Money Co., a related party; non-interest bearing
|
|
|
50
|
|
|
|
-
|
|
Demand
note payable dated December 8, 2016; owed E-Starts Money Co., a related party; non-interest bearing
|
|
|
50
|
|
|
|
-
|
|
|
|
$
|
504
|
|
|
$
|
404
|
|
The
related party notes payable have accrued interest of $22 thousand at December 31, 2016 and $6 thousand at August 31, 2015. Related
party interest expense amounted to $12, $4 and $6 for the year ended December 31, 2016, for the four months ended December 31,
2015 and for the year ended August 31, 2015 and zero for the year ended August 31, 2014.
11.
DEBT
Debt
as of December 31, 2016 and August 31, 2015 consisted of the following:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Senior
secured credit facility with PNC Bank, N.A.
|
|
$
|
10,040
|
|
|
$
|
-
|
|
Note
payable to Weston Energy dated December 30, 2016; interest at 8% per annum; due January 15, 2017
|
|
|
2,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable
|
|
$
|
12,040
|
|
|
$
|
-
|
|
On
March 17, 2016, the Operating Company, as borrower, and Rhino and certain of Rhino’s subsidiaries, as guarantors, entered
into a fourth amendment (the “Fourth Amendment”) of the Amended and Restated Credit Agreement. The Fourth Amendment
amended the definition of change of control in the Amended and Restated Credit Agreement to permit Royal to purchase the membership
interests of Rhino’s general partner. The Fourth Amendment also eliminated the option to borrow funds utilizing the LIBOR
rate plus an applicable margin and establishes the borrowing rate for all borrowings under the facility to be based upon the current
PRIME rate plus an applicable margin of 3.50%. The balance on March 17, 2016 was $41,783.
On
May 13, 2016, Rhino entered into the Fifth Amendment of the Amended and Restated Credit Agreement, which extended the term to
July 31, 2017.
In
July 2016, Rhino entered into a sixth amendment (the “Sixth Amendment”) of the amended and restated senior secured
credit facility that permitted the sale of Elk Horn that was discussed earlier. The Sixth Amendment further reduced the maximum
commitment amount allowed under the credit facility for the additional $1.5 million that is to be received from the Elk Horn sale
by $375,000 each quarterly period beginning September 30, 2016 through June 30, 2017.
In
December, 2016, Rhino entered into a seventh amendment of the amended and restated credit agreement (the “Seventh Amendment”).
The Seventh Amendment allows for the Series A preferred units as outlined in the Fourth Amended and Restated Agreement of Limited
Partnership of the Partnership. The Seventh Amendment immediately reduced the revolving credit commitments by $11.0 million and
provides for additional revolving credit commitment reductions of $2.0 million each on June 30, 2017 and September 30, 2017. The
Seventh Amendment further reduced the revolving credit commitments over time on a dollar-for-dollar basis for the net cash proceeds
received from any asset sales after the Seventh Amendment date once the aggregate net cash proceeds received exceeds $2.0 million.
The Seventh Amendment altered the maximum leverage ratio to 4.0 to 1.0 effective December 31, 2016 through May 31, 2017 and 3.5
to 1.0 from June 30, 2017 through December 31, 2017. The maximum leverage ratio shall be reduced by 0.50 to 1.0 for every $10.0
million of net cash proceeds, in the aggregate, received after the Seventh Amendment date from (i) the issuance of any equity
by Rhino and/or (ii) the disposition of any assets in excess of $2.0 million in the aggregate, provided, however, that in no event
will the maximum leverage ratio be reduced below 3.0 to 1.0. The Seventh Amendment alters the minimum consolidated EBITDA figure,
as calculated on a rolling twelve months basis, to $12.5 million from December 31, 2016 through May 31, 2017 and $15.0 million
from June 30, 2017 through December 31, 2017. The Seventh Amendment alters the maximum capital expenditures allowed, as calculated
on a rolling twelve months basis, to $20.0 million through the expiration of the credit facility. A condition precedent to the
effectiveness of the Seventh Amendment is the receipt of the $13.0 million of cash proceeds received by Rhino from the issuance
of the Series A preferred units pursuant to the Preferred Unit Agreement, which will be used to repay outstanding borrowings under
the revolving credit facility. Per the Seventh Amendment, the receipt of $13.0 million cash proceeds fulfills the required Royal
equity contribution, which was a requirement of prior amendments to the credit agreement.
At
December 31, 2016, the Operating Company had borrowed $10.0 million at a variable interest rate of PRIME plus 3.50% (7.25% at
December 31, 2016). In addition, the Operating Company had outstanding letters of credit of $26.1 million at a fixed interest
rate of 5.00% at December 31, 2016. Based upon a maximum borrowing capacity of 4.00 times a trailing twelve-month EBITDA calculation
(as defined in the credit agreement), the Operating Company had not used $12.9 million of the borrowing availability at December
31, 2016.
Weston
Energy -
Short-term note payable dated December 30, 2016 and due January 15, 2017 with interest at 8% per annum.
The
Company did not capitalize any interest costs during the year ended December 31, 2016.
12.
ASSET RETIREMENT OBLIGATIONS
The
changes in asset retirement obligations for the year ended December 31, 2016, the four months ended December 31, 2015 and the
years ended August 31, 2015 and 2014 are as follows:
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
Ended
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
August
31, 2015
|
|
|
August
31, 2014
|
|
|
|
(in
thousands)
|
|
Balance
at beginning of period, including current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
0
|
|
Acquired
|
|
|
28,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Accretion
expense
|
|
|
1,105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Adjustments
to the liability from annual recosting and other
|
|
|
(1,685
|
)
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Liabilities
settled
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Balance
at end of period
|
|
|
27,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Less
current portion
|
|
|
(917
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Non-current
portion
|
|
$
|
26,503
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
0
|
|
13.
