UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

FORM 10-Q

 

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: November 30, 2015

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from: _____________ to _____________

  

 

Royal Energy Resources, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware		000-52547		11-3480036
(State or Other Jurisdiction		(Commission		(I.R.S. Employer
of Incorporation or Organization)		File Number)		Identification No.)

 

56 Broad Street, Suite 2, Charleston, SC 29401

(Address of Principal Executive Offices) (Zip Code)

 

843-900-7693

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer [  ]

Accelerated filer [  ]

Non-accelerated filer [  ]

Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 14,813,827 shares of common stock issued and outstanding as of January 14, 2016.

 

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION		F-1
ITEM 1:	Financial Statements	F-1
ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
ITEM 3:	Quantitative and Qualitative Disclosures About Market Risk	7
ITEM 4:	Controls and Procedures	7
PART II – OTHER INFORMATION		8
Item 1:	Legal Proceedings	8
ITEM 1A:	Risk Factors	8
ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds	8
ITEM 3:	Defaults upon Senior Securities	8
ITEM 4:	Mine Safety Disclosures	8
ITEM 5:	Other Information	8
ITEM 6:	Exhibits	8
SIGNATURES		9

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: Financial Statements

 

ROYAL ENERGY RESOURCES, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

 

		November 30, 2015				August 31, 2015
		(Unaudited)				(Audited)
Assets
Current assets
Cash		$	7,114,039			$	4,180,210
Accounts receivable, net of allowance for doubtful accounts of $13,000			30,622				30,622
Notes receivable and accrued interest - related party			54,819				43,266
Prepaid expenses			116,241				1,444
Total current assets			7,315,721				4,255,542
Other assets
Coal lands and mineral rights			7,065,651				7,065,651
Deposit			250,000				250,000
Intangible assets, less accumulated amortization of $199,260 and $90,573			670,240				778,927
Total assets		$	15,301,612			$	12,350,120
Liabilities and Stockholders’ Equity
Current liabilities
Note payable - related party		$	403,593			$	403,593
Accounts payable and accrued expenses			282,828				129,256
Related party advances and accrued interest payable			37,768				34,723
Total current liabilities			724,189				567,572
Stockholders’ Equity
Preferred stock: $0.00001 par value; authorized 10,000,000 shares; 51,000 shares issued and outstanding at November 30, 2015 and 100,000 shares issued and outstanding at August 31, 2015			1				1
Common stock: $0.00001 par value; authorized 500,000,000 shares; 15,163,827 shares issued and outstanding at November 30, 2015 and 13,850,230 shares outstanding at August 31, 2015			151				139
Additional paid-in capital			20,337,897				16,792,910
Accumulated deficit			(5,760,626	)			(5,010,502	)
Total stockholders’ equity			14,577,423				11,782,548
Total liabilities and stockholders’ equity		$	15,301,612			$	12,350,120

 

See accompanying notes to condensed consolidated financial statements.

 

 

ROYAL ENERGY RESOURCES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations

Three months ended November 30, 2015 and 2014

(Unaudited)

 

		Three Months Ended
		November 30,
		2015				2014
Revenues		$	-			$	-
Costs and expenses:
Depreciation and amortization			108,687				-
Selling, general and administrative expense			640,706				10,697
Total costs and expenses			749,393				10,697
Loss from operations			(749,393	)			(10,697	)
Other expenses (income):
Loss on comodities trading			-				8,743
Interest income
Related party			(1,553	)			-
Other			(761	)			(103	)
Interest expense
Related party			3,045				-
Other			-				251
Total other expense (income)			731				8,891
Net loss		$	(750,124	)		$	(19,588	)
Net loss per share, basic and diluted		$	(0.05	)		$	(0.00	)
Weighted average shares outstanding, basic and diluted			14,698,189				8,251,702

 

See accompanying notes to condensed consolidated financial statements.

 

 

ROYAL ENERGY RESOURCES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

Three Months Ended November 30, 2015 and 2014

(Unaudited)

 

		Three months ended November 30,
		2015				2014
Cash flows from operating activities
Net loss		$	(750,124	)		$	(19,588	)
Adjustment to reconcile net loss to net cash used in operating activities:
Marketable Securities			-				8,568
Depreciation and amortization			108,687				-
Common stock issued for services			368,750				-
Accrued interest income - related party			(1,553	)			-
Accrued interest expense - related party			3,045				-
Change in other assets and liablities:
Prepaid expenses			(213	)			-
Accounts payable and accrued expenses			170,237				2,876
Net cash used in operations			(101,171	)			(8,144	)
Cash flows from investing activities
Proceeds from sale of treasury stock			-				898
Purchase of treasury stock			-				(226	)
Note receivable advances			(10,000	)			-
Net cash provided by (used in) investing activities			(10,000	)			672
Cash flows from financing activities
Proceeds of related party loans (former principal shareholder)			-				7,264
Common stock sold for cash			3,045,000				-
Net cash provided by financing activities			3,045,000				7,264
Net increase (decrease) in cash and cash equivalents			2,933,829				(208	)
Cash, beginning of period			4,180,210				288
Cash, end of period		$	7,114,039			$	80
Supplemental cash flow information
Cash paid for interest		$	-			$	-
Cash paid for income taxes			-				-
Non-cash investing and financing activities
Accrued compensation paid with common stock		$	16,667			$	-
Increase of common stock recorded as prepaid expense			133,333				-

 

See accompanying notes to condensed consolidated financial statements.

