Filed
Pursuant to Rule 424(b)(4)
Registration No. 333-226042
FINAL PROSPECTUS
1,000,000 Shares
American Resources Corporation
Class A Common Stock
______________________
This
is a public offering of the Class A Common stock (or also referred
to as “common stock”) of American Resources
Corporation, a Florida corporation. Prior to this offering, there
has been limited public market for our common stock on the OTC
Markets under the ticker AREC. We are selling up to 1,000,000
shares of common stock. There are no selling shareholders in this
offering.
Our
common stock is currently quoted on the OTC Market Group,
Inc.’s OTC Pink tier under the symbol “AREC”.
On February 13, 2019, the last reported sale price of our
common stock was $12.50 per share. Our common stock has been
approved for listing on The NASDAQ Capital Market under the symbol
“AREC”.
We are an “emerging growth company” as
that term is used in the Jumpstart Our Business Startups Act
of
2012, and as such, we have
elected to take advantage of certain reduced public company
reporting requirements for this prospectus and future filings. See
“Risk Factors” and “Prospectus
Summary—Emerging Growth Company.”
Investing in our common stock involves risks. See “Risk
Factors” on page 8.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
______________________
|
|
|
Public offering
price
|
$
4.00
|
$
4,000,000
|
Underwriting
discount(1)
|
$
0.28
|
$
280,000
|
Proceeds before
expenses
|
$
3.72
|
$
3,720,000
|
———————
(1) In addition to the
underwriting discount, we have agreed to issue to the
representative of the underwriters warrants to purchase a number of
shares of common stock equal to 7% of the total number of shares
being sold in the offering, including the over-allotments, if any,
and to reimburse the underwriters for expenses incurred by them.
See “Underwriting” beginning on page 99 of this
prospectus for additional information regarding total underwriter
compensation.
We have granted the
underwriters the option for a period of 45 days to purchase
additional shares of common stock (up to 15.0% of the number of
shares of common stock sold in the primary offering) solely to
cover over-allotments, if any (the
“Over-Allotment”).
The
underwriters expect to deliver our shares to purchasers in the
offering on or about February 20, 2019, subject to customary
closing conditions.
MAXIM GROUP, LLC
Lead Bookrunning Manager
The date of this prospectus is
February 1
5, 2019
TABLE OF CONTENTS
ABOUT
THIS PROSPECTUS
|
4
|
OTHER
INFORMATION
|
4
|
PROSPECTUS
SUMMARY
|
5
|
RISK
FACTORS
|
8
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
41
|
USE
OF PROCEEDS
|
44
|
CAPITALIZATION
|
45
|
INFORMATION
WITH RESPECT TO THE REGISTRANT
|
46
|
DESCRIPTION
OF PROPERTY
|
65
|
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
|
65
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
66
|
DIRECTORS
AND EXECUTIVE OFFICERS
|
87
|
EXECUTIVE
COMPENSATION
|
91
|
DESCRIPTION
OF SECURITIES
|
93
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
96
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, DIRECTOR
INDEPENDENCE
|
97
|
UNDERWRITING
|
99
|
DETERMINATION
OF OFFERING PRICE
|
102
|
INTERESTS
OF NAMED EXPERTS AND COUNSEL
|
103
|
WHERE
YOU CAN FIND MORE INFORMATION
|
104
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
104
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
-----------------------------------------
You should rely only on the information contained in this
prospectus and any free writing prospectus prepared by us or on
behalf of us or the information to which we have referred you.
Neither we, nor the underwriters have authorized anyone to provide
you with information different from that contained in this
prospectus and any free writing prospectus. We take no
responsibility for, and can provide no assurance as to the
reliability of, any other information that others may give you. We
and the underwriters are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The information
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus
or any sale of the common stock. Our business, financial condition,
results of operations and prospects may have changed since that
date.
This prospectus contains forward-looking statements that are
subject to a number of risks and uncertainties, many of which are
beyond our control. See “Risk Factors” and
“Cautionary Statement Regarding Forward-Looking
Statements.”
Certain
Terms Used in this Prospectus
All references in
this prospectus to:
●
“American
Resources Corporation,” the “Company,”
“ARC”, “AREC”, “us,”
“we,” “our,” or “ours” or like
terms when used in the present tense or prospectively refer to
American Resources Corporation and its subsidiaries, including its
wholly-owned subsidiary, Quest Energy Inc. American Resources
Corporation is the issuer in this offering.
●
“Common
shares,” “common stock” or “Common
Stock” refers to the Class A common stock of the Company, par
value $0.0001, as defined in the Company’s Articles of
Incorporation, as amended. There is no other class of common shares
of the Company authorized or issued other than the Class A common
stock. The term “stock” and “shares” are
used interchangeably.
●
“Coal mining
permits” refers to permits from Kentucky Department of
Natural Resources or Indiana Department of Natural Resources (as
the case may be) and includes permits for coal extraction,
processing, rail loading, and storage of refuse and/or
slurry.
●
Tons refer to short
tons, unless otherwise indicated.
●
We have not
classified the coal we control as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7. Therefore, any
references to coal in this filing refers to an undetermined coal
deposit that has not been deemed proven or
probable.
You should only
rely on the information contained in this document or to which we
have referred you. We have not authorized anyone to provide you
with information otherwise. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not
making an offer to sell these securities in any jurisdiction where
the offer or sale is not permitted.
OTHER
INFORMATION
Our website address
is www.americanresourcescorp.com. We expect to make our periodic
reports and other information filed with or furnished to the
Securities Exchange Commission (“SEC”), available free
of charge through a link on our website as soon as reasonably
practicable after those reports and other information are
electronically filed with or furnished to the SEC. Information on
our website or any other website is not incorporated by reference
into, and does not constitute a part of, this
prospectus.
PROSPECTUS
SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. You should read the entire prospectus carefully,
including the information under the headings “Risk
Factors,” “Cautionary Statement Regarding
Forward-Looking Statements” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and the financial statements and the notes to
those financial statements appearing elsewhere in this prospectus.
The information presented in this prospectus assumes a public
offering price of $4.00 per common share.
About
Us
We are a low-cost
producer of primarily high-quality, metallurgical coal in eastern
Kentucky. We began our Company on October 2, 2013 and changed our
name from Natural Gas Fueling and Conversion Inc. to NGFC Equities,
Inc. on February 25, 2015, and then changed our name from NGFC
Equities, Inc. to American Resources Corporation on February 17,
2017. On January 5, 2017, ARC executed a Share Exchange Agreement
between the Company and Quest Energy Inc., a private company
incorporated in the State of Indiana with offices at 9002
Technology Lane, Fishers IN 46038, and due to the fulfillment of
various conditions precedent to closing of the transaction, the
control of the Company was transferred to the Quest Energy
shareholders on February 7, 2017 resulting in Quest Energy becoming
a wholly-owned subsidiary of ARC. Through its wholly-owned
subsidiary Quest Energy, which is an Indiana corporation founded in
June 2015, ARC was able to acquire coal mining and coal processing
operations, substantially all located in eastern Kentucky. A
majority of our domestic and international target customer base
includes blast furnace steel mills and coke plants, as well as
international metallurgical coal consumers, domestic electricity
generation utilities, and other industrial customers.
We achieved initial
commercial production of metallurgical coal in September 2016 from
our McCoy Elkhorn Mine #15 and from our McCoy Elkhorn Carnegie 1
Mine in March 2017. In October 2017 we achieved commercial
production of thermal coal from our Deane Mining Access Energy Mine
and from our Deane Mining Razorblade Surface Mine in May 2018. We
believe that we will be able to take advantage of recent increases
in U.S. and global benchmark metallurgical and thermal coal prices
and intend to opportunistically increase the amount of our
projected production that is directed to the export market to
capture favorable differentials between domestic and global
benchmark prices. The Company commenced operations of two out of
four of its internally owned preparation plants in July of 2016
(Bevins #1 and Bevins #2 Prep Plants at McCoy Elkhorn), with a
third preparation plant commencing operation in October 2017 (Mill
Creek Prep Plant at Deane Mining).Pursuant to the definitions in
Paragraph (a) (4) of the Securities and Exchange Commission's
Industry Guide 7, our company and its business activities are
deemed to be in the exploration stage until mineral reserves are
defined on our properties.
Current
Projects
Quest Energy has
six coal mining and processing operating subsidiaries: McCoy
Elkhorn Coal LLC (doing business as McCoy Elkhorn Coal Company,
“McCoy Elkhorn”), Knott County Coal LLC (“Knott
County Coal”), Deane Mining LLC (“Deane Mining”),
ERC Mining Indiana Corporation (“ERC”), Wyoming County
Coal LLC (“Wyoming County Coal”), and Quest Processing
LLC (“Quest Processing”), all of which are located in
eastern Kentucky and West Virginia within the Central Appalachian
coal basin, with the exception of ERC Mining Indiana Corporation,
which is located in southwestern Indiana in the Illinois coal
basin. Below is an organizational and ownership chart of our
Company.
The coal deposits
under control by the Company generally comprise of metallurgical
coal (used for steel making), pulverized coal injections
(“PCI”, used in the steel making process) and high-BTU,
low sulfur, low moisture bituminous coal used for a variety of uses
within several industries, including industrial customers,
specialty products and thermal coal used for electricity
generation.
Emerging Growth Company
We are an
“emerging growth company” as defined in the Jumpstart
Our Business Startups Act (the “JOBS Act”). For as long
as we are an emerging growth company, unlike public companies that
are not emerging growth companies under the JOBS Act, we will not
be required to:
●
provide an
auditor’s attestation report on management’s assessment
of the effectiveness of our system of internal control over
financial reporting pursuant to Section 404(b) of the
Sarbanes-Oxley Act of 2002;
●
provide more than
two years of audited financial statements and related
management’s discussion and analysis of financial condition
and results of operations;
●
comply with any new
requirements adopted by the Public Company Accounting Oversight
Board (the “PCAOB”) requiring mandatory audit firm
rotation or a supplement to the auditor’s report in which the
auditor would be required to provide additional information about
the audit and the financial statements of the issuer;
●
provide certain
disclosure regarding executive compensation required of larger
public companies or hold stockholder advisory votes on the
executive compensation required by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank
Act”); or
●
obtain stockholder
approval of any golden parachute payments not previously
approved.
We will cease to be
an emerging growth company upon the earliest of:
●
the last day of the
fiscal year in which we have $1.0 billion or more in annual
revenues;
●
the date on which
we become a “large accelerated filer” (the fiscal
year-end on which the total market value of our common equity
securities held by non-affiliates is $700 million or more as of our
most recently completed second fiscal quarter);
●
the date on which
we issue more than $1.0 billion of non-convertible debt over a
three-year period; or
●
the last day of the
fiscal year following the fifth anniversary of our initial public
offering.
In addition,
Section 107 of the JOBS Act provides that an emerging growth
company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act of 1933, as
amended (the “Securities Act”), for complying with new
or revised accounting standards, but we intend to irrevocably opt
out of the extended transition period and, as a result, we will
adopt new or revised accounting standards on the relevant dates in
which adoption of such standards is required for other public
companies.
Total
common stock offered by the Company
|
Up to
1,150,000
shares of Class A Common Stock, assuming the
underwriter’s Over-Allotment option is fully
exercised.
|
Use
of proceeds
|
We expect to receive approximately
$
4,000,000
of gross proceeds,
based upon the offering price of $4.00
per share, and after deducting the underwriting
discount of $280,000, we expect to receive approximately
$3,720,000. If the underwriters fully exercise their right to
purchase additional shares of common stock, we estimate that we
will receive gross proceeds of $4,600,000 from the sale of the
common stock and net proceeds of $4,278,000 after deducting
$322,000 for underwriting discounts and commissions.
The Company will use the proceeds of
this offering to fund organic and acquisitive growth and other uses
as described in the “Use of Proceeds” section. The
Company will use the proceeds, among other things, to initiate coal
production on certain permits the Company owns and act upon certain
acquisition opportunities, both those that are in close proximity
to our current operations and those that would create another
“hub” from which we can enhance business expansion. We
have not yet made final investment decisions with respect to any of
these potential projects and we cannot currently allocate specific
percentages of the net proceeds that we may use for the purposes
described above.
Please
read “Use of Proceeds.”
|
Dividend
policy
|
While
we have not paid any dividends on our common stock since our
inception, our longer-term objective is to pay dividends in order
to enhance stockholder returns when the Board of Directors deems
such action as in the best interest of its shareholders. Please
read “Dividend Policy.”
|
Listing
and trading symbol
|
Currently our stock is listed on the OTC Markets OTC Pink tier
under the ticker “AREC” and has been approved for
listing on the NASDAQ Capital Market under the symbol
“AREC”.
|
Risk
factors
|
You
should carefully read and consider the information set forth under
the heading “Risk Factors” and all other information
set forth in this prospectus before deciding to invest in our
common stock.
|
The information
above does not include 4,000,000 shares of Class A Common Stock
reserved for issuance pursuant to the Employee Incentive Stock
Option Plan, 636,830 of which are issued as of the date of this
document.
