| Acquisitions | 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.
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 |