 

 

ROYAL ENERGY RESOURCES, INC. AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

November 30, 2015

 

(Unaudited) 

 

1

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Royal Energy Resources, Inc. (the “Company”) and its wholly owned subsidiary Blaze Minerals, LLC (“Blaze”), a West Virginia limited liability company and Blue Grove Coal, LLC (“Blue Grove”), a West Virginia limited liability company, at November 30, 2015.

 

All significant intercompany balances and transactions have been eliminated in consolidation.

 

The condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These condensed consolidated financial statements have not been audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report for the year ended August 31, 2015 filed with the SEC on November 30, 2015.

 

The results of operations for the three months ended November 30, 2015 are not necessarily indicative of the results to be expected for the entire year.

 

Organization and nature of business

 

The Company is a Delaware corporation which was incorporated on March 22, 1999, under the name Webmarketing, Inc. (“Webmarketing”). On July 7, 2004, the Company revived its charter and changed its name from Webmarketing 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, by 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 principle operations.

 

Blaze is the owner of 40,976 net acres of coal and coal bed methane mineral interests in 22 counties across West Virginia. Blue Grove is an operating mining company based in McDowell County, West Virginia and is currently operating a mine owned by GS Energy, LLC.

 

 

Accounting policies

 

Accounts and notes receivable

 

Accounts receivable are recorded at amounts that are expected to be collected, based on past collection history, the economic environment and specified risks identified in the receivable portfolio. An allowance for doubtful accounts is recorded, if based on management’s analysis, it is necessary.

 

Notes receivable are recorded at the cost (the amount of the loan). An allowance for doubtful accounts is recorded, if based on management’s analysis, it is necessary.

 

Inventories

 

Coal inventories are stated at the lower of average cost or market. The cost of coal inventories is determined based on the average cost of production, which includes all costs incurred to extract, transport and process the coal. Market represents the estimated replacement cost, subject to a floor and ceiling, which considers the future sales price of the product as well as remaining estimated preparation and selling costs. Coal is reported as inventory at the point in time the coal is extracted from the mine. The Company did not have any inventory at November 30, 2015.

 

Property, Equipment and Mine Development Costs

 

Costs for mine development incurred to expand capacity of operating mines or to develop new mines are capitalized and charged to operations on the units-of-production method over the estimated proven and probably reserve tons directly benefiting from the capital expenditures. Mine development costs include costs incurred for site preparation and development of the mines during the development stage less any incidental revenue generated during the development stage. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over estimated useful lives ranging from one to 20 years. Leasehold improvements are amortized using the straight-line method, over the shorter of the estimated useful lives or term of the lease. Major repairs and betterments that significantly extend useful lives or improve productivity are capitalized and depreciated of the period benefited. Maintenance and repairs are expensed as incurred. When equipment is retired or disposed, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposal is recognized in cost of coal sales.

 

Owned and Leased Mineral Rights and Land

 

Costs to obtain owned and leased mineral rights are capitalized and amortized to operations as depletion expense using the units-of-production method. Only proven and probable reserves are included in the depletion base. The Company did not produce any of its owned reserves during 2015, and accordingly had no depletion expense.

 

Asset Impairment and Disposal of Long-Lived Assets

 

Long-lived assets, such as property, equipment, mined development costs, and owned and leased mineral rights are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Assets to be disposed would be presented separately in the Consolidated Balance Sheet.

 

 

Income Taxes

 

We use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“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 tax assets and liabilities are measured using enacted tax rates expected 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 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 enterprises financial statement and proscribes 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 and interim periods, disclosure, and transition period. We have no material uncertain tax positions for any of the reporting period presented.

 

Earnings (loss) per common share

 

The Company is required to report both basic earnings per share, which is based on the weighted average number of common shares outstanding, and diluted earnings per share, which is based on the weighted average number of common shares outstanding plus all potential dilutive shares outstanding. At November 30, 2015 and 2014, there were no potentially dilutive common stock equivalents. Accordingly, basic and dilutive earnings (loss) per share are the same for each of the periods presented.

 

Use of estimates in the preparation of financial statements

 

The preparation of financial statements in conformity with accounting principals 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Credit risk

 

In 2015, the Company had cash deposits in certain banks that at times exceeded the maximum insured by the FDIC. The Company monitors the financial condition of the banks and has experienced no losses on these accounts.

 

Stock option plan

 

The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. The accounting literature covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility period. Because the Company’s options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of its options. However, the Black-Scholes valuation model provides the best available estimate for this purpose.