RISK
FACTORS
Investing in our common stock involves risks. You should carefully
consider the information in this prospectus, including the matters
addressed under “Cautionary Statement Regarding
Forward-Looking Statements,” and the following risks before
making an investment decision. The trading price of our common
stock could decline and our ability to pay dividends may be reduced
due to any of these risks, and you may lose all or part of your
investment.
Risks
Associated with Small Company Size and Liquidity Risks
As a start-up or development stage company, our business and
prospects are difficult to evaluate because we have a very limited
operating history and our business model is evolving, an investment
in us is considered a high-risk investment whereby you could lose
your entire investment.
We have recently
commenced operations and, therefore, we are considered a
“start-up” or “development stage” company.
We have had limited income from the sale of the coal from our
mining operations. We will incur significant expenses in order to
implement our business plan. As an investor, you should be aware of
the difficulties, delays and expenses normally encountered by an
enterprise in its development stage, many of which are beyond our
control, including unanticipated developmental expenses, and
advertising and marketing expenses. We cannot assure you that our
proposed business plan will materialize or prove successful, or
that we will ever be able to operate profitably. If we cannot
operate profitably, you could lose your entire
investment.
We have limited assets, have incurred operating losses and have
limited current sources of revenue.
We
have limited assets and limited revenues since our inception in
2015. Since our inception, we have incurred annual
operating losses. As of the end of the 9 months ending
on September 30, 2018, our unaudited net loss from operations was
$8,869,858. We have only recently started generating
revenue and such revenue is concentrated among a small number of
customers and a small number of operations. We can provide no
assurance that any of our current or future assets will produce any
material revenues for our stockholders, or that any such business
will operate on a profitable basis.
Our results of operations have not resulted in profitability and we
may not be able to achieve profitability going
forward.
We
have had net losses in each quarter since our inception. We expect
that we will continue to incur net losses for the foreseeable
future. We may incur significant losses in the future for a number
of reasons, including the other risks described in this prospectus,
and we may encounter unforeseen expenses, difficulties,
complications, delays and other unknown events. Accordingly, we may
not be able to achieve or maintain profitability. Our business is
early development stage, consisting of the development, marketing,
and sale of our coal. There is no assurance that even if we
successfully implement our business plan, that we will be able to
curtail our losses. Further, as we are a development
stage enterprise, we expect that net losses and the working capital
deficiency will continue. If we incur additional significant
operating losses, our stock price may decline, perhaps
significantly.
We have yet to achieve positive cash flow and, given our projected
funding needs, our ability to generate positive cash flow is
uncertain.
We
have had unaudited negative cash flow from operating activities of
$4,076,157 for the 9 months ending on September 30, 2018. We
anticipate that we will continue to have negative cash flow from
operating and investing activities for the foreseeable future as we
expect to incur increased coal mining development expenses and make
significant capital expenditures in our efforts to commence mining
operations at our various permit sites. Our business also will at
times require significant amounts of working capital to support our
growth, particularly as we acquire infrastructure and equipment to
support our new mining operations. An inability to generate
positive cash flow for the foreseeable future may adversely affect
our ability to raise needed capital for our business on reasonable
terms, diminish supplier or customer willingness to enter into
transactions with us, and have other adverse effects that may
decrease our long-term viability. There can be no assurance we will
achieve positive cash flow in the foreseeable future.
We may need access to additional financing, which may not be
available to us on acceptable terms or at all, and there is a
substantial doubt about our ability to continue as a going concern.
If we cannot access additional financing when we need it and on
acceptable terms, our business, prospects, financial condition,
operating results and ability to continue as a going concern could
be adversely affected.
Our
growth-oriented business plan to mine and sell coal from our
various permits and facilities will require significant continued
capital investment. Our independent registered public accounting
firm for the fiscal year ended December 31, 2016 and December 31,
2017, has included an explanatory paragraph in their opinion that
accompanies our audited consolidated financial statements as of and
for those years indicating that our current liquidity position
raises substantial doubt about our ability to continue as a going
concern. If we are unable to improve our liquidity position, we may
not be able to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments
that might result if we are unable to continue as a going concern
and, therefore, be required to realize our assets and discharge our
liabilities other than in the normal course of business which could
cause investors to suffer the loss of all or a substantial portion
of their investment. We cannot be certain that additional financing
will be available to us on favorable terms when required, or at
all, particularly given that we do not now have a committed credit
facility with any government or financial institution. If we cannot
obtain additional financing when we need it and on terms acceptable
to us, our business, prospects, financial condition, operating
results and ability to continue as a going concern could be
adversely affected.
We do not have any existing bank credit facilities. Our ability to
obtain such financing may be limited and if we are unable to secure
such financing, our profitability may be adversely
affected.
We
do not have any existing bank credit facilities. Our ability to
obtain such financing may be limited as banks and other financial
institutions may be reluctant to extend credit to businesses they
perceive as lacking prolonged operating histories, an industry that
may be politically undesirable, and limited information relating to
revenues and costs upon which they can evaluate the merits and
risks of any such credit extension. Our inability to secure bank
credit facilities (or some other form of cash/liquid injection) may
have an adverse effect on our results of operations. Due to our
limited operating history and limited assets, and the lag often
existing between commencing business operations and profitability,
in the absence of such bank financing, we may be forced to rely
solely on revenues generated from our business operations in order
to support our company, which revenues may not be sufficient to
meet our operating and administrative expenses. If we do not have
sufficient cash to meet our expenses, whether from revenues or bank
credit, we may have to curtail or cease business
operations.
We have identified several material weaknesses in our internal
control over financial reporting. If our remediation of these
material weaknesses is not effective, or if we experience
additional material weaknesses in the future or otherwise fail to
maintain an effective system of internal control over financial
reporting in the future, we may not be able to accurately or timely
report our financial condition or results of operations, which may
adversely affect investor confidence in us and, as a result, the
value of our securities.
In connection with
the audit of our financial statements beginning on page F-1, the
Company identified several material weaknesses in its internal
control over financial reporting. A material weakness is defined as
a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s
financial statements will not be prevented or detected on a timely
basis. Below are the material weakness identified:
●
Insufficient number
of staff performing the accounting and financial reporting
functions; and
●
Lack of timely
reconciliations;
Neither we nor our
independent registered public accounting firm has performed an
evaluation of our internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. In light of
the material weaknesses that were identified, we believe that it is
possible that additional material weaknesses and control
deficiencies may have been identified if such an evaluation had
been performed.
The Company is
working to remediate the material weaknesses, has taken steps to
enhance the internal control environment, and plans to take
additional steps to remediate the material weaknesses.
Specifically, we are:
●
seeking technically
competent staff with appropriate experience;
●
designing
additional controls around identification, documentation and
application of technical accounting guidance regarding
reconciliation of account discrepancies.
The actions that we
are taking are subject to ongoing senior management review as well
as audit committee oversight. Although we plan to complete this
remediation process as quickly as possible, we cannot at this time
estimate how long it will take, and our efforts may not be
successful in remediating these material weaknesses. In addition,
we will incur additional costs in improving our internal control
over financial reporting. If we are unable to successfully
remediate these material weaknesses or if we identify additional
material weaknesses, we may not detect errors on a timely basis.
This could harm our operating results, cause us to fail to meet our
SEC reporting obligations or NASDAQ Capital Market listing
requirements on a timely basis, adversely affect our reputation,
cause our stock price to decline or result in inaccurate financial
reporting or material misstatements in our annual or interim
financial statements.
In addition to the
remediation efforts related to the material weaknesses described
above, we are in the process of designing and implementing the
internal control over financial reporting required to comply with
Section 404 of the Sarbanes Oxley Act. This process will be time
consuming, costly and complicated. If during the evaluation and
testing process, we identify one or more other material weaknesses
in our internal control over financial reporting, our management
will be unable to assert that our internal control over financial
reporting is effective. Even if our management concludes that our
internal control over financial reporting is effective, our
independent registered public accounting firm may conclude that
there are material weaknesses with respect to our internal controls
or the level at which our internal controls are documented,
designed, implemented or reviewed. If we are unable to assert that
our internal control over financial reporting is effective, or when
required in the future, if our independent registered public
accounting firm is unable to express an opinion as to the
effectiveness of our internal control over financial reporting,
investors may lose confidence in the accuracy and completeness of
our financial reports and the market price of our securities could
be adversely affected, and we could become subject to
investigations by the stock exchange on which our securities are
listed, the SEC, or other regulatory authorities, which could
require additional financial and management resources.
We have never declared or paid a cash dividend on our common shares
nor will we in the foreseeable future.
You will not
receive dividend income from an investment in the shares and as a
result, the purchase of the shares should only be made by an
investor who does not expect a dividend return on the
investment.
Our Series B
preferred stock, however, received an 8.0% annual dividend, of
which an accrued amount is recorded of $104,157, as of September
30, 2018, and continued to accrue to the Series B preferred stock
holder at the same rate until all Series B preferred stock was
converted to common stock on November 7, 2018. On November 8, 2018,
we filed an amendment to the company’s Articles of
Incorporation that eliminated the Series B preferred stock and
created a new Series C preferred stock. The Series C preferred
stock accrues a 10.0% annual dividend, compounded annually, of
which no amount has been recorded yet as being
accrued.
With the potential
exception of the Series C preferred stock dividend referenced
above, we currently intend to retain future earnings, if any, to
finance the operation and expansion of our business. Accordingly,
investors who anticipate the need for immediate income from their
investments by way of cash dividends should refrain from purchasing
any of our securities. As we do not intend to declare dividends in
the future, you may never see a return on your investment and you
indeed may lose your entire investment.
We will incur professional fees in connection with being a
reporting company under the Securities Exchange Act of 1934, as
amended.
Our Company is
subject to the reporting requirements of the 1934 Act and as such,
we are required to file 10-Ks, 10-Qs and 8-Ks and other reports
with the Securities and Exchange Commission. We will incur
professional fees (i.e., attorney, auditors and filing agents) in
connection with the preparation and filing of such reports and we
currently anticipate such costs to range from $25,000 to $50,000
per year. If we are unable to file such reports, we will be
delinquent in our filings which could adversely affect the
marketability of the Shares.
The failure to comply with the internal control evaluation and
certification requirements of Section 404 of Sarbanes-Oxley Act
could harm our operations and our ability to comply with our
periodic reporting obligations.
As a reporting
company under the 1934 Act, we are required to comply with the
internal control evaluation and certification requirements of
Section 404 of the Sarbanes-Oxley Act of 2002. We are in the
process of determining whether our existing internal controls over
financial reporting systems are compliant with Section 404. This
process may divert internal resources and will take a significant
amount of time, effort and expense to complete. If it is determined
that we are not in compliance with Section 404, we may be required
to implement new internal control procedures and reevaluate our
financial reporting. We may experience higher than anticipated
operating expenses as well as outside auditor fees during the
implementation of these changes and thereafter. Further, we may
need to hire additional qualified personnel in order for us to be
compliant with Section 404. If we are unable to implement these
changes effectively or efficiently, it could harm our operations,
financial reporting or financial results and could result in our
being unable to obtain an unqualified report on internal controls
from our independent auditors, which could adversely affect our
ability to comply with our periodic reporting obligations under the
1934 Act.
Future sales of restricted shares could decrease the price a
willing buyer would pay for shares of our common stock, could cause
our price to decline and could impair our ability to raise
capital.
Future sales of
common stock by existing shareholders or a new issuance by the
Company under exemptions from registration or through a subsequent
registered offering could materially adversely affect the market
price of our common stock and could materially impair our future
ability to raise capital through an offering of equity securities.
We are unable to predict the effect, if any, that market sales of
these shares, or the availability of these shares for future sale,
will have on the prevailing market price of our common stock at any
given time.
You may not be able to resell any shares you
purchased.
There is an
extremely limited trading market for our common stock at present.
There is no assurance that any trading market will be present. This
means that it may be hard or impossible for you to find a willing
buyer for your shares should you decide to sell them in the
future.
Risks
Related to Our Business
The majority of our properties have not yet been developed into
producing coal mines and, if we experience any development delays
or cost increases, our business, financial condition, and results
of operations could be adversely affected.
We have not yet
completed our development plan and do not expect to have full
annual production from all of our properties until sometime in the
future. We expect to incur significant capital expenditures until
we have completed the development of our properties. In addition,
the development of our properties involves numerous regulatory,
environmental, political and legal uncertainties that are beyond
our control and that may cause delays in, or increase the costs
associated with, their completion. Accordingly, we may not be able
to complete the development of the properties on schedule, at the
budgeted cost or at all, and any delays beyond the expected
development periods or increased costs above those expected to be
incurred could have a material adverse effect on our business,
financial condition, results of operations, cash flows and ability
to pay dividends to our common stockholders.
In connection with
the development of our properties, we may encounter unexpected
difficulties, including the following:
●
shortages of
materials or delays in delivery of materials;
●
unexpected
operational events;
●
facility or
equipment malfunctions or breakdowns;
●
unusual or
unexpected adverse geological conditions;
●
failure to obtain,
or delays in obtaining, all necessary governmental and third-party
rights-of-way, easements, permits, licenses and approvals for the
development, construction and operation of one or more of our
properties;
●
weather conditions
and other catastrophes, such as explosions, fires, floods and
accidents;
●
difficulties in
attracting a sufficient skilled and unskilled workforce, increases
in the level of labor costs and the existence of any labor
disputes; and
●
local and general
economic and infrastructure conditions.
