Royal Energy Resources (ROYE) Risk Analysis

Our common stock is currently quoted on the OTCQB under the symbol "ROYE." The trading market for our common stock is limited. We are exploring a possible listing of our common stock on the NASDAQ, which may improve the trading market for our common stock. However, there is no assurance that we will be approved for listing or that the listing will improve the trading market for our common stock. A more active trading market for our common stock may never develop, or if such a market develops, it may not be sustained.

Our common stock trades on the OTCQB under the ticker symbol "ROYE." The Partnerships common units trade on the OTCQB under the ticker symbol "RHNO." Our common stock and the Partnership's common units will continue to trade on the OTCQB or one of the other over-the-counter markets. Trading on the OTCQB or one of the other over-the-counter markets may result in a reduction in some or all of the following, each of which could have a material adverse effect on our shareholders and the Partnership's unitholders: - The liquidity of our common stock or the Partnership's common units;         - The market price of our common stock or the Partnership's common units;         - our ability or the Partnership's ability to issue additional securities or obtain financing;         - the number of institutional and other investors that will consider investing in our common stock or the Partnership's common units; and         - the number of market makers in our common stock or the Partnership's common units;         - the availability of information concerning the trading prices and volume of our common stock or the Partnership's common units; and         - the number of broker-dealers willing to execute trades in our common stock or the Partnership's common units. Further, since neither us nor the Partnership are traded on a national securities exchange, we are not subject to exchange rules, including rules requiring that either us or the Partnership meet certain corporate governance standards. Without required compliance of these corporate governance standards, investor interest in our common stock or the Partnership's common units may decrease.

Currently, Royal's only operations consist of the coal mining operations of the Partnership, although Royal currently receive royalties under a royalty agreement covering a coal transloading facility on the Ohio River. As a result, Royal is substantially dependent on the Partnership to generate cash flow that can be used to pay distributions or expense reimbursements that Royal can use to pay its own operating expenses and indebtedness. The Partnership's ability to generate operating cash flow that can be used to pay distributions or expense reimbursements to Royal is subject to all of the risks inherent in the Partnership's business, including covenants in the Partnership's Financing Agreement. If the Partnership is unable to pay distributions or expense reimbursements to Royal, Royal may not have sufficient funds to pay its own operating expenses or repay its indebtedness. If Royal is unable to receive sufficient distributions or expense reimbursements from the Partnership, Royal may have to raise capital from third parties to pay its liabilities. There is no assurance that Royal would be able to raise capital on terms that are not dilutive to existing shareholders, or at all. Currently, the Partnership does not have sufficient cash each quarter to pay its minimum quarterly distribution of $4.45 per unit, or $17.80 per unit per year, which would require that it have available cash of approximately $58.6 million per quarter, or $234.2 million per year, based on the number of common and subordinated units outstanding as of December 31, 2018 and the general partner interest. Beginning with the quarter ended September 30, 2014, distributions on its common units were below the minimum level and, beginning with the quarter ended June 30, 2015, it suspended the quarterly distribution on its common units altogether, and has not paid any quarterly distributions since. The amount of cash it can distribute on its common and subordinated units principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things: - the amount of coal the Partnership is able to produce from our properties, which could be adversely affected by, among other things, operating difficulties and unfavorable geologic conditions;         - the price at which it is able to sell coal, which is affected by the supply of and demand for domestic and foreign coal;         - the level of its operating costs, including reimbursement of expenses to its general partner and its affiliates. Its partnership agreement does not set a limit on the amount of expenses for which its general partner and its affiliates may be reimbursed;         - the proximity to and capacity of transportation facilities;         - the price and availability of alternative fuels;         - the impact of future environmental and climate change regulations, including those impacting coal-fired power plants;         - the level of worldwide energy and steel consumption;         - prevailing economic and market conditions;         - difficulties in collecting our receivables because of credit or financial problems of customers;         - the effects of new or expanded health and safety regulations;         - domestic and foreign governmental regulation, including changes in governmental regulation of the mining industry, the electric utility industry or the steel industry;         - changes in tax laws;         - weather conditions; and         - force majeure. The failure of the Partnership to pay distributions on its common units could impair our ability to our obligations that are incurred outside of the Partnership, including our loan from Cedarview and our general and administrative expenses. In addition, the failure of the Partnership to pay distributions on its common units could be a factor in depressing the market value of its common units, which could result in dilution of our interest in the Partnership as a result of the conversion into common units of the Series A Preferred Units of the Partnership whose conversion price is based on the market price of the common units at the time of conversion.

The OTCQB is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current "bids" and "asks", as well as volume information. We anticipate that the market price of our common stock will be subject to wide fluctuations in response to several factors, including: our ability to economically exploit our properties successfully; increased competition from competitors; and our financial condition and results of our operations.

Under the terms of our Certificate of Incorporation, our board of directors is authorized to issue shares of preferred stock in one or more classes or series without stockholder approval. The board has discretion to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of preferred stock. Accordingly, we may designate and issue additional shares or series of preferred stock that would rank senior to the shares of common stock as to dividend rights or rights upon our liquidation, winding-up, or dissolution.