 

There are no options outstanding at November 30, 2015 from the stock option plans.

 

 

Contingencies

 

Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such contingencies related to legal proceeding that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or if probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.

 

Share-Based Compensation

 

The Company accounts for share-based compensation in accordance with Financial Accounting Standards Board (“FASB”) ASC 718, “Compensation-Stock Compensation.” Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award, reduced as appropriate based on estimated forfeitures, and is recognized as expense over the applicable vesting period of the stock award using the accelerated method. The excess tax benefit associated with stock compensation deductions have not been recorded in additional paid-in capital. When evaluating whether an excess tax benefit has been realized, share based compensation deductions are not considered realized until NOLs are no longer sufficient to offset taxable income. Such excess tax benefits will be recorded when realized.

 

Fair value Instruments

 

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The estimated fair value of certain financial instruments, including cash, accounts payable, accrued expenses and notes payable are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

 

ASC 820 defines fair value as 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 on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of observable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

	Level 1 – quoted prices in active markets for identical assets or liabilities;
	Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and
	Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

 

Advanced Mining Royalties

 

Lease rights to coal reserves are often acquired in exchange for royalty payments. Advance mining royalties are advance payments made to lessors under terms of mineral lease agreements that are recoupable against future production royalties. These advance payments are deferred and charged to operations as the coal reserves are mined. The Company regularly reviews recoverability of advance mining royalties and establishes or adjusts the allowance for mining royalties as necessary using the specific identification method. Advance royalty balances are generally charged off against the allowance when they are no longer recoupable. The Company did not have any advance royalties at November 30, 2015.

 

 

Asset Retirement Obligations

 

Minimum standards for mine reclamation have been established by various regulatory agencies and will dictate the reclamation requirements at the Company’s operations. The Company’s asset retirement obligations will consist principally of costs to reclaim acreage disturbed at surface operations, estimated costs to reclaim support acreage, treat mine water discharge and perform other related functions at underground mines. The Company will record these reclamation obligations at fair value in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. Changes to the liability at operations that are not currently being reclaimed are offset by increasing or decreasing the carrying amount of the related long-lived asset. Changes to the liability at operations that are currently being reclaimed are recorded to cost of coal sales. Over time, the liability is accreted and any capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded. The Company will annually review its estimated future cash flows for its asset retirement obligations. At November 30, 2015, the Company had not established any asset retirement obligations.

 

Revenue Recognition

 

The Company earns revenues through the sale of coal and recognizes revenue using the following general revenue recognition criteria: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the price to the buyer is fixed or determinable; and 4) collectability is reasonable assured.

 

Delivery on our coal sales is determined to be complete for revenue recognition purposes when title and risk of loss has passed to the customer in accordance with stated contractual terms and there are no other future obligations related to the shipment. Title and risk of loss generally passes as the coal is loaded into transport carriers for delivery to the customer.

 

Freight and handling costs paid to third-party carriers and invoiced to coal customers are recorded as freight and handling cost and freight and handling revenues, respectively.

 

Recent accounting pronouncements

 

We have evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and find no recent accounting pronouncements that would have a material impact on the financial statements of the Company.

 

2

GOING CONCERN

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has generated minimal revenues since inception. As at November 30, 2015, the Company has a loss from operation of $750,124 and an accumulated deficit of $5,760,626. These factors among others raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The continuing operations of the Company are dependent upon its ability to continue to raise adequate financing and to commence profitable operations in the future and repay its liabilities arising from normal business operations as they become due.

 

3

NOTES RECEIVABLE AND ACCRUED INTEREST

 

At November 30, 2015, the Company had advances of $52,500 and accrued interest of $2,319, pursuant to a related party note receivable with a face amount of $500,000, which bore interest at 12% per annum and was secured by a deed of trust.

 

 

4

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 $7,009,053 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 as part of the acquisition were recognized at their fair values at the acquisition date as follows:

 

Mineral rights		$	7,065,651
Liabilities assumed			56,598
Common stock issued		$	7,009,053

 

Acquisition of Blue Grove Coal, LLC

 

On June 10, 2015, the Company 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. Simultaneous with 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 Ian and Gary Ganzer. 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.

 

The assets acquired as part of the acquisition were recognized at their fair values at the acquisition date as follows:

 

Cash		$	5,500
Intangible assets			869,500
Common stock issued		$	875,000

 

5

COAL LAND AND MINERAL RIGHTS

 

Our coal land and mineral rights, as of November 30, 2015 and August 31, 2015, consist of the following:

 

		November 30, 2015				August 31, 2015
Coal lands and mineral rights		$	7,065,651			$	7,065,651
Less accumulated depreciation, depletion and amortization			-				-
		$	7,065,651			$	7,065,651

 

 

6	INTANGIBLE ASSETS

 

Intangible assets consist of the agreements in place held by Blue Grove Coal, LLC, including an operating license, a two-year management contract with Black Oak Resources, LLC, a mining agreement with a contract miner and purchase orders from a coal purchaser. The value of the intangible assets is being amortized over two-years as follows:

 

		November 30, 2015				August 31, 2015
Intangible assets		$	869,500			$	869,500
Accumulated amortization			(199,260	)			(90,573	)
		$	670,240			$	778,927
Amortization expense during the three months ended November 30, 2015		$	108,687

 

7	CONVERTIBLE NOTES PAYABLE AND NOTE PAYABLE

 

Related party notes payable consist of the following at November 30, 2015 and August 31, 2015.