If we are unable to
complete or are substantially delayed in completing the development
of any of our properties, our business, financial condition,
results of operations cash flows and ability to pay dividends to
our common stockholders could be adversely affected.
Because we have limited operating history and have not yet
generated significant revenues or operating cash flows, you may
have difficulty evaluating our ability to successfully implement
our business strategy.
Because of our
limited operating history, the operating performance of our
properties and our business strategy have not yet been proven. As a
result, our historical financial statements do not provide a
meaningful basis to evaluate our operations or our ability to
achieve our business strategy. Therefore, it may be difficult for
you to evaluate our business and results of operations to date and
assess our future prospects.
In addition, we may
encounter risks and difficulties experienced by companies whose
performance is dependent upon newly-constructed or newly-acquired
assets, such as any one of our properties failing to perform as
expected, having higher than expected operating costs, having lower
than expected customer revenues, or suffering equipment breakdown,
failures or operational errors. We may be less successful in
achieving a consistent operating level capable of generating cash
flows from our operations as compared to a company whose major
assets have had longer operating histories. In addition, we may be
less equipped to identify and address operating risks and hazards
in the conduct of our business than those companies whose major
assets have had longer operating histories.
We have limited operating history and our future performance is
uncertain.
We are an early
stage enterprise and will continue to be so until commencement of
substantial production from our coal properties. We have only
recently commenced limited production at one of our properties. We
have generated substantial net losses and negative cash flows from
operating activities since our inception and expect to continue to
incur substantial net losses as we continue our mine development
program. We face challenges and uncertainties in financial planning
as a result of the unavailability of historical data and
uncertainties regarding the nature, scope and results of our future
activities. New companies must develop successful business
relationships, establish operating procedures, hire staff, install
management information and other systems, establish facilities and
obtain licenses, as well as take other measures necessary to
conduct their intended business activities. We may not be
successful in implementing our business strategies or in completing
the development of the infrastructure necessary to conduct our
business as planned. In the event that one or more of our mine
development programs are not completed or are delayed or
terminated, our operating results will be adversely affected and
our operations will differ materially from the activities described
in this prospectus. As a result of industry factors or factors
relating specifically to us, we may have to change our methods of
conducting business, which may cause a material adverse effect on
our results of operations, financial condition and ability to pay
dividends to our common stockholders.
We will likely depend on a limited number of customers for a
significant portion of our revenues.
We will likely
depend on a limited number of customers for a significant portion
of our revenues. The failure to obtain additional customers or the
loss of all or a portion of the revenues attributable to any
customer as a result of competition, creditworthiness, inability to
negotiate extensions or replacement of contracts or otherwise,
could have a material adverse effect on our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
We expect that our customer base will be highly dependent on a
small number of customers.
The majority of all
of the coal that we produce, or plan to produce, is sold to steel
producers. Therefore, demand for our coal will be highly correlated
to the steel industry. The steel industry’s demand for
metallurgical coal is affected by a number of factors including the
cyclical nature of that industry’s business, technological
developments in the steel-making process and the availability of
substitutes for steel such as aluminum, composites and plastics. A
significant reduction in the demand for steel products would reduce
the demand for metallurgical coal, which would have a material
adverse effect upon our business, cash flows and results of
operations. Similarly, if less expensive ingredients could be used
in substitution for metallurgical coal in the integrated steel mill
process, the demand for metallurgical coal would materially
decrease, which would also materially adversely affect demand for
our metallurgical coal.
We do not expect to enter into long-term sales contracts for our
coal and as a result we will be exposed to fluctuations in market
pricing.
Sales commitments
for our coal typically are not long-term in nature and are
generally no longer than one year in duration. Many coal
transactions in the U.S. are done on a calendar year basis, where
both prices and volumes are fixed in the third and fourth quarter
for the following calendar year. Globally the market is evolving to
shorter term pricing. Some annual contracts have shifted to
quarterly contracts and growing volumes are being sold on an
indexed basis, where prices are determined by averaging the leading
spot indexes reported in the market. As a result, once we commence
operations and enter into agreements with customers, we will be
subject to fluctuations in market pricing. We will not be protected
from oversupply or market conditions where we cannot sell our coal
at economic prices. Metallurgical coal has been an extremely
volatile commodity over the past ten years and prices may become
volatile again in the future given the recent rapid increase. There
can be no assurances we will be able to mitigate such conditions as
they arise. Any sustained failure to be able to market our coal
during such periods would have a material adverse effect on our
business, results of operations, cash flows and ability to pay
dividends to our common stockholders.
Product alternatives may reduce demand for our
products.
The majority of our
coal production in the near term will be comprised of metallurgical
coal or pulverized coal injection (PCI), both which typically
command a price premium over the majority of other forms of coal
because of its use in blast furnaces for steel production.
Metallurgical coal has specific physical and chemical properties,
which are necessary for efficient blast furnace operation. Steel
producers are continually investigating alternative steel
production technologies with a view to reducing production costs.
The steel industry has increased utilization of electric arc
furnaces or pulverized coal injection processes, which reduce or
eliminate the use of furnace coke, an intermediate product produced
from metallurgical coal and, in turn, generally decreases the
demand for metallurgical coal. Many alternative technologies are
designed to use lower quality coals or other sources of carbon
instead of higher cost high-quality metallurgical coal. While
conventional blast furnace technology has been the most economic
large-scale steel production technology for a number of years, and
emergent technologies typically take many years to commercialize,
there can be no assurance that over the longer term competitive
technologies not reliant on metallurgical coal could emerge which
could reduce the demand and price premiums for metallurgical
coal.
Moreover, we may
produce and market other coal products, such as thermal coal, which
are also subject to alternative competition. Alternative
technologies are continually being investigated and developed in
order to reduce production costs or minimize environmental or
social impact. If competitive technologies emerge that use other
materials in place of our products, demand and price for our
products might fall.
We face uncertainties in estimating our economically recoverable
coal deposits, and inaccuracies in our estimates could result in
lower than expected revenues, higher than expected costs and
decreased profitability.
Coal is
economically recoverable when the price at which coal can be sold
exceeds the costs and expenses of mining and selling the coal.
Forecasts of our future performance are based on, among other
things, estimates of our recoverable coal deposits. We base our
coal deposit information on geologic data, coal ownership
information and current and proposed mine plans. We have not
independently verified any of the coal deposit information,
including coal qualities within the coal deposit areas, coal
heights, and deposit boundaries, and our information comes
primarily from previously prepared reports by prior management and
other third parties. Coal deposit estimates are periodically
updated to reflect past coal production, if any, new drilling
information, other geologic or mining data, and changes to coal
price expectations or the cost of production and sale. There are
numerous uncertainties inherent in estimating quantities and
qualities of coal and costs to mine coal, including many factors
beyond our control. As a result, estimates of economically
recoverable coal deposits are by their nature uncertain. Some of
the factors and assumptions that can impact economically
recoverable coal deposits estimates include:
●
geologic and mining
conditions;
●
historical
production from the area compared with production from other
producing areas;
●
the assumed effects
of environmental and other regulations and taxes by governmental
agencies;
●
our ability to
obtain, maintain and renew all required permits;
●
future improvements
in mining technology;
●
assumptions related
to future prices; and
●
future operating
costs, including the cost of materials, and capital
expenditures.
Each of the factors
that impacts coal deposit estimation may vary considerably from the
assumptions used in estimating such deposits. For these reasons,
estimates of coal deposits may vary substantially. Actual
production, revenues and expenditures with respect to our future
coal deposits will vary from estimates, and these variances may be
material. As a result, our estimates may not accurately reflect our
actual future coal deposits.
Our inability to acquire additional coal deposits that are
economically recoverable may have a material adverse effect on our
future profitability.
Our profitability
depends substantially on our ability to mine, in a cost-effective
manner, coal deposits that possess the quality characteristics that
prospective customers desire. Because our coal deposits will
decline as we mine our coal, our future profitability depends upon
our ability to acquire additional coal deposits that are
economically recoverable to replace the coal deposits we will
produce. If we fail to acquire or develop sufficient additional
coal deposits over the long term to replace the coal deposits
depleted by our production, our existing deposits could eventually
be exhausted.
The status of our idled mines, our lack of operating history and
multiple coal quality levels and inability to send test shipments
to our prospective customers may negatively impact our ability to
develop our initial customer base.
As a company with
limited operating history and several idled, non-producing mines,
our potential customer base is also uncertain. Our ability to
commence operations and begin shipments to customers will be
impacted by any potential mine rehabilitation work or start-up
timing and costs.
Deterioration in the global economic conditions in any of the
industries in which prospective customers operate, a worldwide
financial downturn, such as the 2008-2009 financial crisis, or
negative credit market conditions could have a material adverse
effect on our business, financial condition, results of operations,
cash flows and ability to pay dividends to our common
stockholders.
Economic conditions
in the industries in which most of our prospective customers
operate, such as steelmaking and electric power generation,
substantially deteriorated in recent years and reduced the demand
for coal. According to the US Energy Information Agency
(“EIA”), total thermal and metallurgical coal
production in the Central Appalachian Basin is expected to
gradually decline. A deterioration of economic conditions in our
prospective customers’ industries could cause a decline in
demand for and production of metallurgical coal. Renewed or
continued weakness in the economic conditions of any of the
industries served by prospective customers could have a material
adverse effect on our business, financial condition, results of
operations, cash flows and ability to pay dividends to our common
stockholders. For example:
●
demand for
metallurgical coal depends on domestic and foreign steel demand,
which if weakened would negatively impact our revenues, margins and
profitability;
●
the tightening of
credit or lack of credit availability to prospective customers
could adversely affect our ability to collect our trade
receivables; and
●
our ability to
access the capital markets may be restricted at a time when we
intend to raise capital for our business, including for capital
improvements and exploration and/or development of coal
deposits.
Prices for coal are
volatile and can fluctuate widely based upon a number of factors
beyond our control, including oversupply relative to the demand
available for our coal and weather. A substantial or extended
decline in the prices we receive for our coal could adversely
affect our business, results of operations, financial condition,
cash flows and ability to pay dividends to our common
stockholders.
Our financial
results will be significantly affected by the prices we receive for
our coal and depend, in part, on the margins that we will receive
on sales of our coal. Our margins will reflect the price we receive
for our coal over our cost of producing and transporting our coal.
Prices and quantities under U.S. domestic metallurgical coal sales
contracts are generally based on expectations of the next
year’s coal prices at the time the contract is entered into,
renewed, extended or re-opened, Pricing in the global seaborne
market is typically negotiated quarterly, however, increasingly the
market is moving towards shorter term pricing models. The
expectation of future prices for coal depends upon many factors
beyond our control, including the following:
●
the market price
for coal;
●
overall domestic
and global economic conditions, including the supply of and demand
for domestic and foreign coal, coke and steel;
●
the consumption
pattern of industrial consumers, electricity generators and
residential users;
●
weather conditions
in our markets that affect the demand for thermal coal or that
affect the ability to produce metallurgical coal;
●
competition from
other coal suppliers;
●
technological
advances affecting energy consumption;
●
the costs,
availability and capacity of transportation
infrastructure;
●
the impact of
domestic and foreign governmental laws and regulations, including
environmental and climate change regulations and regulations
affecting the coal mining industry, and delays in the receipt of,
failure to receive, failure to maintain or revocation of necessary
governmental permits; and
●
increased
utilization by the steel industry of electric arc furnaces or
pulverized coal injection processes, which reduce or eliminate the
use of furnace coke, an intermediate product produced from
metallurgical coal, and generally decrease the demand for
metallurgical coal.
Metallurgical coal
has been an extremely volatile commodity over the past 10 years, as
steel production growth in Asia underpinned demand growth, while
the market experienced two supply shocks from flooding events in
Australia’s Queensland and a third in 2016 caused by a
reduction in Chinese domestic production. The first severe flooding
sent global metallurgical coal prices from $98 per MT in 2007 to
$305 per MT in 2008. A second round of flooding disrupted the
Australian supply chain in 2011, and prices jumped from $129 per MT
to $330 per MT. The temporary supply disruptions caused major price
spikes, which, while short-lived, resulted in a period of elevated
prices, before declining once supply normalized, and production
growth that high prices incentivized eventually came online. The
slow decline in global prices since 2011 forced high-cost U.S.
suppliers who could not compete in the export market to reduce
output. Any decline in the prices of and demand for coal could have
a material adverse effect on our business, financial condition,
results of operations, cash flows and ability to pay dividends to
our common stockholders.
Increased competition or a loss of our competitive position could
adversely affect sales of, or prices for, our coal, which could
impair our profitability. In addition, foreign currency
fluctuations could adversely affect the competitiveness of our coal
abroad.
We will compete
with other producers primarily on the basis of coal quality,
delivered costs to the customer and reliability of supply. We
expect to compete primarily with U.S. coal producers and with some
Canadian coal producers for sales of metallurgical coal to domestic
steel producers and, to a lesser extent, thermal coal to electric
power generators. We also expect to compete with both domestic and
foreign coal producers for sales of metallurgical coal in
international markets. Certain of these coal producers may have
greater financial resources and larger coal deposit bases than we
do. We expect to sell coal to the seaborne metallurgical coal
market, which is significantly affected by international demand and
competition.