INCOME TAXES
The
income tax provision (benefit) consists of the following:
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
ended
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
August
31, 2015
|
|
|
August
31, 2014
|
|
|
|
(in
thousands)
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(6,053,200
|
)
|
|
|
(436,400
|
)
|
|
|
(170,700
|
)
|
|
|
(277,700
|
)
|
State and local:
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
(712,200
|
)
|
|
|
(51,300
|
)
|
|
|
(20,100
|
)
|
|
|
(32,700
|
)
|
Change
in valuation allowance
|
|
|
6,765,400
|
|
|
|
487,700
|
|
|
|
190,800
|
|
|
|
310,400
|
|
Income
tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
expected tax benefit based on the statutory rate is reconciled with actual tax benefit as follows:
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
ended
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
August
31, 2015
|
|
|
August
31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
statutory rate
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
State income tax, net
of federal benefit
|
|
|
-4.0
|
%
|
|
|
-4.0
|
%
|
|
|
-4.0
|
%
|
|
|
-4.0
|
%
|
Increase
(decrease) in valuation allowance
|
|
|
38.0
|
%
|
|
|
38.0
|
%
|
|
|
38.0
|
%
|
|
|
38.0
|
%
|
Income
tax provision (benefit)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred
tax assets consist of the effects of temporary differences attributable to the following:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
Deferred tax assets:
|
|
(in thousands)
|
|
Net operating
losses
|
|
$
|
1,332,600
|
|
|
$
|
178,500
|
|
Bad debt allowance
|
|
|
-
|
|
|
|
4,900
|
|
Asset impairment
|
|
|
6,363,500
|
|
|
|
-
|
|
Investment in public
limited partnership
|
|
|
(375,100
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
94,100
|
|
|
|
8,600
|
|
Deferred
tax assets
|
|
|
7,415,100
|
|
|
|
192,000
|
|
Valuation
allowance
|
|
|
(7,415,100
|
)
|
|
|
(192,000
|
)
|
Deferred
tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Due
to the changes in ownership of the Company in connection with the change in control and related transactions in March 2015, approximately
$55,000 in existing net operating loss carryforwards (computed in accordance with IRS section 382) are available to reduce future
taxable income. These NOLs begin to expire in 2019. In addition, losses incurred from the date of the merger to August 31, 2015
aggregating approximately $415,000 are also available to reduce future taxable income. In assessing the realization of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has
established a full valuation allowance against all of the deferred tax assets for every period because it is more likely than
not that all of the deferred tax assets will not be realized.
A
reconciliation of the changes in valuation allowance for the year ended August 31, 2015 is as follows:
Balance at August 31, 2014
|
|
$
|
1,533,200
|
|
Current year addition
|
|
|
190,800
|
|
Effect
of change in control
|
|
|
(1,532,000
|
)
|
Balance at August
31, 2015
|
|
$
|
192,000
|
|
14.
STOCKHOLDERS’ EQUITY
The
authorized capital stock of the Company consists of 500,000,000 shares of Common Stock, par value $0.00001 per share, and 10,000,000
shares of Preferred Stock, par value $0.00001 per share. In March 2017, the Company filed an amendment to its Certificate of Incorporation
to reduce the authorized shares of Common Stock to 25,000,000 shares and to reduce the authorized shares of Preferred Stock to
5,000,000 shares.
Series
A preferred stock
The
Company’s Board is authorized, without further stockholder approval, to issue Preferred Stock in one or more series from
time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions
of the shares of each series.
The
Board has authorized one series of Preferred Stock, which is known as the “Series A Preferred Stock,” for 100,000
shares. The certificate of designation of the Series A Preferred Stock provides: the holders of Series A Preferred Stock shall
be entitled to receive dividends when, as and if declared by the Board of Directors of the Company; participates with common stock
upon liquidation; convertible into one share of common stock; and has voting rights such that the Series A Preferred Stock shall
have an aggregate voting right for 54% of the total shares entitled to vote.
At
December 31, 2016 and August 31, 2015, 51,000 shares of Series A Preferred Stock were issued and outstanding.
Common
stock
In
October 2012, the Company amended its charter to authorize issuance of up to 500,000,000 shares of common stock with a par value
of $0.00001. At December 31, 2016, 17,212,278 shares were issued and outstanding. At August 31, 2015, 13,850,230 shares were issued
and outstanding.
During
the year ended December 31, 2016, the Company issued shares of common stock in the following transactions:
|
●
|
On
February 5, 2016, the Company issued 37,500 shares in exchange for $300,000 in cash.
|
|
|
|
|
●
|
On
February 17, 2016, the Company issued 11,608 shares each to William Tuorto and Brian Hughs, executive officers, in exchange
for accrued compensation in the amount of $125,832 each.
|
|
|
|
|
●
|
On
March 1, 2016, the Company issued 4,878 shares to Ronald Phillips, President, in exchange for a $50,000 bonus pursuant to
his employment contract.
|
|
|
|
|
●
|
On
March 22, 2016, the Company issued 1,750,000 restricted shares in exchange for the Blaze Mining royalties. (See Note 3).
|
|
|
|
|
●
|
On
April 13, 2016, the Company issued 62,500 shares in exchange for $500,000 in cash.