 

		November 30, 2015				August 31, 2015
Demand note payable dated March 6, 2015; owed E-Starts Money Co., a related party; interest at 6% per annum		$	203,593			$	203,593
Demand note payable dated June 11, 2015; owed E-Starts Money Co., a related party; non-interest bearing			200,000				200,000
Total related party notes payable		$	403,593			$	403,593

 

The related party notes payable have accrued interest of $9,085 at November 30, 2015 and $6,040 at August 31, 2015. The Company expensed $3,045 in interest from the related party loan in the quarter ended November 30, 2015.

 

8	STOCKHOLDERS’ EQUITY

 

Series A preferred stock

 

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 November 30, 2015 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 November 30, 2015, 15,163,827 shares were issued and outstanding and at August 31, 2015, 13,850,230 shares were issued and outstanding.

 

During the quarter ended November 30, 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 to “accredited investors” pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933.
	●	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 $18,750 was accrued in the quarter ended November 30, 2015, leaving a balance of $114,583 to be earned and recorded as a prepaid expense.

 

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 November 30, 2015. 95,597 shares were issued from the Employee, Consultant and Advisor Stock Compensation Plan during the three months ended November 30, 2015.

 

9	RELATED PARTY TRANSACTIONS

 

On March 6, 2015, the Company borrowed $203,593 from E-Starts pursuant to a 6% demand promissory note. (See Note 6) 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 6% demand promissory note. The total amount owed to E-Starts at November 30, 2015 was $403,593, plus accrued interest.

 

Due to related party at November 30, 2015 amounted to $37,768. E-Starts Money Co., wholly is owned by our current Chairman and Chief Executive Officer, advanced money to the Company for use in paying certain obligations of the Company. The details of the due to related party account are summarized as follows:

 

		November 30, 2015
Beginning balance		$	34,723
Accrued interest to E-Starts			3,045
		$	37,768

 

 

On May 14, 2015, the Company entered into an Option Agreement to acquire substantially all of the assets of Wellston by issuing 500,000 shares of the Company’s common stock by September 1, 2015 (extended until March 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”). The Company plans to close on the acquisition of the Wellston Property upon satisfactory completion of due diligence. 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, to which $8,000 was paid at the date of execution. The loan is pursuant to Promissory Note bearing interest at 12% per annum, due and payable at the expiration of the Option Agreement (currently extended until March 31, 2016), and secured by a Deed of Trust on the Wellston Property. At November 30, 2015, the Company had advances of $52,500 and accrued interest of $2,319, pursuant to the Promissory Note. Our President and Secretary, Ronald Phillips, owns a minority interest in Wellston, and is the manager of Wellston.

 

10	OPTION AGREEMENTS

 

Wellston Coal, LLC (“Wellston”)

 

On May 14, 2015, the Company entered into an Option Agreement to acquire substantially all of the assets of Wellston by issuing 500,000 shares of the Company’s common stock by September 1, 2015 (extended until March 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”). The Company plans to close on the acquisition of the Wellston Property upon satisfactory completion of due diligence. 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, to which $8,000 was paid at the date of execution. The loan is pursuant to Promissory Note bearing interest at 12% per annum, due and payable at the expiration of the Option Agreement (currently extended until March 31, 2016), and secured by a Deed of Trust on the Wellston Property. Our President and Secretary, Ronald Phillips, owns a minority interest in Wellston, and is the manager of Wellston.

 

Blaze Mining Company, LLC (“Blaze Mining”)

 

On May 29, 2015, the Company entered into an Option Agreement to acquire all of the membership units of Blaze Mining. Under the Option Agreement, the Company has the right to complete the purchase through September 1, 2015 (extended until 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 controls operations for and has the right to acquire 100% ownership of the Alpheus Coal Impoundment reclamation site in McDowell County, West Virginia (“Alpheus”). Alpheus has approximately 16 million tons of low-volatile Met fine and coarse coal in two separate coal refuse ponds. Alpheus has rail access, a permitted wash plant construction site, and an operating processing plant, which produces renewable energy in the form of coal pellets, for sale to utility customers using the on-site coal fines. Blaze Mining’s operations are located within seven miles of the Wellston Property. The Company plans to close on the acquisition of Blaze Mining after the satisfactory completion of due diligence.