We cannot assure
you that competition from other producers will not adversely affect
us in the future. The coal industry has experienced consolidation
over the past 10 years, including consolidation among some of our
major competitors. We cannot assure you that the result of current
or further consolidation in the coal industry, or the
reorganization through bankruptcy of competitors with large legacy
liabilities, will not adversely affect us. A number of our
competitors have idled production over the last year in light of
lower metallurgical coal prices in 2015 and the first half of 2016.
The recent increase in coal prices in 2017 and 2018 could encourage
existing producers to expand capacity or could encourage new
producers to enter the market.
In addition, we
face competition from foreign producers that sell their coal in the
export market. Potential changes to international trade agreements,
trade concessions, foreign currency fluctuations or other political
and economic arrangements may benefit coal producers operating in
countries other than the United States. Additionally, North
American steel producers face competition from foreign steel
producers, which could adversely impact the financial condition and
business of our prospective customers. We cannot assure you that we
will be able to compete on the basis of price or other factors with
companies that in the future may benefit from favorable foreign
trade policies or other arrangements. Coal is sold internationally
in U.S. dollars and, as a result, general economic conditions in
foreign markets and changes in foreign currency exchange rates may
provide our foreign competitors with a competitive advantage. If
our competitors’ currencies decline against the U.S. dollar
or against our prospective foreign customers’ local
currencies, those competitors may be able to offer lower prices for
coal to prospective customers. Furthermore, if the currencies of
our prospective overseas customers were to significantly decline in
value in comparison to the U.S. dollar, those prospective customers
may seek decreased prices for the coal we sell to them.
Consequently, currency fluctuations could adversely affect the
competitiveness of our coal in international markets, which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Our business involves many hazards and operating risks, some of
which may not be fully covered by insurance. The occurrence of a
significant accident or other event that is not fully insured could
adversely affect our business, results of operations, financial
condition, cash flows and ability to pay dividends to our common
stockholders.
Our mining
operations, including our preparation and transportation
infrastructure, are subject to many hazards and operating risks. In
particular, underground mining and related processing activities
present inherent risks of injury to persons and damage to property
and equipment. Our mines are subject to a number of operating risks
that could disrupt operations, decrease production and increase the
cost of mining for varying lengths of time, thereby adversely
affecting our operating results. In addition, if coal production
declines, we may not be able to produce sufficient amounts of coal
to deliver under future sales contracts. Our inability to satisfy
contractual obligations could result in prospective customers
initiating claims against us. The operating risks that may have a
significant impact on our future coal operations
include:
●
variations in
thickness of the layer, or seam, of coal;
●
adverse geologic
conditions, including amounts of rock and other natural materials
intruding into the coal seam, that could affect the stability of
the roof and the side walls of the mine;
●
mining and
processing equipment failures and unexpected maintenance
problems;
●
fires or
explosions, including as a result of methane, coal, coal dust or
other explosive materials, or other accidents;
●
inclement or
hazardous weather conditions and natural disasters or other force
majeure events;
●
seismic activities,
ground failures, rock bursts or structural cave-ins or
slides;
●
delays in moving
our mining equipment;
●
railroad delays or
derailments;
●
security breaches
or terroristic acts; and
●
other hazards or
occurrences that could also result in personal injury and loss of
life, pollution and suspension of operations.
Any of these risks
could adversely affect our ability to conduct operations or result
in substantial loss to us as a result of claims for:
●
personal injury or
loss of life;
●
damage to and
destruction of property, natural resources and equipment, including
our coal properties and our coal production or transportation
facilities;
●
pollution,
contamination and other environmental damage to our properties or
the properties of others;
●
potential legal
liability and monetary losses;
●
regulatory
investigations, actions and penalties;
●
suspension of our
operations; and
●
repair and
remediation costs.
In addition, the
total cost of coal sold, and overall coal production may be
adversely affected by various factors.
Although we
maintain insurance for a number of risks and hazards, we may not be
insured or fully insured against the losses or liabilities that
could arise from a significant accident in our future coal
operations. We may elect not to obtain insurance for any or all of
these risks if we believe that the cost of available insurance is
excessive relative to the risks presented. In addition, pollution,
contamination and environmental risks generally are not fully
insurable. Moreover, a significant mine accident or regulatory
infraction could potentially cause a mine shutdown. The occurrence
of an event that is not fully covered by insurance could have a
material adverse effect on our business, financial condition,
results of operations, cash flows and ability to pay dividends to
our common stockholders.
In addition, if any
of the foregoing changes, conditions or events occurs and is not
determined to be a force majeure event, any resulting failure on
our part to deliver coal to the purchaser under contract could
result in economic penalties, suspension or cancellation of
shipments or ultimately termination of the agreement, any of which
could have a material adverse effect on our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
Depending on future acquisitions, our operations could be
exclusively located in a single geographic region, making us
vulnerable to risks associated with operating in a single
geographic area.
Initially,
substantially all of our operations will be conducted in a single
geographic region in the eastern United States in the Commonwealth
of Kentucky. The geographic concentration of our operations may
disproportionately expose us to disruptions in our operations if
the region experiences severe weather, transportation capacity
constraints, constraints on the availability of required equipment,
facilities, personnel or services, significant governmental
regulation or natural disasters. If any of these factors were to
impact the region in which we operate more than other coal
producing regions, our business, financial condition, results of
operations and cash flows will be adversely affected relative to
other mining companies that have a more geographically diversified
asset portfolio.
In addition, some
scientists have warned that increasing concentrations of greenhouse
gases (“GHGs”) in the Earth’s atmosphere may
produce climate changes that have significant physical effects,
such as increased frequency and severity of storms, droughts and
floods and other climatic events. If these warnings are correct,
and if any such effects were to occur in areas where we or our
customers operate, they could have an adverse effect on our assets
and operations.
The availability and reliability of transportation facilities and
fluctuations in transportation costs could affect the demand for
our coal or impair our ability to supply coal to prospective
customers.
Transportation
logistics will play an important role in allowing us to supply coal
to prospective customers. Any significant delays, interruptions or
other limitations on the ability to transport our coal could
negatively affect our operations. Delays and interruptions of rail
services because of accidents, failure to complete construction of
rail infrastructure, infrastructure damage, lack of rail or port
capacity, weather-related problems, governmental regulation,
terrorism, strikes, lock-outs, third-party actions or other events
could impair our ability to supply coal to customers and adversely
affect our profitability. In addition, transportation costs
represent a significant portion of the delivered cost of coal and,
as a result, the cost of delivery is a critical factor in a
customer’s purchasing decision. Increases in transportation
costs, including increases resulting from emission control
requirements and fluctuations in the price of locomotive diesel
fuel and demurrage, could make our coal less competitive, which
could have a material adverse effect on our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
Any significant downtime of our major pieces of mining equipment,
including any preparation plant, could impair our ability to supply
coal to prospective customers and materially and adversely affect
our results of operations.
We currently and in
the future, will depend on several major pieces of mining equipment
to produce and transport our coal, including, but not limited to,
underground continuous mining units and coal conveying systems,
surface mining equipment such as augers, highwall miners, front-end
loaders and coal over burden haul trucks, preparation plant and
related facilities, conveyors and transloading facilities. If any
of these pieces of equipment or facilities suffered major damage or
were destroyed by fire, abnormal wear, flooding, incorrect
operation or otherwise, we may be unable to replace or repair them
in a timely manner or at a reasonable cost, which would impact our
ability to produce and transport coal and materially and adversely
affect our business, results of operations, financial condition and
cash flows. Moreover, the Mine Safety and Health Administration
(“MSHA”) and other regulatory agencies sometimes make
changes with regards to requirements for pieces of equipment. For
example, in 2015, MSHA promulgated a new regulation requiring the
implementation of proximity detection devices on all continuous
mining machines. Such changes could cause delays if manufacturers
and suppliers are unable to make the required changes in compliance
with mandated deadlines.
If either our
preparation plants, or train loadout facilities, or those of a
third-party processing or loading our coal, suffer extended
downtime, including major damage, or is destroyed, our ability to
process and deliver coal to prospective customers would be
materially impacted, which would materially adversely affect our
business, results of operations, financial condition and cash flows
and our ability to pay dividends to our common
stockholders.
If customers do not enter into, extend or honor contracts with us,
our profitability could be adversely affected.
We have entered
into a limited number of contracts for the sale of our coal. Coal
mined from our operations is subject to testing by our prospective
customers for the ability to meet various specifications and to
work successfully test our coals or enter into contracts for the
sale of our coal, our ability to achieve profitability would be
materially adversely affected. Once we enter into contracts, if a
substantial portion of our sales contracts are modified or
terminated and we are unable to replace the contracts (or if new
contracts are priced at lower levels), our results of operations
would be adversely affected, perhaps materially. In addition, if
customers refuse to accept shipments of our coal for which they
have a contractual obligation, our revenues could be substantially
affected and we may have to reduce production at our mines until
our customer’s contractual obligations are
honored.
Certain provisions in typical long-term sales contracts provide
limited protection during adverse economic conditions, which may
eventually result in economic penalties to us or permit the
customer to terminate the contract. Furthermore, our ability to
collect payments from prospective customers could be impaired if
their creditworthiness declines or if they fail to honor their
contracts with us.
Price adjustment,
“price reopener” and other similar provisions in
typical long-term sales contracts may reduce protection from
short-term coal price volatility traditionally provided by such
contracts. Price reopener provisions may be included in our future
sales contracts. These price reopener provisions may automatically
set a new price based on prevailing market price or, in some
instances, require the parties to agree on a new price, sometimes
within a specified range of prices. Any adjustment or
renegotiations leading to a significantly lower contract price
could adversely affect our profitability. Some annual metallurgical
coal contracts have shifted to quarterly contracts and growing
volumes are being sold on an indexed basis, where prices are
determined by averaging the leading spot indexes reported in the
market, exposing us further to risks related to pricing
volatility.
Our ability to
receive payment for coal sold and delivered depends on the
continued solvency and creditworthiness of prospective customers.
The number of domestic steel producers is small, and they compete
globally for steel production. If their business or
creditworthiness suffers, we may bear an increased risk with
respect to payment default. In addition, some prospective customers
have been adversely affected by the recent economic downturn, which
may impact their ability to fulfill their contractual obligations.
Competition with other coal suppliers could force us to extend
credit to customers and on terms that could increase the risk we
bear with respect to payment default. We could also enter into
agreements to supply coal to energy trading and brokering customers
under which a customer sells coal to end-users. If the
creditworthiness of any prospective energy trading and brokering
customer declines, we may not be able to collect payment for all
coal sold and delivered to or on behalf of this customer. In
addition, if customers refuse to accept shipments of our coal that
they have a contractual obligation to purchase, our revenues will
decrease, and we may have to reduce production at our mines until
prospective customers’ contractual obligations are honored.
Our inability to collect payment from counterparties to our sales
contracts may materially adversely affect our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
Decreases in demand for electricity and changes in coal consumption
patterns of U.S. electric power generators could adversely affect
our business.
While our initial
coal production consists primarily of metallurgical and PCI coal,
which is not closely linked to domestic demand for electricity, we
anticipate initiating production and sales of thermal coal in the
future. In such case, any changes in coal consumption by electric
power generators in the United States would likely impact our
business over the long term. According to the EIA, in 2015, the
domestic electric power sector accounts for more than 90% of total
U.S. coal consumption. The amount of coal consumed by the electric
power generation industry is affected by, among other
things:
●
general economic
conditions, particularly those affecting industrial electric power
demand, such as a downturn in the U.S. economy and financial
markets;
●
overall demand for
electricity;
●
competition from
alternative fuel sources for power generation, including natural
gas, fuel oil, nuclear, and renewable sources such as
hydroelectric, wind and solar power, and the location,
availability, quality and price of those alternative fuel
sources;
●
environmental and
other governmental regulations, including those impacting
coal-fired power plants; and
●
energy conservation
efforts and related governmental policies.
For example, the
low price of natural gas in recent years has resulted, in some
instances, in domestic electric generators increasing natural gas
consumption while decreasing coal consumption. Federal and state
mandates for increased use of electricity derived from renewable
energy sources, such as the Clean Power Plan (“CPP”),
could also affect demand for our coal. Such mandates, combined with
other incentives to use renewable energy sources, such as tax
credits, could make renewable fuel sources more competitive with
coal. A decrease in coal consumption by the electric power
generation industry could adversely affect the price of coal, which
could have a material adverse effect on our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
According to the
EIA, although electricity demand fell in only three years between
1950 and 2007, it declined in six of the eight years between 2008
and 2015. The decline in electricity demand is due to several
primary factors, including the steep economic downturn from late
2007 through 2009, the shift from an energy-intensive manufacturing
economy to a service economy and an overall improvement in energy
efficiency. Other factors, such as efficiency improvements
associated with new appliance standards in the buildings sectors,
overall improvement in the efficiency of technologies powered by
electricity, and future conservation efforts based on
implementation of the new CPP, have slowed or may slow electricity
demand growth and may contribute to slower growth in the future,
even if the U.S. economy continues its recovery. Further decreases
in the demand for electricity, such as decreases that could be
caused by a worsening of current economic conditions, a prolonged
economic recession or other similar events, could have a material
adverse effect on the demand for coal and on our business over the
long term.