|
|
|
|
|
●
|
On
May 17, 2016, the Company issued 12,500 shares in exchange for $100,000 in cash.
|
|
|
|
|
●
|
On
October 10, 2016, the Company issued 50,000 shares to East Hill Investment, Ltd. pursuant to a securities purchase agreement
in exchange for a note in the amount of $212,500.
|
|
|
|
|
●
|
On
December 6, 2016, the Company issued a total of 447,857 shares in exchange for convertible notes payable in the amount of
$2,350,000 and related accrued interest of $112,671. The majority of the convertible notes were originally issued in April
2016.
|
During
the four months ended December 31, 2015, the Company issued shares of common stock in the following transactions:
|
●
|
Between
September 14, 2015 and October 9, 2015, the Company issued 1,218,000 shares of common stock for cash proceeds of $3,045,000
pursuant to a private offering.
|
|
|
|
|
●
|
On
October 22, 2015, the Company issued 95,597 shares of its common stock, valued at $500,000, as compensation under employment
agreements with officers. Of this amount, $350,000 was in payment of bonuses pursuant to employment agreements. The remaining
$150,000 was pursuant to a two-year employment agreement originally executed on June 10, 2015, of which $16,667 was accrued
at August 31, 2015 and $133,333 was recorded as a prepaid expense to be amortized over the life of the agreement. During the
four months ended December 31, 2015, $25,000 was amortized to expense. During 2016, $72,917 was amortized to expense.
|
|
|
|
|
●
|
On
December 23, 2015, the Company amended the Blue Grove acquisition agreement (Note 3) and the consideration for the purchase
was reduced from 350,000 shares of the Company’s common stock to 10,000 shares.
|
During
the year ended August 31, 2015, the Company issued shares of common stock in the following transactions:
|
●
|
On
December 12, 2014, the Company issued 410,000 shares of common stock to a consultant in exchange for $41,000 in services.
|
|
|
|
|
●
|
On
March 9, 2015, the Company issued 250,000 shares of common stock for cash proceeds of $50,000.
|
|
|
|
|
●
|
On
April 17, 2015, the Company issued 2,803,621 shares of common stock to acquire Blaze Minerals. The shares were valued at $2.50
share, based upon the price for which the Company sold its common stock in a private placement. See Note 4.
|
|
|
|
|
●
|
On
June 10, 2015, the Company issued 350,000 shares of common stock to acquire Blue Grove.
|
|
|
|
|
●
|
Between
June 12, 2015 and August 31, 2015, the Company issued 1,782,000 shares of common stock for cash proceeds of $4,455,000 pursuant
to a private offering.
|
Stock
subscription receivable
On
October 4, 2016, the Company entered into a securities purchase agreement with East Hill Investments, Ltd. (“East Hill”),
a British Virgin Islands company. The agreement provided that the Company would sell 1,000,000 shares of its common stock, par
value $0.00001, to East Hill for an aggregate purchase price of $4,250,000. The transaction was to be completed in a series of
transactions for 25,000 to 50,000 shares each. The initial transaction was on October 4, 2016 in the amount of $212,500 for which
the Company received a note originally due October 19, 2016 and extended to November 30, 2016. During the first quarter of 2017,
both parties agreed to cancel the transaction and the shares were returned to the Company to be cancelled.
15.
OTHER NON-CURRENT LIABILITIES
Other
non-current liabilities consist of the following at December 31, 2016 and August 31, 2015.
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
|
|
|
Workers'
compensation and black lung claims
|
|
$
|
41,523
|
|
|
$
|
-
|
|
Less
current portion
|
|
|
(2,450
|
)
|
|
|
-
|
|
Non-current
obligations
|
|
$
|
39,073
|
|
|
$
|
-
|
|
WORKERS’
COMPENSATION AND BLACK LUNG
Certain
of the Company’s subsidiaries are liable under federal and state laws to pay workers’ compensation and coal workers’
black lung benefits to eligible employees, former employees and their dependents. The Company currently utilizes an insurance
program and state workers’ compensation fund participation to secure its on-going obligations depending on the location
of the operation. Premium expense for workers’ compensation benefits is recognized in the period in which the related insurance
coverage is provided.
The
Company’s black lung benefit liability is calculated using the service cost method that considers the calculation of the
actuarial present value of the estimated black lung obligation. The Company’s actuarial calculations using the service cost
method for its black lung benefit liability are based on numerous assumptions including disability incidence, medical costs, mortality,
death benefits, dependents and interest rates. The Company’s liability for traumatic workers’ compensation injury
claims is the estimated present value of current workers’ compensation benefits, based on actuarial estimates, which are
based on numerous assumptions including claim development patterns, mortality, medical costs and interest rates. The discount
rate used to calculate the estimated present value of future obligations for black lung was 4.0% for December 31, 2016 and for
workers’ compensation was 2.0% at December 31, 2016.