 

Transactions involving Jet Fuel, LLC

 

On July 21, 2015, the Company entered into a Letter Agreement with Middle Wilgat LLC and Coal Fields Transports, Inc., affiliates of The Cline Group (collectively, the “Cline Group”), for the purchase of all of the membership units of Gatling LLC, Gatling Ohio LLC, Meigs Point Dock LLC, Big River Mining LLC, Yellow Bush Mining LLC and Broad Run Dock LLC (the “Gatling Entities”). Together these entities comprise the “Gatling Mining Complex” situate on an aggregate of 70,000 net acres adjacent to the Ohio River.

 

On November 24, 2015, the Company, by and through Royal Ventures, LLC, a wholly owned Delaware limited liability company, being formed for purposes of the contemplated transactions described herein (“Royal Ventures”), and Jet Ohio, LLC, an unaffiliated third-party (“Jet Ohio”), entered into an Operations Agreement with Jet Fuel, LLC (“Jet Fuel”) for the purpose of acquiring the Gatling Entities from the Cline Group. Jet Fuel is owned 51% by Royal Ventures and 49% by Jet Ohio.

 

 

On November 25, 2015, Jet Fuel entered into definitive agreements with the Cline Group to acquire the Gatling Entities. The transaction is scheduled to close on or before December 20, 2015, but in no event later than December 31, 2015, and provides in pertinent part for the purchase of the Gatling Entities on the following terms:

 

A purchase price of $20,000,000.00, payable (i) $14,000,000.00 in cash; and (ii) $6,000,000.00 in the form of a senior secured promissory note in favor of the Cline Group (the “Cline Note”), less $1,750,000.00 previously paid in earnest money deposits for the benefit of Jet Fuel, $250,000.00 of which was paid by the Company.

 

The Cline Note (i) bears interest at 9%; (ii) is payable interest-only monthly; (iii) requires a $1,000,000.00 principle payment six months from closing; and (iv) will be guaranteed by the Company.

 

The Gatling Mining Complex includes two permitted, room-and-pillar underground mines in both West Virginia and Ohio, a substantial quantity of mining equipment, an operational wash plant, conveyor systems, a coal loading facility on the Ohio River, and a dedicated beltline to the Mountaineer Power Plant of American Electric Power (AEP). Based on an appraisal report by Weir International, Inc., the Ohio mine has proven and probable reserves of approximately 121 million tons of coal, and the West Virginia mine 64 million tons of coal, with a Fair Market Value as of March 26, 2014 of $75.35 Million. The underlying reserves and certain surface assets and infrastructure are owned by Natural Resource Partners, LP (NRP), and were previously leased to certain of the Gatling entities on a per ton royalty basis. The closing under the transaction is subject to, among other things, Jet Fuel and NRP entering into new and/or revised agreements for the minerals and the surface infrastructure.

 

11	COMMITMENTS AND CONTINGENCIES

 

Office Lease

 

Effective April 1, 2015 the Company entered into an oral sub-lease agreement with E-Starts to lease office space for the Company’s headquarters. The sub-lease agreement provides for monthly rent of $1,400, has a term of one year and expires on March 31, 2016.

 

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. Simultaneous with 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 Ian and Gary Ganzer. 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.

 

 

The Ganzer’s 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 Ganzers at least $1,900,000 to acquire their shares of common stock, or (iii) when a comparable option granted to the Ganzers 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 Ganzers. 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 Ganzers to acquire Blue Grove.

 

G.S. Energy, LLC (“GS Energy”)

 

On June 10, 2015, the Company entered into a Securities Exchange Agreement to acquire G.S. Energy, under which the Company agreed to acquire all of the issued and outstanding membership units of GS Energy for common stock by the issuance of common stock of the Company with a market value of $9,600,000 provided that the Company issue a minimum of 1,250,000 shares of its common stock and a maximum of 1,750,000 shares. Closing under the Securities Exchange Agreement will occur upon the successful completion of a financial audit of GS Energy and due diligence.

 

GS Energy owns and leases approximately 6,000 net acres of coal and coalbed methane mineral rights and a surface coal mine in McDowell County, West Virginia. Blue Grove is the exclusive operator of the GS Energy surface coal mine. Ian Ganzer owns 25% of the membership units of GS Energy and Gary Ganzer, his father, owns the remaining 75%. GS Energy’s operations are located within thirty miles of Wellston and Alpheus. The Company plans future integration of the operations in the form of blended coal sales, administrative efficiencies, and logistical cost-savings through the Alpheus rail load-out.

 

12	SUBSEQUENT EVENTS

 

Blue Grove Amendment and GS Energy Agreement Termination

 

On December 23, 2015, the Company entered into an Amendment to Securities Exchange Agreement (“Amendment”) with Ian Ganzer and Gary Ganzer (“Members”). Originally, the Company and Members entered into a Securities Exchange Agreement on June 8, 2015 under which the Company acquired all of the membership interests of Blue Grove Coal, LLC (“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.