Our certificate of incorporation and bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. Our board has authorized the issuance of 100,000 shares of one class of preferred stock, known as "Series A Preferred Stock." The Series A Preferred Stock has voting rights entitling it to 54% of the total votes on any matter on which stockholders are entitled to vote. In addition, we cannot authorize or issue any class of capital stock or bonds, debentures, notes or other securities or other obligations ranking senior to or on a parity with the Series A Preferred Stock without the approval of the Series A Preferred Stock voting as a separate class. Mr. Tuorto holds all of the outstanding shares of Series A Preferred Stock. As a result, at any meeting of shareholders Mr. Tuorto has a disproportionate voting power. Mr. Tuorto's control of our Series A Preferred Stock may prevent our stockholders from replacing a majority of our board of directors at any shareholder meeting, which may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of stockholders. Moreover, our board of directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless certain specific requirements are met as set forth in Section 203. Collectively, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

The Series A preferred units of the Partnership are a new class of partnership interests that rank senior to its common units with respect to distribution rights and rights upon liquidation. The Partnership is required to pay annual distributions on the Series A preferred units in an amount equal to the greater of (i) 50% of CAM Mining free cash flow (which is defined in our partnership agreement as (i) the total revenue of the our Central Appalachia business segment, minus (ii) the cost of operations (exclusive of depreciation, depletion and amortization) for the its 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) and (ii) an amount equal to the number of outstanding Series A preferred units multiplied by $0.80. 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 it will not be permitted to pay any distributions on Royal's partnership interests that rank junior to the Series A Preferred Units, including its common units. The preferred units also rank senior to the common units in right of liquidation, and will be entitled to receive a liquidation preference in any such case. The Partnership may convert the Series A preferred units into common 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. All unconverted Series A preferred units will convert into common units on December 31, 2021. The number of common units issued in any conversion will be based on the volume-weighted average closing price of the common units for 90 days preceding the date of conversion. Accordingly, the lower the trading price of the Partnership's common units over the 90 day measurement period, the greater the number of common units that will be issued upon conversion of the preferred units, which would result in greater dilution to our interest in the Partnership. Dilution has the following effects on our interest in the Partnership: - our proportionate ownership interest in the Partnership will decrease;         - the amount of cash available for distribution on each unit may decrease;         - the relative voting strength of our ownership interest will be diminished; and         - the market price of our common units may decline.

For as long as the Series A preferred units are outstanding, 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, LLC 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 its Central Appalachia business segment, subject to certain exceptions. These consent rights effectively add a constituency to the Partnership's fundamental decision-making process, and failure to obtain such consent from the Series A preferred holders could prevent the Partnership from taking actions that its management or board of directors otherwise view as prudent or necessary for its business operations or the execution of its business strategy.

As of March 20, 2019, we had 18,579,293 shares of common stock (including 914,797 shares held by its consolidated subsidiary, Rhino Resource Partners, LP) and 51,000 shares of Series A Preferred Stock outstanding. All of the Series A Preferred Shares are convertible into common stock on a one for one basis. Approximately 50.5% of our common stock is owned or controlled by our officers and directors, including approximately 45.4% by William Tuorto and entities he controls. There is currently only a limited market for our commons stock. Sales by our large holders of a substantial number of shares of our common units in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock or could impair our ability to obtain capital through an offering of equity securities.

Like all equity investments, an investment in our common shares is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally. Reduced demand for our common shares resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common shares to decline.

Rhino has not requested a ruling from the IRS with respect to its treatment as a partnership for U.S. federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the positions Rhino takes and it may be necessary to resort to administrative or court proceedings to sustain some or all of its positions. A court may not agree with some or all of the positions Rhino takes. Any contest with the IRS may materially and adversely impact the value of our investment in its common units and the price at which they trade. Moreover, the costs of any contest with the IRS will reduce Rhino's cash available for distribution to its unitholders, including Royal. Rhino has requested and obtained a favorable private letter ruling from the IRS to the effect that, based on facts presented in the private letter ruling request, income from management fees, cost reimbursements and cost-sharing payments related to its management and operation of mining, production, processing, and sale of coal and from energy infrastructure support services will constitute "qualifying income" within the meaning of Section 7704 of the Code.

Rhino's unitholders, including Royal, are required to pay federal income taxes and, in some cases, state and local income taxes, on their share of taxable income, whether or not they receive cash distributions from Rhino. The unitholders may not receive cash distributions from Rhino equal to their share of its taxable income or even equal to the actual tax due with respect to that income.

Because Rhino cannot match transferors and transferees of common units, Rhino has adopted certain methods of allocating depreciation and amortization deductions that may not conform to all aspects of the Treasury Regulations. A successful IRS challenge to the use of these methods could adversely affect the amount of tax benefits available to Royal. It also could affect the timing of these tax benefits or the amount of gain from its sale of common units and could have a negative impact on the value of its common units or result in audit adjustments to its tax returns.

Rhino generally prorates its items of income, gain, loss and deduction between transferors and transferees of its common units each month based upon the ownership of its units on the first day of each month (the "Allocation Date"), instead of on the basis of the date a particular common unit is transferred. Similarly, Rhino generally allocates gain or loss realized on the sale or other disposition of its assets or, in the discretion of Rhino, any other extraordinary item of income, gain, loss or deduction on the Allocation Date. Nonetheless, Rhino allocates certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. Treasury Regulations allow a similar monthly simplifying convention, but such regulations do not specifically authorize all aspects of its proration method. If the IRS challenged its proration method, Rhino could be required to change its allocation of items of income, gain, loss and deduction among its unitholders, including Royal.

In determining the items of income, gain, loss and deduction allocable to its unitholders, Rhino must routinely determine the fair market value of its assets. Although Rhino may, from time to time, consult with professional appraisers regarding valuation matters, Rhino makes many fair market value estimates using a methodology based on the market value of its common units as a means to measure the fair market value of its assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction. A successful IRS challenge to these methods or allocations could adversely affect the timing or amount of taxable income or loss being allocated to its unitholders, including Royal. It also could affect the amount of gain from Royal's sale of common units and could have a negative impact on the value of Royal's investment in the common units or result in audit adjustments to Royal's tax returns without the benefit of additional deductions.