Item
1.01 Entry into a Material Definitive Agreement.
Acquisition
of Controlling Interest in Rhino Resource Partners, LP
On
January 21, 2016 Royal Energy Resources, Inc. (the “
Company
”) entered into a Securities Purchase Agreement
(the “
Purchase Agreement
”) with Wexford Capital, LP, and certain of its affiliates (collectively, “
Wexford
”),
under which the Company agreed to purchase, and Wexford agreed to sell, a controlling interest in Rhino Resource Partners, LP
(“
Rhino
”) in two separate transactions. Pursuant to the Purchase Agreement, the Company purchased 6,769,112
Common Units of Rhino from three holders for total consideration of $3,500,000. The Common Units purchased by the Company represent
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, the Company purchased all of the membership interests of Rhino GP, LLC, and 9,455,252
Subordinated Units of Rhino from two holders thereof, for aggregate consideration of $1,000,000. The Subordinated Units purchased
by the Company represent approximately 76.5% of the issued and outstanding Subordinated Units of Rhino, and when combined with
the Common Units already owned by the Company, result in the Company owning approximately 55.4% of the outstanding Units of Rhino.
Rhino GP, LLC is the general partner of Rhino, and in that capacity controls Rhino.
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. The NYSE’s decision
to delist the Common Units is currently under appeal.
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. In addition to operating coal properties, Rhino manages and leases coal properties and collect
royalties from those management and leasing activities. 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, as well as produces
and sell natural sand proppant 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, 2014, Rhino controlled an estimated 480.0 million tons of proven and
probable coal reserves, consisting of an estimated 425.1 million tons of steam coal and an estimated 54.9 million tons of metallurgical
coal. In addition, as of December 31, 2014, Rhino controlled an estimated 290.0 million tons of non-reserve coal deposits.
During
the nine months ended September 30, 2015, Rhino operated nine mines, including four underground and five surface mines, located
in Kentucky, Ohio, West Virginia and Utah. However, in the third quarter of 2015, Rhino temporarily idled a majority of its Central
Appalachia operations due to ongoing weak coal market conditions for met and steam coal produced from this region. Future market
conditions will determine the duration that its Central Appalachia operations remain idle.
For
the three and nine months ended September 30, 2015, Rhino generated revenues of approximately $54.1 million and $167.1 million,
respectively, and it generated net losses of approximately $9.3 million and $21.3 million, respectively. For the three months
ended September 30, 2015, Rhino produced approximately 0.8 million tons of coal and sold approximately 0.9 million tons of
coal, of which approximately 78% of tons sold were sold pursuant to supply contracts. For the nine months ended September 30,
2015, Rhino produced and sold approximately 2.8 million tons of coal, of which approximately 82% of tons sold were sold pursuant
to supply contracts.
Acquisition
of Additional Common Units in Rhino Resource Partners, LP
On
March 21, 2016, the Company entered into a Securities Purchase Agreement (the “
SPA
”) with Rhino, under which
the Company purchased 60,000,000 newly issued Common Units of Rhino for $0.15 per Common Unit, for a total investment in Rhino
of $9,000,000. Closing under the SPA occurred on March 22, 2016. The Company 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 is 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.
Rhino
has the right to rescind the note installments due on September 30, 2016 and December 31, 2016 before such installments are 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 installments. If Rhino elects to rescind either or both installments, Company will be obligated to return for cancellation
13,333,333 Common Units for each installment.
In
the event Rhino fails to exercise its rescission rights as to the installments due on September 30, 2016 and December 31, 2016,
Rhino will have an option to repurchase the Common Units represented by those installments at a price of $0.30 per Common Unit,
which option may only be exercised in full and in cash as to each installment on or before December 31, 2017.
The
Company 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 extent its Credit Agreement with PNC Bank, N.A. to December 31, 2017, and that Rhino is not then in default under its Credit
Agreement with PNC Bank, N.A.
The
note is secured by a first lien on the 46,666,667 of the Common Units issued under the SPA. The installment due on July 31, 2016
is with full recourse to the Company. The installments due on September 30, 2016 and December 31, 2016 are nonrecourse to the
Company, and Rhino’s only recourse is to cancel the Common Units represented by the installments in full satisfaction of
the installments. The Common Units are subject to a restrictive legend which prevents any transfer by the Company of certain of
the Common Units until all installments are paid and all rights of rescission and repurchase have expired unexercised.
Reconstitution
of Board of Directors of Rhino
In
connection with Royal’s purchase of a controlling interest in Rhino, all of the existing directors of Rhino resigned except
for Joseph Funk, who is Rhino’s chief executive officer, and James F. Tompkins who is an independent director. On
March 18, 2016, Royal appointed William Tuorto, Ronald Phillips, Ian Ganzer, Douglas Holsted and Brian Hughs, who are officers
and directors of Royal, and are therefore interested directors. Royal also appointed Michael Thompson and David Hanig to the board
of directors of Rhino. Messrs. Thompson and Hanig are unaffiliated with Royal, and therefore are independent directors.