Changes in the coal
industry that affect our prospective customers, such as those
caused by decreased electricity demand and increased competition,
could also adversely affect our business. Indirect competition from
natural gas-fired plants that are relatively less expensive to
construct and less difficult to permit has the most potential to
displace a significant amount of coal-fired electric power
generation in the near term, particularly older, less efficient
coal-fired powered generators. In addition, uncertainty caused by
federal and state regulations could cause thermal coal customers to
be uncertain of their coal requirements in future years, which
could adversely affect our ability to sell coal to such prospective
customers under multi-year sales contracts.
We may be unsuccessful in integrating the operations of any future
acquisitions, including acquisitions involving new lines of
business, with our existing operations, and in realizing all or any
part of the anticipated benefits of any such
acquisitions.
From time to time,
we may evaluate and acquire assets and businesses that we believe
complement our existing assets and business, and we may use a
portion of the proceeds from this offering for acquisitions. The
assets and businesses we acquire may be dissimilar from our initial
lines of business. Acquisitions may require substantial capital or
the incurrence of substantial indebtedness. Our capitalization and
results of operations may change significantly as a result of
future acquisitions. We may also add new lines of business to our
existing operations. Acquisitions and business expansions involve
numerous risks, including the following:
●
difficulties in the
integration of the assets and operations of the acquired businesses
or lines of business;
●
inefficiencies and
difficulties that arise because of unfamiliarity with new assets
and the businesses associated with them and new geographic
areas;
●
the possibility
that we have insufficient expertise to engage in such activities
profitably or without incurring inappropriate amounts of risk;
and
●
the diversion of
management’s attention from other operations.
Further, unexpected
costs and challenges may arise whenever businesses with different
operations or management are combined, and we may experience
unanticipated delays in realizing the benefits of an acquisition.
Entry into certain lines of business may subject us to new laws and
regulations with which we are not familiar and may lead to
increased litigation and regulatory risk. Also, following an
acquisition, we may discover previously unknown liabilities
associated with the acquired business or assets for which we have
no recourse under applicable indemnification provisions. If an
acquired business or new line of business generates insufficient
revenue or if we are unable to efficiently manage our expanded
operations, our results of operations may be materially adversely
affected. Additionally, we can offer no assurance that the planned
marketing, brokerage and trading company will be able to attract
third-party coal producers as customers or make any significant
contribution to our financial results.
To maintain and grow our business, we will be required to make
substantial capital expenditures. If we are unable to obtain needed
capital or financing on satisfactory terms, we may have to curtail
our operations and delay our construction and growth plans, which
may materially adversely affect our business, financial condition,
results of operations, cash flows and ability to pay dividends to
our common stockholders.
In order to
maintain and grow our business, we will need to make substantial
capital expenditures associated with our mines and the construction
of coal preparation facilities, which have not yet been
constructed. Constructing, maintaining and expanding mines and
infrastructure, including coal preparation and loading facilities,
is capital intensive. Specifically, the exploration, permitting and
development of coal deposits, and the maintenance of machinery,
equipment and facilities, and compliance with applicable laws and
regulations require substantial capital expenditures. We must
continue to invest capital to maintain or to increase our
production and to develop any future acquired properties. Decisions
to increase our production levels could also affect our capital
needs. We cannot assure you that we will be able to maintain our
production levels or generate sufficient cash flow, or that we will
have access to sufficient financing to continue our production,
exploration, permitting and development activities, and we may be
required to defer all or a portion of our capital
expenditures.
If we do not make
sufficient or effective capital expenditures, we will be unable to
develop and grow our business. To fund our projected capital
expenditures, we will be required to use cash from our operations,
incur debt or issue additional common stock or other equity
securities. Using cash from our operations will reduce cash
available for maintaining or increasing our operating activities
and paying dividends to our common stockholders. Our ability to
obtain bank financing or our ability to access the capital markets
for future equity or debt offerings may be limited by our financial
condition at the time of any such financing or offering and the
covenants in our future debt agreements, as well as by general
economic conditions, contingencies and uncertainties that are
beyond our control.
In addition,
incurring additional debt may significantly increase our interest
expense and financial leverage, and issuing additional equity
securities may result in significant stockholder
dilution.
We may not be able to obtain equipment, parts and supplies in a
timely manner, in sufficient quantities or at reasonable costs to
support our coal mining and transportation operations.
Coal mining
consumes large quantities of commodities including steel, copper,
rubber products and liquid fuels and requires the use of capital
equipment. Some commodities, such as steel, are needed to comply
with roof control plans required by regulation. The prices we pay
for commodities and capital equipment are strongly impacted by the
global market. A rapid or significant increase in the costs of
commodities or capital equipment we use in our operations could
impact our mining operations costs because we may have a limited
ability to negotiate lower prices and, in some cases, may not have
a ready substitute.
We will use
equipment in our coal mining and transportation operations such as
continuous mining units, conveyors, shuttle cars, rail cars,
locomotives, and roof bolters. We procure this equipment from a
concentrated group of suppliers, and obtaining this equipment often
involves long lead times. Occasionally, but not currently, demand
for such equipment by mining companies can be high and some types
of equipment may be in short supply. Delays in receiving or
shortages of this equipment, as well as the raw materials used in
the manufacturing of supplies and mining equipment, which, in some
cases, do not have ready substitutes, or the cancellation of any
future supply contracts under which we obtain equipment and other
consumables, could limit our ability to obtain these supplies or
equipment. In addition, if any of our suppliers experiences an
adverse event, or decides to no longer do business with us, we may
be unable to obtain sufficient equipment and raw materials in a
timely manner or at a reasonable price to allow us to meet our
production goals and our revenues may be adversely impacted. We use
considerable quantities of steel in the mining process. If the
price of steel or other materials increases substantially or if the
value of the U.S. dollar declines relative to foreign currencies
with respect to certain imported supplies or other products, our
operating expenses could increase. Any of the foregoing events
could materially and adversely impact our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
The decline in coal
prices since 2011 has incentivized producers to retain their used,
idle equipment. The availability of used equipment is a key
assumption in our business plan, and we may find it difficult to
procure mining equipment at a suitable cost, in particular deep
mining equipment. To the extent we are unable to procure suitable
mining equipment in line with our projected cost profile, our
projected results may not be realized, and our results of
operations may be negatively affected.
We are a holding company and we depend on the ability of our
subsidiaries to distribute funds to us in order to satisfy our
financial obligations and to make dividend payments.
We are a holding
company and our subsidiaries conduct all of our operations and own
all of our operating assets. We have no significant assets other
than the equity interests in our subsidiaries. As a result, our
ability to pay our obligations and to make dividend payments
depends entirely on our subsidiaries and their ability to
distribute funds to us. The ability of a subsidiary to make these
distributions could be affected by a claim or other action by a
third party, including a creditor, or by the law of their
respective jurisdictions of formation which regulates the payment
of dividends. If we are unable to obtain funds from our
subsidiaries, our board of directors may exercise its discretion
not to declare or pay dividends.
Debt we incur in the future may limit our flexibility to obtain
financing and to pursue other business opportunities. Our future
level of debt could have important consequences to us, including
the following:
●
our ability to
obtain additional financing, if necessary, for working capital,
capital expenditures or other purposes may be impaired, or such
financing may not be available on favorable terms;
●
our funds available
for operations and future business opportunities will be reduced by
that portion of our cash flow required to make interest payments on
our debt;
●
our ability to pay
dividends if an event of default occurs and is continuing or would
occur as a result of paying such dividend;
●
we may be more
vulnerable to competitive pressures or a downturn in our business
or the economy generally; and
●
our flexibility in
responding to changing business and economic conditions may be
limited.
Our ability to
service our debt will depend upon, among other things, our future
financial and operating performance, which will be affected by
prevailing economic conditions and financial, business, regulatory
and other factors, some of which are beyond our control. If our
operating results are not sufficient to service any future
indebtedness, we will be forced to take actions such as reducing or
delaying our business activities, investments or capital
expenditures, selling assets or issuing equity. We may not be able
to effect any of these actions on satisfactory terms or at
all.
Our operations could be adversely affected if we are unable to
obtain required financial assurance, or if the costs of financial
assurance increase too much.
Federal and state
laws require financial assurance to secure our permit obligations
including to reclaim lands used for mining, to pay federal and
state workers’ compensation and black lung benefits, and to
satisfy other miscellaneous obligations. The changes in the market
for coal used to generate electricity in recent years have led to
bankruptcies involving prominent coal producers. Several of these
companies relied on self-bonding to guarantee their
responsibilities under the Surface Mining Control and Reclamation
Act of 1977 (“SMCRA”) permits including for
reclamation. In response to these bankruptcies, the Office of
Surface Mining Reclamation and Enforcement (“OSMRE”)
issued a Policy Advisory in August 2016 to state agencies that are
authorized under the SMCRA to implement the act in their states.
Certain states, including Virginia, had previously announced that
it would no longer accept self-bonding to secure reclamation
obligations under the state mining laws. This Policy Advisory is
intended to discourage authorized states from approving
self-bonding arrangements and may lead to increased demand for
other forms of financial assurance, which may strain capacity for
those instruments and increase our costs of obtaining and
maintaining the amounts of financial assurance needed for our
operations.
In addition, OSMRE
announced in August 2016 that it would initiate a rulemaking under
SMCRA to revise the requirements for self-bonding in light of
changes in the coal-mining industry and the market. Individually
and collectively, revised various financial assurance requirements
may increase the amounts of needed financial assurance and limit
the types of acceptable instruments and strain the capacity of the
surety markets to meet demand, which may delay the timing for and
increase the costs of obtaining this financial assurance. We use
surety bonds, trusts and letters of credit to provide financial
assurance for certain transactions and business activities. Our
reclamation surety bonding program does not currently require us to
post collateral, however, insurance companies may elect not to
provide surety bonds without collateral. Indeed, sureties typically
require coal producers to post collateral, often having a value
equal to 40% or more of the face amount of the bond. As a result,
we may be required to provide collateral, letters of credit or
other assurances of payment in order to obtain the necessary types
and amounts of financial assurance. We currently have outstanding
surety bonds at all of our mining operations totaling approximately
$26.62 million. Using letters of credit in lieu of surety bonds can
be significantly costlier to us than surety bonds. Moreover, the
need to obtain letters of credit may also reduce amounts that we
can borrow under any senior secured credit facility for other
purposes. If, in the future, we are unable to secure surety bonds
for these obligations and are forced to secure letters of credit
indefinitely or obtain some other form of financial assurance at
too high of a cost, our profitability may be negatively
affected.
Our mines could be located in areas containing oil and natural gas
operations, which may require us to coordinate our operations with
those of oil and natural gas drillers.
Our coal deposits
may be in areas containing developed or undeveloped oil and natural
gas deposits and reservoirs, such as the Marcellus Shale in eastern
Kentucky, which are currently the subject of substantial oil and
natural gas exploration and production activities, including by
horizontal drilling. If we have received a permit for our mining
activities, then, while we will have to coordinate our mining with
such oil and natural gas drillers, our mining activities are
expected to have priority over any oil and natural gas drillers
with respect to the land covered by our permit. For coal deposits
outside of our permits, we expect to engage in discussions with
drilling companies on potential areas on which they can drill that
may have a minimal effect on our mine plan. Depending on priority
of interests, our operations may have to avoid existing oil and gas
wells or expend sums to plug oil and gas wells.
If a well is in the
path of our mining for coal on land that has not yet been permitted
for our mining activities, we may not be able to mine through the
well unless we purchase it. The cost of purchasing a producing
horizontal or vertical well could be substantial. Horizontal wells
with multiple laterals extending from the well pad may access
larger oil and natural gas deposits than a vertical well, which
would typically result in a higher cost to acquire. The cost
associated with purchasing oil and natural gas wells that are in
the path of our coal mining activities may make mining through
those wells uneconomical, thereby effectively causing a loss of
significant portions of our coal reserves, which could materially
and adversely affect our business, financial condition, results of
operations, cash flows and ability to pay dividends to our common
stockholders.
Defects in title or loss of any leasehold interests in our
properties could limit our ability to conduct mining operations on
these properties or result in significant unanticipated
costs.
We expect to
conduct all of our mining operations on properties that we lease. A
title defect or the loss of any lease upon expiration of its term,
upon a default or otherwise, could adversely affect our ability to
mine the associated coal and/or process the coal we mine. Title to
most of our leased properties and mineral rights is not usually
verified until we make a commitment to develop a property, which
may not occur until after we have obtained necessary permits and
completed exploration of the property. In many cases, we rely on
title information or representations and warranties provided by our
lessors or grantors. Our right to mine some of our coal deposits
may be adversely affected if defects in title or boundaries exist
or if a lease expires. Any challenge to our title or leasehold
interests could delay the exploration and development of the
property and could ultimately result in the loss of some or all of
our interest in the property and, accordingly, require us to reduce
our estimated coal deposits. Mining operations from time to time
may rely on an expired lease that we are unable to renew. If we
were to be in default with respect to leases for properties on
which we have mining operations, we may have to close down or
significantly alter the sequence of such mining operations, which
may adversely affect our future coal production and future
revenues. If we mine on property that we do not own or lease, we
could incur liability for such mining.