The
uninsured black lung and workers’ compensation expenses for the year ended December 31, 2016, the four months ended December
31, 2015 and the years ended August 31, 2015 and 2014 are as follows:
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
ended
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
August
31, 2015
|
|
|
August
31, 2014
|
|
|
|
(in
thousands)
|
|
Black
lung benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
(401
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Interest
cost
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Actuarial
loss/(gain)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
black lung
|
|
|
(114
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Workers'
compensation expense
|
|
|
3,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
expense
|
|
$
|
2,949
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
The
changes in the black lung benefit liability for the year ended December 31, 2016, the four months ended December 31, 2015 and
the years ended August 31, 2015 and 2014 are as follows:
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
ended
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
August
31, 2015
|
|
|
August
31, 2014
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligations assumed on acquisition
|
|
$
|
9,196
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Service cost
|
|
|
(401
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Interest cost
|
|
|
287
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Actuarial loss (gain)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Benefits
and expenses paid
|
|
|
(300
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
changes
|
|
$
|
8,782
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
The
classification of the amounts recognized for the workers’ compensation and black lung benefits liability as of December
31, 2016 and August 31, 2015 are as follows:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Black lung
claims
|
|
$
|
8,782
|
|
|
$
|
-
|
|
Insured black lung
and workers' compensation claims
|
|
|
27,157
|
|
|
|
-
|
|
Workers'
compensation claims
|
|
|
5,584
|
|
|
|
-
|
|
Total
obligations
|
|
|
41,523
|
|
|
|
-
|
|
Less
current portion
|
|
|
(2,450
|
)
|
|
|
-
|
|
Non-current
obligations
|
|
$
|
39,073
|
|
|
$
|
-
|
|
The
balance for insured black lung and workers’ compensation claims as of December 31, 2016 consisted of $27.2 million. This
is a primary obligation of the Company, but is also due from the Company’s insurance providers and is included in Note 8
as non-current receivables. The Company presents this amount on a gross asset and liability basis since a right of setoff does
not exist per the accounting guidance in ASC Topic 210. This presentation has no impact on the results of operations or cash flows.
16.
RELATED PARTY TRANSACTIONS
On
March 6, 2015, the Company borrowed $203,593 from E-Starts Money Co. (“E-Starts”) pursuant to a 6% demand promissory
note. (See Note 9) The proceeds were used to repay all of our indebtedness at the time. E-Starts is owned by William L. Tuorto,
our Chairman and Chief Executive Officer. On June 11, 2015, the Company borrowed an additional $200,000 from E-Starts pursuant
to a non-interest bearing demand promissory note. On September 22, 2016, we borrowed $50,000 from E-Starts pursuant to a non-interest
bearing demand promissory note and on December 8, 2016, we borrowed an additional $50,000 from E-Starts pursuant to a non-interest
bearing demand promissory note. The total amount owed to E-Starts at December 31, 2016 and December 31, 2015 was $503,593 and
$403,593, respectively, plus accrued interest.
GS
Energy, LLC is owned by Ian and Gary Ganzer and is a creditor of Blue Grove Coal, LLC.
The
details of the due to related party account are summarized as follows:
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Due to E-Starts Money
Co
|
|
|
|
|
|
|
|
|
Expense
advances
|
|
$
|
11
|
|
|
$
|
10
|
|
Accrued
interest
|
|
|
22
|
|
|
|
6
|
|
Total
obligations
|
|
|
33
|
|
|
|
16
|
|
Due to GS Energy, LLC
|
|
|
18
|
|
|
|
18
|
|
Due
to Ian and Gary Ganzer
|
|
|
20
|
|
|
|
-
|
|
Total
|
|
$
|
71
|
|
|
$
|
34
|
|
On
May 14, 2015, the Company entered into an Option Agreement to acquire substantially all of the assets of Wellston for 500,000
shares of the Company’s common stock. The Option Agreement originally terminated on September 1, 2015, but was later extended
to December 31, 2016. Wellston owns approximately 1,600 acres of surface and 2,200 acres of mineral rights in McDowell County,
West Virginia (the “Wellston Property”). Pursuant to the Option Agreement, pending the closing of the Wellston Property,
the Company agreed to loan Wellston up to $500,000 from time to time. The loan is pursuant to Promissory Note bearing interest
at 12% per annum, due and payable at the expiration of the Option Agreement, and secured by a Deed of Trust on the Wellston Property.
The Company ultimately loaned Wellston $53,000. Our President and Secretary, Ronald Phillips, owns a minority interest in Wellston,
and is the manager of Wellston. On September 13, 2016, Wellston sold its assets to an unrelated third party, and we received a
royalty of $1 per ton on the first 250,000 tons of coal mined from the property in consideration for a release of our lien on
Wellston’s assets.
In
January 2014, the President and Chief Executive Officer of the Company acquired 6,700,000 shares of the Company’s common
stock in exchange for $100,500 due to him, including $71,550 assumed by him of the Company’s liabilities to third party
vendors. The fair value of the shares was $502,500. The difference between the value of the shares and the amount paid of $402,000
is included as non-cash compensation in selling, general and administrative expense in the statement of operations. This compensation
is for the years 2008 through 2014 for which the President and Chief Executive Officer had not been previously received any compensation.
17.
EMPLOYEE BENEFITS
401(k)
Plans
—Rhino and certain subsidiaries sponsor defined contribution savings plans for all employees. Under one defined
contribution savings plan, the Operating Company matches voluntary contributions of participants up to a maximum contribution
based upon a percentage of a participant’s salary with an additional matching contribution possible at the Operating Company’s
discretion. The expense under these plans for the period owned by the Company is included in cost of operations and selling, general
and administrative expense in the Company’s consolidated statements of operations and was as follows:
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
Year
ended
|
|
|
ended
|
|
|
Year
ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
August
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan expense
|
|
$
|
1,206
|
|
|
$
|
-
|
|
|
$
|
-
|
|
18.
EQUITY-BASED COMPENSATION
Stock
option plan -
The Royal Energy Resources, Inc. 2015 Stock Option Plan and the Royal Energy Resources, Inc. 2015 Employee,
Consultant and Advisor Stock Compensation Plan (“Plans”) were approved by the Company’s board on July 31, 2015.