 

On June 10, 2015, the Company entered into a Securities Exchange Agreement to acquire GS Energy, under which the Company agreed to acquire all of the issued and outstanding membership units of GS Energy for common stock by the issuance of common stock of the Company with a market value of $9,600,000 provided that the Company issue a minimum of 1,250,000 shares of its common stock and a maximum of 1,750,000 shares. In December 2015, the Securities Exchange Agreement to acquire GS Energy was voluntarily terminated by the parties.

 

  

Rhino Resource Partners LP

 

On January 7, 2016, the Company entered into a term sheet setting forth the terms and conditions under which the Company agreed to enter into definitive agreements to acquire the general partner of Rhino Resource Partners, LP (“RHNO”), as well as 39.6% of the common units and 76.3% of the subordinated units of RHNO. Closing is contingent on the execution of definitive agreements and the completion of due diligence.

 

RHNO is a publicly traded Delaware limited partnership 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. In addition to operating coal properties, the Operating Company manages and leases coal properties and collects royalties from such management and leasing activities.

 

Jet Fuel, LLC

 

On November 25, 2015, Jet Fuel, a 51% owned-subsidiary of the Company, entered definitive agreements to acquire the Gatling Entities for gross consideration of $20,000,000. The transaction was scheduled to close on or before December 31, 2015. Jet Fuel has not closed on the Gatling Entities. Jet Fuel is pursuing an acquisition of the Gatling Entities on more favorable terms. In the event Jet Fuel is not able to negotiate a more favorable acquisition agreement, it intends to abandon the transaction and pursue other acquisition opportunities. If Jet Fuel abandons the transaction, it will forfeit a $250,000 deposit it paid in connection with the transaction.

 

 

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Disclosure Regarding Forward Looking Statements

 

This Quarterly Report on Form 10-Q includes forward looking statements (“Forward Looking Statements”). All statements other than statements of historical fact included in this report are Forward Looking Statements. In the normal course of its business, the Company, in an effort to help keep its shareholders and the public informed about the Company’s operations, may from time-to-time issue certain statements, either in writing or orally, that contain or may contain Forward-Looking Statements. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by the Company, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of the Company operations are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company’s proposed operations and whether Forward Looking Statements made by the Company ultimately prove to be accurate. Such important factors (“Important Factors”) and other factors could cause actual results to differ materially from the Company’s expectations are disclosed in this report. All prior and subsequent written and oral Forward Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from the Company’s expectations as set forth in any Forward Looking Statement made by or on behalf of the Company.

 

Overview

 

The Company previously pursued gold, silver, copper and rare earth metals mining concessions in Romania and mining leases in the United States. Commencing in January 2015, the Company began a series of transactions under which the Company would dispose of all of its existing assets, undergo a change in ownership control and management, and repurpose itself as a North American energy recovery company, with plans to purchase a group of synergistic, long-lived energy assets by taking advantage of favorable valuations for mergers and acquisitions in the current energy markets. On April 17, 2015, the Company completed its first acquisition in furtherance of its change in principle operations, consisting of 40,976 net acres of coal and coalbed methane, located across 22 counties in West Virginia. See Note 9 to the consolidated financial statements for additional completed and planned acquisitions.

 

The Company does not believe that its operating results for the period ending November 30, 2015 are indicative of its future operations. Current management of the Company acquired control of the Company in March 2015, with the goal of using the Company as a vehicle to acquire undervalued natural resource assets. The Company has raised approximately $7 million through the sale of shares of common stock in a private placement, and is currently evaluating a number of possible acquisitions of operating coal mines and non-operating coal assets. There are currently many coal assets for sale at attractive prices due to distress conditions in the coal industry. The distress conditions are mainly due to new environmental regulations, which have increased operating costs for coal operators, and have encouraged coal buyers to switch to less costly energy sources, such as natural gas. The resulting drop in demand from coal buyers has caused the price of coal to decline considerably, and caused bankruptcy filings by many of the major coal operators. Despite the current distress in the industry, industry experts still predict that coal will supply a significant percentage of the nation’s energy needs for the foreseeable future, and thus overall demand for coal will remain significant. Management believes there are a number of attractive acquisition candidates in the coal industry which can be operated profitably at current prices and under the current regulatory environment.

 

 

Results of Operations

 

Three Months Ended November 30, 2015 and November 30, 2014

 

Revenues

 

During the year ending August 31, 2015, we disposed of our existing mining and oil and gas assets, and acquired 40,976 net acres of coal and coalbed methane mineral rights in 22 counties in West Virginia. Also, during the year ending August 31, 2015, we acquired Blue Grove, which is the exclusive operator for GS Energy, which owns and leases approximately 6,000 net acres of coal and coalbed methane mineral rights and a surface coal mine in McDowell County, West Virginia. We also entered into an agreement to acquire GS Energy, the completion of which is subject to the completion of an audit of GS Energy and due diligence. Pending the completion of the acquisition of GS Energy, Blue Grove began surface mining of the minerals owned or leased by GS Energy. The Company also has entered into option agreements to acquire other coal assets, and is evaluating the purchase of other coal mines in the Appalachian region.