Also, in any such
case, the investigation and resolution of title issues would divert
management’s time from our business and our results of
operations could be adversely affected. Additionally, if we lose
any leasehold interests relating to any preparation plants, we may
need to find an alternative location to process our coal and load
it for delivery to customers, which could result in significant
unanticipated costs.
In order to obtain
leases or mining contracts to conduct our mining operations on
property where these defects exist, we may in the future have to
incur unanticipated costs. In addition, we may not be able to
successfully negotiate new leases or mining contracts for
properties containing additional coal deposits or maintain our
leasehold interests in properties where we have not commenced
mining operations during the term of the lease. Some leases have
minimum production requirements. Failure to meet those requirements
could result in losses of prepaid royalties and, in some rare
cases, could result in a loss of the lease itself.
Some of our mining properties are leased from Land Resources &
Royalties LLC, a company owned and controlled by certain members of
our management, and conflicts of interest may arise in the future
as a result.
Some of our
properties are leased or subleased to our subsidiaries from Land
Resources & Royalties, which is a related party and an entity
that is owned and controlled by some of our management team, with
financial and economic benefit of such leases going directly to
those members of the management team. Given some of the common
ownership and control between Land Resources & Royalties LLC
and us and the complex contractual obligations under these
arrangements, conflicts could arise between us and Land Resources
& Royalties LLC that could adversely affect the interests of
our stockholders, including, without limitation, conflicts
involving compliance with payment and performance obligations under
existing leases, and negotiation of the terms of and performance
under additional leases we may enter into with Land Resources &
Royalties LLC in the future.
While none of our employees who conduct mining operations are
currently members of unions, our business could be adversely
affected by union activities.
We are not subject
to any collective bargaining or union agreement with respect to
other properties we currently control. However, it is possible that
future employees, or those of our contract miners, who conduct
mining operations may join or seek recognition to form a labor
union or may be required to become a labor agreement signatory. If
some or all of the employees who conduct mining operations were to
become unionized, it could adversely affect productivity, increase
labor costs and increase the risk of work stoppages at our mines.
If a work stoppage were to occur, it could interfere with
operations and have a material adverse effect on our business,
financial condition, results of operations, cash flows and our
ability to pay dividends to our common stockholders.
A shortage of skilled labor in the mining industry could pose a
risk to achieving improved labor productivity and competitive
costs, which could adversely affect our profitability.
Efficient coal
mining using modern techniques and equipment requires skilled
laborers, preferably with at least a year of experience and
proficiency in multiple mining tasks. In the event there is a
shortage of experienced labor, it could have an adverse impact on
our labor productivity and costs and our ability to expand
production in the event there is an increase in the demand for our
coal.
Our ability to operate effectively could be impaired if we fail to
attract and retain key personnel.
The loss of our
senior executives could have a material adverse effect on our
business. There may be a limited number of persons with the
requisite experience and skills to serve in our senior management
positions. We may not be able to locate or employ qualified
executives on acceptable terms. In addition, as our business
develops and expands, we believe that our future success will
depend greatly on our continued ability to attract and retain
highly skilled personnel with coal industry experience. We may not
be able to continue to employ key personnel or attract and retain
qualified personnel in the future. Our failure to retain or attract
key personnel could have a material adverse effect on our ability
to effectively operate our business. There is nothing at this time
on which to base an assumption that our business will prove
successful, and there is no assurance that we will be able to
operate profitably if or when operations commence. You may lose
your entire investment do to our lack of experience.
Terrorist attacks or cyber-incidents could result in information
theft, data corruption, operational disruption and/or financial
loss.
Like most
companies, we have become increasingly dependent upon digital
technologies, including information systems, infrastructure and
cloud applications and services, to operate our businesses, to
process and record financial and operating data, communicate with
our business partners, analyze mine and mining information,
estimate quantities of coal deposits, as well as other activities
related to our businesses. Strategic targets, such as
energy-related assets, may be at greater risk of future terrorist
or cyber-attacks than other targets in the United States.
Deliberate attacks on, or security breaches in, our systems or
infrastructure, or the systems or infrastructure of third parties,
or cloud-based applications could lead to corruption or loss of our
proprietary data and potentially sensitive data, delays in
production or delivery, difficulty in completing and settling
transactions, challenges in maintaining our books and records,
environmental damage, communication interruptions, other
operational disruptions and third-party liability. Our insurance
may not protect us against such occurrences. Consequently, it is
possible that any of these occurrences, or a combination of them,
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Further, as cyber
incidents continue to evolve, we may be required to expend
additional resources to continue to modify or enhance our
protective measures or to investigate and remediate any
vulnerability to cyber incidents.
We may face restricted access to international markets in the
future.
Access to
international markets may be subject to ongoing interruptions and
trade barriers due to policies and tariffs of individual countries,
and the actions of certain interest groups to restrict the import
or export of certain commodities. Although there are currently no
significant trade barriers existing or impending of which we are
aware that do, or could, materially affect our access to certain
markets, there can be no assurance that our access to these markets
will not be restricted in the future. An inability for U.S.
metallurgical thermal, and other specialty coal suppliers to access
international markets would likely result in an oversupply of such
respective coals in the domestic market, resulting in a decrease in
prices.
On
August 14, 2017, the President of the United States issued a
memorandum instructing the U.S. Trade Representative
(“USTR”) to determine whether to investigate under
section 301 of the U.S. Trade Act of 1974 (Trade Act), laws,
policies, practices, or actions of the PRC government that may be
unreasonable or discriminatory and that may be harming U.S.
intellectual property rights, innovation, or technology
development. Based on information gathered in that investigation,
the USTR published a report on March 22, 2018 on the acts, policies
and practices of the PRC government supporting findings that such
are unreasonable or discriminatory and burden or restrict U.S.
commerce.
On
March 8, 2018, the President exercised his authority to issue the
imposition of significant tariffs on imports of steel and aluminum
from a number of countries, including the PRC. Subsequently, the
USTR announced an initial proposed list of 1,300 goods imported
from the PRC that could be subject to additional tariffs and
initiated a dispute with the World Trade Organization against the
PRC for alleged unfair trade practices. The President has indicated
that his two primary concerns to be addressed by the PRC are (i) a
mandatory $100 billion reduction in the PRC/U.S. trade deficit and
(ii) limiting the planned $300 billion PRC government support for
advanced technology industries including artificial intelligence,
semiconductors, electric cars and commercial aircraft. On June 15,
2018, the President announced that the U.S. would go ahead with
tariffs on $50 billion worth of Chinese goods, including
agriculture and industrial machinery, which prompted the PRC
government to consider imposing tariffs on $50 billion worth of
goods from the U.S., including beef, poultry, tobacco and cars. In
response to the PRC’s proposed retaliatory measures, the
President announced on June 19, 2018 that the U.S. would compile a
list of $200 billion in China goods for levies should the PRC move
forward with their proposed tariffs. On August 7, 2018, the U.S.
announced a tariff of 25% on approximately $16 billion worth of
mostly industrial goods from China, including tractors, plastic
tubes and antennas, which went into effect on August 23, 2018. In
response, on August 8, 2018, China announced a 25% tariff on $16
billion worth of US goods, including large passenger cars,
motorcycles, chemical items and diesel fuel, which also went into
effect on August 23, 2018. On September 7, 2018, the President
warned that he was prepared to impose tariffs on another $267
billion of Chinese goods, which in addition to the other previously
announced tariffs, would cover virtually all of China’s
imports into the U.S. Despite a September 12, 2018 invitation by
the U.S. to China to restart trade talks, which China has welcomed,
the President has instructed his administration to proceed with a
10% tariff on Chinese goods worth $200 billion, which China intends
to match with tariffs on $60 billion of US goods.
In
addition to the proposed retaliatory tariffs, the President has
also directed the U.S. Secretary of the Treasury to develop new
restrictions on PRC investments in the U.S. aimed at preventing
PRC-controlled companies and funds from acquiring U.S. firms with
sensitive technologies. Congress is currently considering new
legislation, the Foreign Investment Risk Review Modernization Act,
to modernize the restrictive powers imposed by the Committee on
Foreign Investment in the United States.
This
evolving policy dispute between the PRC and the U.S. is likely to
have significant impact on the industries in which we participate,
directly and indirectly, and no assurance can be given that any
individual customer, or significant groups of companies or a
particular industry, will not be adversely affected by any
governmental actions taken by either the PRC or the U.S., perhaps
materially. In view of the positions of the respective trade
representatives, it is not possible to predict with any certainty
the outcome of this dispute or whether it will involve other
agencies or entities brought in to resolve the policy differences
of the two countries.
Risks
Related to Environmental, Health, Safety and Other
Regulations
Laws and regulations restricting greenhouse gas emissions as well
as uncertainty concerning such regulations could adversely impact
the market for coal, increase our operating costs, and reduce the
value of our coal assets.
Climate change
continues to attract considerable public and scientific attention.
There is widespread concern about the contributions of human
activity to such changes, especially through the emission of GHGs.
There are three primary sources of GHGs associated with the coal
industry. First, the end use of our coal by our customers in
electricity generation, coke plants, and steelmaking is a source of
GHGs. Second, combustion of fuel by equipment used in coal
production and to transport our coal to our customers is a source
of GHGs. Third, coal mining itself can release methane, which is
considered to be a more potent GHG than CO
2
, directly into
the atmosphere. These emissions from coal consumption,
transportation and production are subject to pending and proposed
regulation as part of initiatives to address global climate
change.
As a result,
numerous proposals have been made and are likely to continue to be
made at the international, national, regional and state levels of
government to monitor and limit emissions of GHGs. Collectively,
these initiatives could result in higher electric costs to our
customers or lower the demand for coal used in electric generation,
which could in turn adversely impact our business. They could also
result in direct regulation of the GHGs produced by our
operations.
At present, we are
principally focused on metallurgical coal production and other
industrial uses, which is not used in connection with the
production of power generation. However, we may seek to sell
greater amounts of our coal into the power-generation market in the
future. The market for our coal may be adversely impacted if
comprehensive legislation or regulations focusing on GHG emission
reductions are adopted, or if our customers are unable to obtain
financing for their operations. The uncertainty over the outcome of
litigation challenging the CPP and the extent of future regulation
of GHG emissions may inhibit utilities from investing in the
building of new coal-fired plants to replace older plants or
investing in the upgrading of existing coal-fired plants. Any
reduction in the amount of coal consumed by electric power
generators as a result of actual or potential regulation of GHG
emissions could decrease demand for our coal, thereby reducing our
revenues and materially and adversely affecting our business and
results of operations. We or prospective customers may also have to
invest in CO2 capture and storage technologies in order to burn
coal and comply with future GHG emission standards.
Finally, there have
been attempts to encourage greater regulation of coalbed methane
because methane has a greater GHG effect than CO2. Methane from
coal mines can give rise to safety concerns and can require various
measures be taken to mitigate those risks. If new laws or
regulations were introduced to reduce coalbed methane emissions,
those rules could adversely affect our costs of operations by
requiring installation of air pollution controls, higher taxes, or
additional costs incurred to purchase credits that permit us to
continue operations. New laws or regulations could also potentially
require that we curtail coal production.
Current and future government laws, regulations and other legal
requirements relating to protection of the environment and natural
resources may increase our costs of doing business and may restrict
our coal operations.
We and our
potential customers are subject to stringent and complex laws,
regulations and other legal requirements enacted by federal, state
and local authorities relating to protection of the environment and
natural resources. These include those legal requirements that
govern discharges or emissions of materials into the environment,
the management and disposal of substances and wastes, including
hazardous wastes, the cleanup of contaminated sites, threatened and
endangered plant and wildlife protection, reclamation and
restoration of mining properties after mining is completed,
mitigation and restoration of streams or other waters, the
protection of drinking water, assessment of the environmental
impacts of mining, monitoring and reporting requirements, the
installation of various safety equipment in our mines, remediation
of impacts of surface subsidence from underground mining, and work
practices related to employee health and safety. Examples include
laws and regulations relating to:
●
employee health and
safety;
●
emissions to air
and discharges to water;
●
plant and wildlife
protection, including endangered species protections;
●
the reclamation and
restoration of properties after mining or other activity has been
completed;
●
limitations on land
use;
●
mine permitting and
licensing requirements;
●
the storage,
treatment and disposal of wastes;
●
protection of human
health, plant-life and wildlife, including endangered and
threatened species;
●
protection of
wetlands;
●
the discharge of
materials into the environment;
●
remediation of
contaminated soil, surface and groundwater; and
●
the effects of
operations on surface water and groundwater quality and
availability.
Complying with
these environmental and employee health and safety requirements,
including the terms of our permits, has had, and will continue to
have, a significant effect on our costs of operations. In addition,
there is the possibility that we could incur substantial costs as a
result of violations of environmental laws, judicial
interpretations of or rulings on environmental laws or permits, or
in connection with the investigation and remediation of
environmental contamination. For example, the EPA and several of
the states where we operate have, or intend to, propose revised
recommended criteria for discharges of selenium regulated under the
Clean Water Act (“CWA”), which may be more stringent
than current criteria. Any additional laws, regulations and other
legal requirements enacted or adopted by federal, state and local
authorities, or new interpretations of existing legal requirements
by regulatory bodies relating to the protection of the environment,
including those related to discharges of selenium, could further
affect our costs or limit our operations.