Each Plan reserves 1,000,000 shares for awards under each Plan. The Company’s Board of Directors is designated to administer
the Plan. No options are outstanding under the Plans at December 31, 2016. 95,597 shares were issued from the Employee, Consultant
and Advisor Stock Compensation Plan during the four months ended December 31, 2015 and 28,094 shares were issued during the year
ended December 31, 2016. As of December 31, 2016, there are 1,000,000 shares available under the Stock Option Plan and 876,309
shares available under the Employee, Consultant and Advisor Stock Compensation Plan. The shares issued under the Employee, Consultant
and Advisor Stock Compensation Plan were expensed at their market value on the date of issuance.
In
October 2010, the General Partner of Rhino established the Rhino Long-Term Incentive Plan (the “Plan” or “LTIP”).
The Plan is intended to promote the interests of the Partnership by providing to employees, consultants and directors of the General
Partner, the Partnership or affiliates of either incentive compensation awards to encourage superior performance. The LTIP provides
for grants of restricted units, unit options, unit appreciation rights, phantom units, unit awards, and other unit-based awards.
The aggregate number of units initially reserved for issuance under the LTIP was 247,940.
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
Date
|
|
|
|
Common
|
|
|
Fair
Value
|
|
|
|
Units
|
|
|
(per
unit)
|
|
|
|
|
|
|
|
|
Non-vested
awards outstanding when Rhino was acquired
|
|
|
127
|
|
|
$
|
2.58
|
|
Granted
|
|
|
183
|
|
|
$
|
2.19
|
|
Vested
|
|
|
(310
|
)
|
|
$
|
2.35
|
|
Non-vested awards at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
For
the years ended December 31, 2016 the Company recorded expense of approximately $0.4 million for the LTIP awards. For the year
ended December 31, 2016, the total fair value of the awards that vested was $0.7 million. As of December 31, 2016, the Company
did not have any unrecognized compensation expense or intrinsic value of any non-vested LTIP awards.
19.
COMMITMENTS AND CONTINGENCIES
Coal
Sales Contracts and Contingencies
—As of December 31, 2016, the Company had commitments under sales contracts to
deliver annually scheduled base quantities of coal as follows:
Year
|
|
Tons
(in thousands)
|
|
|
Number
of customers
|
|
2017
|
|
|
3,669
|
|
|
|
14
|
|
2018
|
|
|
701
|
|
|
|
5
|
|
Some
of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on a variety of
factors and indices.
Purchase
Commitments
—As of December 31, 2016, the Company had a commitment to purchase approximately 1.0 million gallons
of diesel fuel at fixed prices from January 2017 through December 2017 for approximately $2.0 million.
Leases
—The
Company leases various mining, transportation and other equipment under operating leases. The Company also leases coal reserves
under agreements that call for royalties to be paid as the coal is mined. Lease and royalty expense for the year ended December
31, 2016, the four months ended December 31, 2015 and the years ended August 31, 2015 and 2014 was as follows:
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
ended
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
August
31, 2015
|
|
|
August
31, 2014
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease expense
|
|
$
|
4,062
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
|
-
|
|
Royalty expense
|
|
$
|
8,115
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Approximate
future minimum lease and royalty payments (not including advance royalties already paid and recorded as assets in the accompanying
consolidated balance sheet) are as follows:
|
|
|
|
|
|
|
Years
Ending December 31,
|
|
Royalties
|
|
|
Leases
|
|
|
|
(in thousands)
|
|
2017
|
|
$
|
1,640
|
|
|
$
|
2,533
|
|
2018
|
|
|
1,615
|
|
|
|
148
|
|
2019
|
|
|
1,665
|
|
|
|
-
|
|
2020
|
|
|
1,648
|
|
|
|
-
|
|
2021
|
|
|
1,767
|
|
|
|
-
|
|
Thereafter
|
|
|
8,836
|
|
|
|
-
|
|
Total minimum royalty
and lease payments
|
|
$
|
17,171
|
|
|
$
|
2,681
|
|
Environmental
Matters
—Based upon current knowledge, the Company believes that it is in compliance with environmental laws and
regulations as currently promulgated. However, the exact nature of environmental control problems, if any, which the Company may
encounter in the future cannot be predicted, primarily because of the increasing number, complexity and changing character of
environmental requirements that may be enacted by federal and state authorities.
Legal
Matters
—The Company is involved in various legal proceedings arising in the ordinary course of business due to claims
from various third parties, as well as potential citations and fines from the Mine Safety and Health Administration, potential
claims from land or lease owners and potential property damage claims from third parties. The Company is not party to any other
pending litigation that is probable to have a material adverse effect on the financial condition, results of operations or cash
flows of the Company. Management is also not aware of any significant legal, regulatory or governmental proceedings against or
contemplated to be brought against the Company.
Guarantees/Indemnifications
and Financial Instruments with Off-Balance Sheet Risk
—In the normal course of business, the Company is a party to
certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety
bonds. No liabilities related to these arrangements are reflected in the consolidated balance sheet. The amount of bank letters
of credit outstanding with PNC Bank, N.A., as the letter of credit issuer under the credit facility, was $26.1 million as of December
31, 2016. The bank letters of credit outstanding reduce the borrowing capacity under the credit facility. In addition, the Company
has outstanding surety bonds with third parties of $48.9 million as of December 31, 2016 to secure reclamation and other performance
commitments.