 

In July 2015, the Company temporarily suspended coal operations at the surface coal mine owned by GS Energy when the coal purchaser filed Chapter 11 Bankruptcy, as a result the Company did not generate any revenues in the three months ended November 30, 2015. Operations are expected to recommence during the second or third quarter. The Company did not generate any revenues in the three months ended November 30, 2014.

 

Costs and Expenses

 

Costs and expenses during the three months ended November 30, 2015 and 2014 are summarized as follows.

 

		2015				2014
Depreciation and amortization		$	108,687			$	-
Selling, general and administrative expense			640,706				10,697
		$	749,393			$	10,697

 

During the 2015 period, the Company recorded $108,687 in amortization expense associated with the intangible assets acquired in the Blue Grove acquisition, which occurred in June of 2015.

 

During the three months ended November 30, 2015 and 2014, our selling, general and administrative expenses were $640,706 and $10,697, respectively. Set forth below is a breakdown of our selling, general and administrative expenses:

 

		2015				2014
Officer compensation		$	470,833			$	-
Consulting fees			40,586				1,560
Payroll taxes			38,088				-
Other professional services			23,605				2,427
Coal land and mineral rights property taxes			18,522				-
Accounting and auditing			21,692				6,430
Travel			9,153				-
Other			18,227				280
		$	640,706			$	10,697

  

 

Set forth below is a summary of material changes in our selling, general and administrative expenses:

 

	●	Officer compensation amounted to $470,833 in the 2015 period and none in the 2014 period. During the 2015 period, the Company entered into initial employment agreements with its officers, which provided for bonuses in the form of common stock. Officer compensation expense in 2015 includes $368,750 associated with these bonuses. The remaining officer compensation expense of $102,083 represents non-bonus officer compensation that accrued during the period under the employment agreements.
	●	Consulting fees amounted to $40,586 in the 2015 period as compared to $1,560 in the prior year period. The increase is due to accruals for compensation for accounting staff.
	●	Payroll taxes in the amount of $38,088 are recorded for the officer compensation in the 2015 period. There was no compensation in the 2014 period.
	●	Other professional services in 2015 were $23,605 and represented legal fees of $20,251, stock transfer agent fees of $1,689 and filing agent fees of $1,665. In comparison, our professional services were $2,427 in the same period in 2014. The increase was the result of increased acquisition activity in the period.
	●	Property taxes in the 2015 period represent accruals of property taxes on the mineral rights acquired by the Company in March 2015. The Company did not own any mineral or property rights in the 2014 period.
	●	Accounting and auditing amounted to $21,692 in the 2015 period and $6,430 in the 2014 period. The increase is primarily due to the Company’s growth and acquisition activity.
	●	The Company incurred $9,153 in travel costs during the period, primarily associated with continuing acquisition activity.
	●	Other selling, general and administrative costs amounted to $18,227 in the 2015 period and $280 in the 2014 period. The increase in such expenses in the 2015 period was attributable to increased obligations for rent, website, telephone and other office costs as compared to the 2014 period and is a result of the growth of the Company.

 

Other expense (income) for the three months ended November 30, 2015 and 2014 was $731 and $8,891, respectively, as follows.

 

		2015				2014
Loss (gain) on commodities trading		$	-			$	8,743
Interest and other (income)
Related party			(1,553	)			-
Other			(761	)			(103	)
Interest expense
Related party			3,045				-
Other			-				251
		$	731			$	8,891

 

Loss (gain) on commodities trading amounted to a loss of $8,743 in 2014 with no activity in the 2015 period.

 

Interest income amounted to $1,553 in accrued interest on a note receivable from a related party and $761 from cash deposits in the 2015 period and other income of $103 in the 2014 period.

 

Interest expense amounted to $3,045 for a related party in 2015 and $251 for other in 2014. The related party interest is on a note executed in March 2015 in the amount of $203,593, the proceeds of which were used to repay all existing liabilities of the Company at the time.

 

Our net loss for the three months ended November 30, 2015 and 2014 was $740,124 ($0.05 per share) and $19,588 ($0.00 per share), respectively. The weighted average number of shares outstanding during the 2015 period was 14,698,189 shares, as compared to 8,251,702 shares during the 2014 period.

 

 

Liquidity, Capital Resources and Going Concern

 

Overview - The Company does not have any established sources of revenues sufficient to fund the development of its business, or pay projected operating expenses and commitments for the next year. The Company has accumulated a net loss of $5,760,626 through November 30, 2015, and incurred a loss of $750,124 for the three months then ended.

 

At November 30, 2015 and August 31, 2015, our current assets were $7,315,721 and $4,255,542, respectively, and our current liabilities were $724,189 and 567,572, respectively, which resulted in working capital of $6,591,532 and $3,687,970, respectively.

 

Total assets at November 30, 2015 and August 31, 2015 amounted to $15,301,612 and $12,350,120, respectively. The substantial increase in total assets and working capital was primarily the result of the increase in cash of $2,933,829, which was derived from the sale of $3,045,000 of common stock in a private offering in the three months ended November 30, 2015.