Our operations may impact the environment or cause exposure to
hazardous substances, and our properties may have environmental
contamination, which could expose us to significant costs and
liabilities.
Our operations
currently use hazardous materials and generate limited quantities
of hazardous wastes from time to time. Drainage flowing from or
caused by mining activities can be acidic with elevated levels of
dissolved metals, a condition referred to as “acid mine
drainage,” or may include other pollutants requiring
treatment. We could become subject to claims for toxic torts,
natural resource damages and other damages as well as for the
investigation and clean-up of soil, surface water, groundwater, and
other media. Such claims may arise, for example, out of conditions
at sites that we currently own or operate, as well as at sites that
we previously owned or operated, or may acquire. Our liability for
such claims may be joint and several, so that we may be held
responsible for more than our share of the contamination or other
damages, or for the entire share.
We will maintain
coal refuse areas and slurry impoundments as necessary. Such areas
and impoundments are subject to extensive regulation. Structural
failure of a slurry impoundment or coal refuse area could result in
extensive damage to the environment and natural resources, such as
bodies of water that the coal slurry reaches, as well as liability
for related personal injuries and property damages, and injuries to
wildlife. If an impoundment were to fail, we could be subject to
claims for the resulting environmental contamination and associated
liability, as well as for fines and penalties. Our coal refuse
areas and slurry impoundments will be designed, constructed, and
inspected by our company and by regulatory authorities according to
stringent environmental and safety standards.
We must obtain, maintain, and renew governmental permits and
approvals for mining operations, which can be a costly and
time-consuming process and result in restrictions on our
operations.
Numerous
governmental permits and approvals are required for mining
operations. Our operations are principally regulated under permits
issued pursuant to SMCRA and the federal CWA. State and federal
regulatory authorities exercise considerable discretion in the
timing and scope of permit issuance. Requirements imposed by these
authorities may be costly and time consuming and may result in
delays in the commencement or continuation of exploration or
production operations. In addition, we may be required to prepare
and present to permitting or other regulatory authorities data
pertaining to the effect or impact that proposed exploration for or
production of coal might have on the environment.
Our coal production
will be dependent upon our ability to obtain various federal and
state permits and approvals to mine our coal deposits. The
permitting rules, and the interpretations of these rules, are
complex, change frequently, and are often subject to discretionary
interpretations by regulators, all of which may make compliance
more difficult or impractical, and which may possibly preclude the
continuance of ongoing mine development or operations or the
development of future mining operations. The EPA also has the
authority to veto permits issued by the U.S. Army Corps of
Engineers (the “Corps”) under the CWA’s
Section 404 program that prohibits the discharge of dredged or
fill material into regulated waters without a permit. The pace with
which the government issues permits needed for new operations and
for ongoing operations to continue mining, particularly CWA
permits, can be time-consuming and subject to delays and denials.
These delays or denials of environmental permits needed for mining
could reduce our production and materially adversely impact our
cash flow and results of operations.
For example, prior
to placing fill material in waters of the United States, such as
with the construction of a valley fill, coal mining companies are
required to obtain a permit from the Corps under Section 404
of the CWA. The permit can be either a Nation-Wide Permit
(“NWP”), normally NWP 21, 49 or 50 for coal mining
activities, or a more complicated individual permit. NWPs are
designed to allow for an expedited permitting process, while
individual permits involve a longer and more detailed review
process. The EPA also has the authority to veto permits issued by
the Corps under the CWA’s Section 404 program that
prohibits the discharge of dredged or fill material into regulated
waters without a permit.
Prior to
discharging any pollutants to waters of the United States, coal
mining companies must obtain a National Pollutant Discharge
Elimination System (“NPDES”) permit from the
appropriate state or federal permitting authority. NPDES permits
include effluent limitations for discharged pollutants and other
terms and conditions, including required monitoring of discharges.
Changes and proposed changes in state and federally recommended
water quality standards may result in the issuance or modification
of permits with new or more stringent effluent limits or terms and
conditions. Further, on June 29, 2015, the EPA and the Corps
published a new, more expansive, definition of “waters of the
United States” that became effective on August 28, 2015
(the “2015 Rule”). This rule was stayed nationwide by
the U.S. Court of Appeals for the Sixth Circuit pending the outcome
of litigation concerning the rule. On January 22, 2018, the Supreme
Court held that the courts of appeals do not have original
jurisdiction to review challenges to the 2015 Rule. With this final
rule, the agencies intend to maintain the status quo by adding an
applicability date to the 2015 Rule and thus providing continuity
and regulatory certainty for regulated entities, the States and
Tribes, and the public while the agencies continue to consider
possible revisions to the 2015 Rule. In light of this holding, in
February 2018 the agencies published a final rule adding an
applicability date to the 2015 Rule of February 6,
2020.
Further, the public
has certain statutory rights to comment on and submit objections to
requested permits and environmental impact statements prepared in
connection with applicable regulatory processes, and otherwise
engage in the permitting process, including bringing
citizens’ claims to challenge the issuance or renewal of
permits, the validity of environmental impact statements or
performance of mining activities. As a result of such potential
challenges, the permits we need may not be issued or renewed in a
timely fashion or issued or renewed at all, or permits issued or
renewed may not be maintained, may be challenged or may be
conditioned in a manner that may restrict our ability to
efficiently and economically conduct our mining activities, any of
which would materially reduce our production, cash flow, and
profitability.
Permitting rules
may also require, under certain circumstances, that we obtain
surface owner consent if the surface estate has been severed from
the mineral estate. This could require us to negotiate with third
parties for surface access that overlies coal we acquired or intend
to acquire. These negotiations can be costly and time-consuming,
lasting years in some instances, which can create additional delays
in the permitting process. If we cannot successfully negotiate for
land access, we could be denied a permit to mine coal we already
own.
We and our owners and controllers are subject to the Applicant
Violator System.
Under SMCRA and its
state law counterparts, all coal mining applications must include
mandatory “ownership and control” information, which
generally includes listing the names of our officers and directors,
and our principal stockholders owning 10 percent or more of our
voting shares, among others. Ownership and control reporting
requirements are designed to allow regulatory review of any
entities or persons deemed to have ownership or control of a coal
mine and bars the granting of a coal mining permit to any such
entity or person (including any “owner and controller”)
who has had a mining permit revoked or suspended, or a bond or
similar security forfeited within the five-year period preceding a
permit application or application for a permit revision. Regulatory
agencies also block the issuance of permits to an applicant who, or
whose owner and controller, has permit violations outstanding that
have not been timely abated.
A federal database,
known as the Applicant Violator System (“AVS”), is
maintained for this purpose. Certain relationships are presumed to
constitute ownership or control, including the following: being an
officer or director of an entity; being the operator of the coal
mining operation; having the ability to commit the financial or
real property assets or working resources of the permittee or
operator; based on the instruments of ownership or the voting
securities of a corporate entity, owning of record 10% or more of
the mining operator, among others. This presumption, in most cases,
can be rebutted where the person or entity can demonstrate that it
in fact does not or did not have authority directly or indirectly
to determine the manner in which the relevant coal mining operation
is conducted. An ownership and control notice must be filed by us
each time an entity obtains a 10% or greater interest in us. If we
have unabated violations of SMCRA or its state law counterparts,
have a coal mining permit suspended or revoked, or forfeit a
reclamation bond, we and our “owners and controllers,”
as discussed above, may be prohibited from obtaining new coal
mining permits, or amendments to existing permits, until such
violations of law are corrected. This is known as being
“permit-blocked.” Additionally, Thomas M. Sauve and
Mark C. Jensen are currently, or may be in the future, deemed an
“owner or controller” of a number of other mining
companies, as such, we could be permit-blocked based upon the
violations of or permit-blocked status of an “owner or
controller” of us.
We may be subject to additional limitations on our ability to
conduct mining operations due to federal jurisdiction.
We may conduct some
underground mining activities on properties that are within the
designated boundary of federally protected lands or national
forests where the above-mentioned restrictions within the meaning
of SMCRA could apply. Federal court decisions could pose a
potential restriction on underground mining within 100 feet of a
public road as well as other restrictions. If these SMCRA
restrictions ultimately apply to underground mining, considerable
uncertainty would exist about the nature and extent of this
restriction. While it could remain possible to obtain permits for
underground mining operations in these areas even where this
100-foot restriction was applied, the time and expense of that
permitting process would be likely to increase significantly, and
the restrictions placed on the mining of those properties could
adversely affect our costs.
Our prospective customers are subject to extensive existing and
future government laws, regulations and other legal requirements
relating to protection of the environment, which could negatively
impact our business and the market for our products.
Coal contains
impurities, including sulfur, mercury, chlorine and other elements
or compounds, many of which are released into the air when coal is
burned. Complying with regulations to address these emissions can
be costly for our customers. For example, in order to meet the CAA
limits for sulfur dioxide emissions from electric power plants,
coal users must install costly pollution control devices, use
sulfur dioxide emission allowances (some of which they may
purchase), or switch to other fuels. Recent EPA rulemakings
requiring additional reductions in permissible emission levels for
coal-fired plants will likely make it costlier to operate
coal-fired electric power plants and may make coal a less
attractive fuel for electric power generation in the future. For
example, the EPA’s Cross-State Air Pollution Rule
(“CSAPR”) is one of a number of significant regulations
that the EPA has issued or expects to issue that will impose more
stringent requirements relating to air, water and waste controls on
electric generating units. These rules also include the EPA’s
new requirements for coal combustion residues management, which
were finalized in December 2014 and further regulate the handling
of wastes from the combustion of coal. In addition, the EPA has
formally adopted a revised final rule to reduce emissions of toxic
air pollutants from power plants. More costly and stringent
environmental regulations could adversely impact the operations of
our customers, which could in turn adversely impact our business. A
number of coal-fired power plants, particularly smaller and older
plants, already have retired or announced that they will retire
rather than retrofit to meet the obligations of these rules.
Additional retirements of coal-fired power plants by prospective
customers could further decrease demand for thermal coal and reduce
our revenues and adversely affect our business and results of
operations.
In addition,
considerable uncertainty is associated with air emissions
initiatives. New regulations are in the process of being developed,
and many existing and potential regulatory initiatives are subject
to review by federal or state agencies or the courts. More
stringent air emissions limitations are either in place or are
likely to be imposed in the short to medium term, and these
limitations will likely require significant emissions control
expenditures for many coal-fired power plants. As a result, some of
our prospective customers may switch to other fuels that generate
fewer of these emissions or may install more effective pollution
control equipment that reduces the need for low-sulfur coal. Any
further switching of fuel sources away from coal, closure of
existing coal-fired power plants, or reduced construction of new
coal-fired power plants could have a material adverse effect on
demand for, and prices received for, our coal. In addition, our
coke plant and steelmaking customers may face increased operational
costs as a result of higher electric costs.
Apart from actual
and potential regulation of air emissions and solid wastes from
coal-fired plants, state and federal mandates for increased use of
electricity from renewable energy sources could have an impact on
the market for our coal. Several states have enacted legislative
mandates requiring electricity suppliers to use renewable energy
sources to generate a certain percentage of power. Possible
advances in technologies and incentives, such as tax credits, to
enhance the economics of renewable energy sources could make these
sources more competitive with coal. Any reductions in the amount of
coal consumed by electric power generators as a result of current
or new standards for the emission of impurities, or current or new
incentives to switch to renewable fuels or renewable energy
sources, such as the CPP and various state programs, could reduce
the demand for our coal, thereby reducing our revenues and
adversely affecting our business, cash flows, results of operations
and our ability to pay dividends to our common
stockholders.
Environmental activism and initiatives aimed at limiting climate
change and a reduction of air pollutants could interfere with our
business activities, operations and ability to access capital
sources.
Participants in the
coal mining industry are frequently targeted by environmental
activist groups that openly attempt to disrupt the industry. It is
possible that we may be the target of such activism in the future,
including when we attempt to grow our business through
acquisitions, commence new mining operations or register our
securities with the SEC. If that were to happen, our ability to
operate our business or raise capital could be materially and
adversely impacted.
In addition, there
have also been efforts in recent years to influence the investment
community, including investment advisors, sovereign wealth funds,
public pension funds, universities and other groups, promoting the
divestment of fossil fuel equities and also pressuring lenders to
limit funding to companies engaged in the extraction of fossil fuel
reserves. In California, for example, legislation was signed into
law in October 2015 that required California’s state pension
funds to divest investments in companies that generate 50% or more
of their revenue from coal mining, which was done by the
established deadline of July 2017. Several large investment banks
also announced that they had adopted climate change guidelines for
lenders. The guidelines require the evaluation of carbon risks in
the financing of electric power generation plants, which may make
it more difficult for utilities to obtain financing for coal-fired
plants. Other activist campaigns have urged banks to cease
financing coal-driven businesses. As a result, the World Bank
announced in December 2017 that it would no longer finance upstream
oil and gas projects after 2019, apart from certain gas projects in
the poorest countries in exceptional circumstances. The impact of
such efforts may adversely affect the demand for and price of
securities issued by us and impact our access to the capital and
financial markets. In addition, several well-funded
non-governmental organizations have explicitly undertaken campaigns
to minimize or eliminate mining and the use of coal as a source of
electricity generation. The net effect of these developments is to
make it more costly and difficult to maintain our business and to
continue to depress the market for coal.