The
credit facility is fully and unconditionally, jointly and severally guaranteed by Rhino and substantially all of its wholly owned
subsidiaries. Borrowings under the credit facility are collateralized by the unsecured assets of Rhino and substantially all of
its wholly owned subsidiaries. See Note 12 for a more complete discussion of the Company’s debt obligations.
Joint
Ventures
—The Company may contribute additional capital to the Timber Wolf joint venture that was formed in the first
quarter of 2012. The Company did not make any capital contributions to the Timber Wolf joint venture during the year ended December
31, 2016.
The
Company may contribute additional capital to the Sturgeon joint venture that was formed in the third quarter of 2014. Rhino made
an initial capital contribution of $5.0 million during the year ended December 31, 2014 based upon its proportionate ownership
interest.
Blue
Grove Coal, LLC (“Blue Grove”).
On June 10, 2015, the Company acquired Blue Grove in exchange for 350,000
shares of its common stock. Blue Grove was owned 50% by Ian Ganzer, our chief operating officer, and 50% by Gary Ganzer, Ian Ganzer’s
father (the “Members”). Simultaneous with the Company’s acquisition of Blue Grove, Blue Grove entered into an
operator agreement with GS Energy, LLC, under which Blue Grove has an exclusive right to mine the coal properties of GS Energy
for a two year period. During the term of the Operator Agreement, Blue Grove is entitled to all revenues from the sale of coal
mined from GS Energy’s properties, and is responsible for all costs associated with the mining of the properties or the
properties themselves, including operating costs, lease, rental or royalty payments, insurance and bonding costs, property taxes,
licensing costs, etc. Simultaneous with the acquisition of Blue Grove, Blue Grove also entered into a Management Agreement with
Black Oak Resources, LLC (“Black Oak”), a company owned by the Members. Under the Management Agreement, Blue Grove
subcontracted all of its responsibilities under the Management Agreement with GS Energy to Black Oak. In consideration, Black
Oak was entitled to 75% of all net profits generated by the mining of the coal properties of GS Energy. Subsequently, the agreement
with Black Oak was amended to provide that Black Oak was entitled to 100% of the first $400,000 and 50% of the next $1,000,000,
for a maximum of $900,000 of net profits generated by the mining of the coal properties of GS Energy.
The
Members have an option to purchase the membership interests in Blue Grove from the Company. If exercised between ten and sixteen
months after closing, the exercise price of the option is $50,000 less any dividends received on the shares of common stock issued
in the acquisition, plus 90% of the shares issued to acquire Blue Grove. If exercised between sixteen and twenty-four months after
closing, the exercise price of the option is 80% of the shares issued to acquire Blue Grove. The call option will terminate when
(i) the parties agree it has terminated, (ii) when the Company pays the Members at least $1,900,000 to acquire their shares of
common stock, or (iii) when a comparable option granted to the Members with respect to common stock issued to them to acquire
GS Energy is terminated. The Company also has an option to sell the Blue Grove membership interests back to the Members. If exercised
between ten and sixteen months after closing, the exercise price of the Company’s option is 90% of the common stock issued
to the Ganzers to acquire Blue Grove. If exercised between sixteen and twenty-four months after closing, the exercise price of
the Company’s option is 80% of the common stock issued to the Members to acquire Blue Grove.
On
December 23, 2015, the Company and the Members entered into an Amendment to Securities Exchange Agreement (“Amendment”)
originally entered into on June 8, 2015. Pursuant to the Amendment, the consideration for the acquisition of Blue Grove was reduced
from 350,000 shares of the Company’s common stock to 10,000 shares. See Note 3.
Distributions
on Common Units.
Beginning with the quarter ended June 30, 2015 and continuing through the quarter ended December 31, 2016,
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 paid 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. The distribution
suspension and prior reductions were the result of prolonged weakness in the coal markets, which has continued to adversely affect
its cash flow.
20.
MAJOR CUSTOMERS
The
Company had revenues or receivables from the following major customers that in each period equaled or exceeded 10% of revenues
or receivables.
|
|
|
|
|
Four
months
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
Ended
|
|
|
Year
ended
|
|
|
Year
ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
August
31, 2015
|
|
|
August
31, 2014
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Corporation
|
|
$
|
34,308
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
PacifiCorp Energy
|
|
$
|
14,923
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Big Rivers
|
|
$
|
11,930
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Alpha Natural Resources
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
281
|
|
|
|
-
|
|
|
|
December
31, 2016
|
|
|
August
31, 2015
|
|
|
|
(in thousands)
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
PPL Corporation
|
|
$
|
1,496
|
|
|
$
|
-
|
|
PacifiCorp
Energy
|
|
|
1,509
|
|
|
|
-
|
|
Big
Rivers
|
|
|
-
|
|
|
|
-
|
|
Alpha
Natural Resources
|
|
|
-
|
|
|
|
44
|
|
21.
FAIR VALUE MEASUREMENTS
The
Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants. The fair values are based on assumptions that market participants would use when pricing
an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations.
The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions of what
market participants would use.
The
fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below:
|
●
|
Level
One - Quoted prices for identical instruments in active markets.
|
|
●
|
Level
Two - The fair value of the assets and liabilities included in Level 2 are based on standard industry income approach models
that use significant observable inputs.
|
|
●
|
Level
Three - Unobservable inputs significant to the fair value measurement supported by little or no market activity.
|
In
those cases when the inputs used to measure fair value meet the definition of more than one level of the fair value hierarchy,
the lowest level input that is significant to the fair value measurement in its totality determines the applicable level in the
fair value hierarchy.