 

At November 30, 2015, our total liabilities of $724,189 increased $156,617 from $567,572 at August 31, 2015. The increase primarily consists of an increase in accounts payable and accrued expenses of $153,572, which is primarily the accrual of compensation and related payroll taxes.

 

At November 30, 2015, our stockholders’ equity was $14,577,423, as compared to $11,782,548 at August 31, 2015. The principal reason for the net increase of $2,794,875 was the sale of common stock for cash in the amount of $3,045,000, the issuance of common stock for compensation in the net amount of $368,750, less a net loss for the period of $750,124.

 

The following table sets forth the major sources and uses of cash for the three months ended November 30, 2015 and 2014.

 

		2015				2014
Net cash used in operations		$	(101,171	)		$	(8,144	)
Net cash provided by (used in) investing activities			(10,000	)			672
Net cash provided by financing activities			3,045,000				7,264
Net increase (decrease) in unrestricted cash and cash equivalents		$	2,933,829			$	(208	)

 

Material Commitments and Contingencies

 

As of November 30, 2015, the Company had the following material commitments and contingencies.

 

Planned acquisitions – See Note 10, 11 and 12 to the consolidated financial statements.

 

Notes payable to E-Starts Money Co – See Note 7 to the consolidated financial statements.

 

Cash requirements and capital expenditures – As noted in Note 10, 11 and 12 to the consolidated financial statements, the Company has several planned acquisitions which will require both the issuance of common stock of the Company and cash. The acquisitions will also require cash for working capital and capital improvements, among other things. In addition, the Company has paid a material part of the compensation due to its officers in shares of common stock, which has enabled it to conserve cash for other operating expenses and acquisitions. The Company has completed its first private placement of common stock to fund operating expenses and acquisitions, and plans to initiate a new private placement after it completes its next acquisition; however, there can be no assurance that the Company will be successful, or that any capital can be raised on terms that are not dilutive to existing common stockholders.

 

Known trends and uncertainties – The Company is initiating a new business direction as a North American energy recovery company. The uncertainty of the economy may increase the difficulty of raising funds to support the new energy recovery business.

 

 

Evaluation of the amounts and certainty of cash flows – Previously the Company had no revenue and relied on its CEO and loans to fund operations. There can be no assurance that the new CEO will be able to fund future operations, sell capital stock or obtain loans.

 

Going Concern

 

Our financial statements have been presented on the basis that we continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, we incurred a net operating loss in the three months ended November 30, 2015, and have minimal revenues at this time. These factors create an uncertainty about our ability to continue as a going concern. We are currently trying to raise capital through private offerings of common stock and convertible notes. Our ability to continue as a going concern is dependent on the success of this plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Critical Accounting Estimates

 

Our significant accounting policies are described in Note 1 of Notes to Financial Statements. During the period ending November 30, 2015, we were not required to make any material estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. However, as we begin actual mining operations, we will be required to make estimates and assumptions typical of other companies in the mining business. For example, we will be required to make critical accounting estimates related to future metals prices, obligations for environmental, reclamation, and closure matters, mineral reserves, and accounting for business combinations. The estimates will require us to rely upon assumptions that were highly uncertain at the time the accounting estimates are made, and changes in them are reasonably likely to occur from period to period. Changes in estimates used in these and other items could have a material impact on our financial statements in the future. Our estimates will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

ITEM 4: Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of November 30, 2015. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the evaluation date, such controls and procedures were not effective.

 

(b) Changes in Internal Controls

 

In the Company’s Form 10-K for the year ended August 31, 2015, the Company disclosed that its disclosure controls and procedures were not effective due to lack of segregation of duties. The Company has begun the process of establishing the necessary controls and procedures, however, these changes have not yet been implemented.

 

 

PART II - OTHER INFORMATION

 

Item 1: Legal Proceedings

 

None

 

ITEM 1A: Risk Factors

 

Not applicable.

 

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended November 30, 2015, the board of directors of the Company approved the issuance of 1,218,000 shares of its common stock to unrelated individuals for cash in the amount of $3,045,000.

 

The shares were sold pursuant to an exemption from registration under Section 4(2) promulgated under the Securities Act of 1933, as amended.

 

ITEM 3: Defaults upon Senior Securities.

 

None

 

ITEM 4: Mine Safety Disclosures.

 

Exhibit 95

 

ITEM 5: Other Information.

 

None

 

ITEM 6: Exhibits

 

Exhibit No.		Description
10.1*		Amendment to Blue Grove Stock Purchase Agreement
31.1*		Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002
95*		Mine Safety Disclosure
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

**In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: January 14, 2016	Royal Energy Resources, Inc.
	By:	/s/ William L. Tuorto
		William L. Tuorto
		CEO and Principal Executive Officer
	By:	/s/ Douglas C. Holsted
		Douglas C. Holsted
		Principal Financial Officer