The
book values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their
respective fair values because of the immediate short-term maturity of these financial instruments. The fair value of the Company’s
senior secured credit facility was determined based upon a market approach and approximates the carrying value at December 31,
2016. The fair value of the senior secured credit facility is a Level 2 measurement.
As
of December 31, 2016, the Company had a recurring fair value measurement relating to its investment in Mammoth Energy Services,
Inc. (“Mammoth, Inc.”). In October 2016, the Company contributed its limited partner interests in Mammoth to Mammoth
Energy Services, Inc. (“Mammoth, Inc.”) in exchange for 234,300 shares of common stock of Mammoth, Inc. The common
stock of Mammoth, Inc. began trading on the NASDAQ Global Select Market in October 2016 under the ticker symbol TUSK and the Company
sold 1,953 shares during the initial public offering of Mammoth, Inc. and received proceeds of approximately $27,000. The Company’s
remaining shares of Mammoth, Inc. are subject to a 180-day lock-up period from the date of Mammoth Inc.’s initial public
offering and are classified as a held-for-sale investment on the Company’s consolidated balance sheet. Based on the availability
of a quoted price, the recurring fair value measurement of the Mammoth, Inc. shares is a Level 2 measurement.
As
of December 31, 2016, December 31, 2015 and August 31, 2015, the Company did not have any nonrecurring fair value measurements
related to any assets held for sale.
For
the years ended December 31, 2016, the four months ended December 31, 2015 and the year ended August 31, 2015, the Company had
nonrecurring fair value measurements related to asset impairments as described in Note 6. The nonrecurring fair value measurements
for the asset impairments were Level 3 measurements.
22.
SEGMENT INFORMATION
The
Company primarily produces and markets coal from surface and underground mines in Kentucky, West Virginia, Ohio and Utah and sells
primarily to electric utilities in the United States.
As
of December 31, 2016, the Company has four reportable business segments: Central Appalachia, Northern Appalachia, Rhino Western
and Illinois Basin. Additionally, the Company has an Other category that includes its ancillary businesses.
The
Company’s Other category as reclassified is comprised of the Company’s ancillary businesses and its remaining oil
and natural gas activities. The Company has not provided disclosure of total expenditures by segment for long-lived assets, as
the Company does not maintain discrete financial information concerning segment expenditures for long lived assets, and accordingly
such information is not provided to the Company’s chief operating decision maker. The information provided in the following
tables represents the primary measures used to assess segment performance by the Company’s chief operating decision maker.
Reportable
segment results of operations and financial position for the year ended December 31, 2016 are as follows (Note: “DD&A”
refers to depreciation, depletion and amortization). The Company did not have a reportable segment prior to March 17, 2016.
|
|
Central
|
|
|
Northern
|
|
|
Rhino
|
|
|
Illinois
|
|
|
|
|
|
Total
|
|
|
|
Appalachia
|
|
|
Appalachia
|
|
|
Western
|
|
|
Basin
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,995
|
|
|
$
|
10,967
|
|
|
$
|
27,498
|
|
|
$
|
14,665
|
|
|
$
|
71,117
|
|
|
$
|
166,242
|
|
Total revenues
|
|
|
33,031
|
|
|
|
31,620
|
|
|
|
26,726
|
|
|
|
46,843
|
|
|
|
349
|
|
|
|
138,569
|
|
DD&A
|
|
|
1,215
|
|
|
|
577
|
|
|
|
992
|
|
|
|
1,681
|
|
|
|
38
|
|
|
|
4,503
|
|
Interest expense
|
|
|
1,579
|
|
|
|
201
|
|
|
|
312
|
|
|
|
784
|
|
|
|
1,421
|
|
|
|
4,297
|
|
Net income (loss) from
continuing operations
|
|
$
|
(20,031
|
)
|
|
$
|
6,783
|
|
|
$
|
2,526
|
|
|
$
|
459
|
|
|
$
|
(3,934
|
)
|
|
$
|
(14,197
|
)
|
23.
SUBSEQUENT EVENTS
On
March 27, 2017, the Company filed a Certificate of Amendment to its Certificate of Incorporation which changed the authorized
capital of the Company. The authorized preferred shares, par value $0.00001 per share was reduced from 10,000,000 shares to 5,000,000
shares and the authorized common shares, par value $0.00001 per share, was reduced from 500,000,000 shares to 25,000,000 shares.
On
December 30, 2016, Royal entered into a Secured Promissory Note and a Pledge and Security Agreement with Weston Energy, LLC (“Weston”)
under which Royal borrowed $2.0 million from Weston (the “Loan”). The Loan bore interest at 8% per annum and all principal
and interest was due and payable on January 15, 2017, which date was later extended to January 31, 2017. The Loan was payable,
at the option of Royal, either in cash, or in common units of Rhino. The proceeds of the Loan were used to make an investment
of $2.0 million in 200,000 Series A Preferred Units of Rhino on December 30, 2016, at $10 per Series A Preferred Unit.
On
January 27, 2017, Royal repaid the Loan in full by the payment of $1,000,000 cash to Weston and the sale to Weston of 100,000
Series A Preferred Units at $10 per Series A Preferred Unit. Royal funded the cash portion of the repayment of the Loan by selling
its remaining 100,000 Series A Preferred Units to a third party for $10 per Series A Preferred Unit. As a result, Royal did not
realize any gain or loss on its investment in the Series S Preferred Units.
24.
SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED)
|
|
Three
Months Ended
|
|
|
|
March
31, 2016
|
|
|
June
30, 2016
|
|
|
September
30, 2016
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,258
|
|
|
$
|
42,740
|
|
|
$
|
43,415
|
|
|
$
|
45,156
|
|
Cost and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
3,994
|
|
|
|
33,860
|
|
|
|
35,249
|
|
|
|
38,531
|
|
Asset
impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,746
|
|
INCOME (LOSS) FROM
OPERATIONS
|
|
|
624
|
|
|
|
2,337
|
|
|
|
1,425
|
|
|
|
(14,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations
|
|
|
249
|
|
|
|
577
|
|
|
|
(615
|
)
|
|
|
(14,364
|
)
|
Income from discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
650
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable
to Company shareholders
|
|
$
|
157
|
|
|
$
|
382
|
|
|
$
|
(629
|
)
|
|
$
|
(14,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share,
basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.01
|
|
|
$
|
.02
|
|
|
$
|
.04
|
|
|
$
|
(0.85
|
)
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(.04
|
)
|
|
|
-
|
|
Total
|
|
$
|
.01
|
|
|
$
|
.02
|
|
|
$
|
-
|
|
|
$
|
(0.85
|
)
|
*
Amount in 2nd Quarter of $13,300 recorded as asset impairment was reclassified as an adjustment to the original purchase price.
Amount
in 3rd Quarter of $575 in discontinued operations and gains of $1,763 were reclassified as an adjustment to the original purchase
price.
|
|
Three
Months Ended
|
|
|
|
November
30, 2014
|
|
|
February
28, 2015
|
|
|
May
31, 2015
|
|
|
August
31, 2015
|
|
Revenues:
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
281
|
|
Cost of operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
283
|
|
INCOME (LOSS) FROM
OPERATIONS
|
|
|
(11
|
)
|
|
|
(78
|
)
|
|
|
(49
|
)
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
|
|
|
(20
|
)
|
|
|
(80
|
)
|
|
|
(52
|
)
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable
to Company shareholders
|
|
$
|
(20
|
)
|
|
$
|
(80
|
)
|
|
$
|
(52
|
)
|
|
$
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share, basic and diluted:
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
25.
DISCONTINUED OPERATIONS (AMENDED)
Elk
Horn Coal Leasing
In
August 2016, the Company entered into an agreement to sell its Elk Horn coal leasing company (“Elk Horn”) to a
third party for total cash consideration of $12.0 million. The Company received $10.5 million in cash consideration upon the
closing of the Elk Horn transaction and the remaining $1.5 million of consideration will be paid in ten equal monthly
installments of $150,000 on the 20th of each calendar month beginning on September 20, 2016. The Company valued the Elk Horn
assets at their sale value and recognized no gain or loss on the sale. Discontinued operations includes the earnings from
operations since the acquisition date.
Major
components of net income from discontinued operations for the period from the date of acquisition of Rhino to the date of sale
is summarized as follows:
Other revenues
|
|
$
|
1,707
|
|
Cost
of operations (exclusive of depreciation, depletion and Amortization shown separately below)
|
|
|
650
|
|
Depreciation,
depletion and amortization
|
|
|
237
|
|
Selling,
general and administrative (exclusive of depreciation, depletion And amortization shown separately above)
|
|
|
161
|
|
Interest
expense and other
|
|
|
9
|
|
Income
from discontinued operations
|
|
$
|
650
|
|
Cash
Flows. The depreciation, depletion and amortization amounts for Elk Horn for the period presented is listed in the previous table.
The Company did not fund any capital expenditures for Elk Horn for the period presented. Elk Horn did not have any material
non-cash investing items for the period presented.
26.
REVISION TO RHINO ACQUISITION AMOUNTS (UNAUDITED)
The
Rhino acquisition was completed in three steps as described in Note 3. The fair value of Rhino’s property, plant and equipment
was determined by an independent, third-party appraiser that completed their report during the first quarter of 2017. The fair
value of Rhino’s coal properties were based on observable inputs from market transactions that closely related to the nature
of Rhino’s coal properties. The asset retirement obligations of Rhino were adjusted to fair value based upon current risk
adjusted discount rates. The original provisional assets and liabilities were adjusted as of March 31, 2017 within the one year
measurement period. The total income statement impact of these adjustments was recognized during the three months ended March
31, 2017. The table below reflects the fair value of the assets acquired and the liabilities assumed for the acquisition of Rhino.
|
|
Adjusted
Values (Unaudited)
|
|
|
Provisional
Amounts
(See Note 3)
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
Current
assets
|
|
$
|
25,851
|
|
|
$
|
23,117
|
|
Property,
plant and equipment*
|
|
|
229,950
|
|
|
|
66,812
|
|
Other
non-current assets
|
|
|
37,673
|
|
|
|
40,047
|
|
Goodwill
|
|
|
-
|
|
|
|
7,594
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
60,211
|
|
|
|
62,810
|
|
Long-term debt, net of current portion
|
|
|
2,536
|
|
|
|
2,536
|
|
Asset retirement obligations, net of current portion
|
|
|
17,986
|
|
|
|
27,108
|
|
Other non-current
Liabilities
|
|
|
37,090
|
|
|
|
37,092
|
|
*Property, plant and equipment as
adjusted consists of the follow classes:
|
|
Land
|
|
$
|
10,994
|
|
Mineral rights
|
|
|
43,552
|
|
Buildings and equipment
|
|
|
174,374
|
|
Construction
in progress
|
|
|
1,030
|
|
Total
|
|
$
|
229,950
|
|
The
provisional amount at December 31, 2016 was calculated at a composite amount and not allocated to individual classes.