Our mines are subject to stringent federal and state safety
regulations that increase our cost of doing business at active
operations and may place restrictions on our methods of operation.
In addition, government inspectors in certain circumstances may
have the ability to order our operations to be shut down based on
safety considerations.
The Federal Mine
Safety and Health Act of 1977 (the “Mine Act”) and Mine
Improvement and New Emergency Response Act (the “MINER
Act”), and regulations issued under these federal statutes,
impose stringent health and safety standards on mining operations.
The regulations that have been adopted under the Mine Act and the
MINER Act are comprehensive and affect numerous aspects of mining
operations, including training of mine personnel, mining
procedures, roof control, ventilation, blasting, use and
maintenance of mining equipment, dust and noise control,
communications, emergency response procedures, and other matters.
MSHA regularly inspects mines to ensure compliance with regulations
promulgated under the Mine Act and MINER Act. In addition, Kentucky
has similar programs for mine safety and health regulation and
enforcement. The various requirements mandated by federal and state
statutes, rules, and regulations may place restrictions on our
methods of operation and potentially result in fees and civil
penalties for violations of such requirements or criminal liability
for the knowing violation of such standards, significantly
impacting operating costs and productivity. In addition, government
inspectors have the authority to issue orders to shut down our
operations based on safety considerations under certain
circumstances, such as imminent dangers, accidents, failures to
abate violations, and unwarrantable failures to comply with
mandatory safety standards.
The regulations
enacted under the Mine Act and MINER Act as well as under similar
state acts are routinely expanded, raising compliance costs and
increasing potential liability. For example, in 2014, MSHA
finalized a new rule limiting miners’ exposure to respirable
coal dust. The first phase of the rule went into effect as of
August 1, 2014, and requires, among other things, single shift
sampling to determine noncompliance and corrective action to remedy
any excessive levels of dust. The next phase of the rule went into
effect as of February 1, 2016 and requires increased sampling
frequency and the use of continuous personal dust monitors. This
and other future mine safety rules could potentially result in or
require significant expenditures, as well as additional safety
training and planning, enhanced safety equipment, more frequent
mine inspections, stricter enforcement practices and enhanced
reporting requirements. At this time, it is not possible to predict
the full effect that new or proposed statutes, regulations and
policies will have on our operating costs, but any expansion of
existing regulations, or making such regulations more stringent may
have a negative impact on the profitability of our operations. If
we were to be found in violation of mine safety and health
regulations, we could face penalties or restrictions that may
materially and adversely impact our operations, financial results
and liquidity.
We must also
compensate employees for work-related injuries. State
workers’ compensation acts typically provide for an exception
to an employer’s immunity from civil lawsuits for workplace
injuries in the case of intentional torts. In such situations, an
injured worker would be able to bring suit against his or her
employer for damages in excess of workers’ compensation
benefits. In addition, Kentucky’s workers’ compensation
act provides a much broader exception to workers’
compensation immunity, allowing an injured employee to recover
against his or her employer if he or she can show damages caused by
an unsafe working condition of which the employer was aware and
that was a violation of a statute, regulation, rule or consensus
industry standard. These types of lawsuits are not uncommon and
could have a significant effect on our operating
costs.
In addition, we
have obtained from a third-party insurer a workers’
compensation insurance policy, which includes coverage for medical
and disability benefits for black lung disease under the Federal
Coal Mine Health and Safety Act of 1969 and the Mine Act, as
amended. We perform periodic evaluations of our black lung
liability, using assumptions regarding rates of successful claims,
discount factors, benefit increases and mortality rates, among
others. Of note, the Affordable Care Act of 2010 significantly
amended the black lung provisions of the Mine Act by reenacting two
provisions, which had been eliminated in 1981. Under the
amendments, a miner with at least fifteen years of underground coal
mine employment (or surface mine employment with similar dust
exposure) who can prove that he suffers from a totally disabling
respiratory condition is entitled to a rebuttable presumption that
his disability is caused by black lung. The other amendment
provides that the surviving spouse of a miner who was collecting
federal black lung benefits at the time of his death is entitled to
a continuation of those benefits. These changes could have a
material impact on our costs expended in association with the
federal black lung program.
We have reclamation, mine closing, and related environmental
obligations under the Surface Mining Control and Reclamation Act.
If the assumptions underlying our accruals are inaccurate, we could
be required to expend greater amounts than
anticipated.
SMCRA establishes
operational, reclamation and closure standards for our mining
operations. SMCRA requires that comprehensive environmental
protection and reclamation standards be met during the course of
and following completion of mining activities. Permits for all
mining operations must be obtained from the U.S. Office of Surface
Mining (“OSM”) or, where state regulatory agencies have
adopted federally approved state programs under SMCRA, the
appropriate state regulatory authority. Our operations are located
in states which have achieved primary jurisdiction for enforcement
of SMCRA through approved state programs. See
“Business—Environmental and Other Regulatory
Matters.”
In December 2016
OSM published the final version of the Stream Protection Rule,
which became effective in January 2017. The rule would have
impacted both surface and underground mining operations, as it
would have imposed stricter guidelines on conducting coal mining
operations, and would have required more extensive baseline data on
hydrology, geology and aquatic biology in permit applications. The
rule also required the collection of increased pre-mining data
about the site of the proposed mining operation and adjacent areas
to establish a baseline for evaluation of the impacts of mining and
the effectiveness of reclamation associated with returning streams
to pre-mining conditions. However, in February 2017, both the House
and Senate passed a resolution disapproving of the Stream
Protection Rule pursuant to the Congressional Review Act
(“CRA”). President Trump signed the resolution on
February 16, 2017 and, pursuant to the CRA, the Stream Protection
Rule “shall have no force or effect” and cannot be
replaced by a similar rule absent future legislation. On November
17, 2017, OSMRE published a Federal Register notice that removed
the text of the Stream Protection Rule from the Code of Federal
Regulations. Whether Congress will enact future legislation to
require a new Stream Protection Rule remains uncertain. The
existing rules, or other new SMCRA regulations, could result in
additional material costs, obligations and restrictions upon our
operations.
In addition, SMCRA
imposes a reclamation fee on all current mining operations, the
proceeds of which are deposited in the Abandoned Mine Reclamation
Fund (“AML Fund”), which is used to restore unreclaimed
and abandoned mine lands mined before 1977. The current per ton fee
is $0.28 per ton for surface mined coal and $0.12 per ton for
underground mined coal. These fees are currently scheduled to be in
effect until September 30, 2021. We accrue for the costs of
current mine disturbance and of final mine closure, including the
cost of treating mine water discharge where necessary.
The amounts
recorded are dependent upon a number of variables, including the
estimated future closure costs, the amount of estimated coal
deposits, assumptions involving profit margins, inflation rates,
and the assumed credit-adjusted risk-free interest rates. If these
accruals are insufficient or our liability in a particular year is
greater than currently anticipated, our future operating results
could be adversely affected. We are also required to post bonds for
the cost of a coal mine as a condition of our mining
activities.
Volatility in the Products We Sell.
Our
business plan involves selling coal to various customers, and the
price of coal has historically been volatile and unpredictable. Any
significant change in the price of coal could cause detriment to
our ability to execute our business plan or our ability to be
profitable.
Limited Operating History.
We
have a limited operating history and have incurred significant
losses to date, and our current profitability is not guaranteed,
and we may incur significant losses in the future.
We
have generated limited revenues from the sale of our products, and
our business may fail if we are not able to mine the coal, not
successfully sell the coal we produce, or if we produce the coal at
a loss.
The
successful development of our business depends on our ability to
efficiently and cost-effectively mine, transport, and process coal
that will be purchased at a price above our costs.
Our business currently requires substantial capital expenditures
and any expansion of our operations requires substantial capital
investment and we may not have access to the capital required to
reach profitability.
Maintaining
and expanding our existing business is capital intensive.
Specifically, the ongoing expenses of coal mining and processing,
the required capital investment for any new mines going into
production, and compliance with the applicable laws and regulations
all require substantial capital expenditures. In order to maintain
compliance of existing or future regulations, we invest significant
capital and continue to invest significant capital to maintain our
production and operations. We cannot assure you that we will be
able to maintain our existing or future levels of business or
generate sufficient cash flow, or that we will have access to
sufficient financing to continue our production, development or
marketing at or above our present levels and on our current or
projected timelines and we may be required to defer all or a
portion of our capital expenditures. Our results of operations,
business and financial condition, as well as our ability to satisfy
our obligations may be materially adversely affected if we cannot
make such capital expenditures.
Our business is highly contractual in nature and failure to adhere
to the terms of agreements, such as mineral lease agreements, may
result in significant business impairment.
All
of our material coal deposits and surface rights are leased from
mineral and surface owners, such as Elk Horn Coal Company, LLC,
Alma Land Company, Big Sandy Company, LP, Kentucky Berwind Land
Company, and various individuals and companies (including
potentially Land Resources & Royalties LLC in the future). Our
ability to retain these coal leases is dependent on our ability to
meet the contractual obligations of the leases, such as payments of
royalties and other performance metrics. Failure to adhere to the
lease agreements may result in significantly impairment of our
business, including the loss of coal deposits under management,
loss of revenue, loss of certain operational divisions, and/or
additional costs incurred by our business.
A defect in title or the loss of a leasehold interest in certain
property could limit our ability to mine our coal deposits or
result in significant unanticipated costs.
We
conduct our coal mining operations on properties that we lease. A
title defect or the loss of a lease could adversely affect our
ability to mine the associated coal deposit. We may not verify
title to our leased properties or associated coal deposits until we
have committed to developing those properties or coal deposits. We
may not commit to develop property or coal deposits until we have
obtained necessary permits and completed exploration. As such, the
title to property that we intend to lease or coal deposits that we
intend to mine may contain defects prohibiting our ability to
conduct mining operations. Similarly, our leasehold interests may
be subject to superior property rights of other third parties or to
royalties owed to those third parties. In order to conduct our
mining operations on properties where these defects exist, we may
incur unanticipated costs. In addition, some leases require us to
produce a minimum quantity of coal and require us to pay minimum
production royalties. Our inability to satisfy those requirements
may cause the leasehold interest to terminate.
We outsource certain aspects of our business to third party
contractors, which subjects us to risks, including disruptions in
our business.
A
significant portion of our business is operated via contractor
model, in which we contract with third parties to provide coal
extraction, coal mining, blasting services, and other operational
functions at all of our mines. In addition, we contract with third
parties to provide truck transportation services between our mines
and our preparation plants. Accordingly, we are subject to the
risks associated with the contractors’ ability to
successfully provide the necessary services to meet our needs. If
the contractors are unable to adequately provide the contracted
services, and we are unable to find alternative service providers
in a timely manner, our ability to conduct our coal mining
operations and deliver coal to our customers may be
disrupted.
Our coal sale agreements are subject to quality specifications that
we may not be able to meet, resulting in lower sales price of our
coal or non-acceptance of delivery of our coal by the
customer.
The
coal we sell is subject to stated specifications or a range of
specifications, such as heat value (BTU/lb value), percent sulfur,
percent volatile matter, and percent ash, among other
characteristics. Failure to meet these characteristics on a
particular order, or in general, could result in rejection of coal
delivery, non-payment of coal sales, and/or refusal to continue the
sales relationship. Any of these factors could have a detrimental
effect on our business and our ability to sell our coal and pay our
expenses.
Our coal is sold primarily through various regional coal brokers
and our ability to sell our coal to these brokers and receive
payment for such sales is dependent on their ability to properly
operate and manage their business.
For
the coal we sell to brokers and intermediaries, which is all of our
sales currently and anticipated to be a significant portion of our
sales going forward, the ability to utilize such brokers is
dependent on their ability to successfully operate their business.
Inability to operate their business or impairment of their business
will result in our ability to sell coal to such brokers and
intermediaries.
Furthermore,
there is the risk that any broker or intermediary fails to pay for
any coal delivered, either in whole or in part, due to a potential
combination of factors, such as:
●
improper
coal qualities and characteristics that don’t meet delivery
specifications;
●
delay
in the broker and/or intermediaries’ receipt of
payment(s);
●
fraudulent
activity of the broker and/or intermediary; and
●
bankruptcy
of the broker and/or intermediary.
Any
failure to receive payment from our brokers and/or intermediaries
could result in severe impairment or bankruptcy of our
business.
Furthermore,
for the coal we may sell directly to the end-customer, our ability
to receive payment for the coal we sell depends on the continued
creditworthiness of our customers. The current economic volatility
and tightening credit markets increase the risk that we may not be
able to collect payments from our customers. A continuation or
worsening of current economic conditions or other prolonged global
or U.S. recessions could also impact the creditworthiness of our
customers. If the creditworthiness of a customer declines, this
would increase the risk that we may not be able to collect payment
for all of the coal we sell to that customer. If we determine that
a customer is not creditworthy, we may not be required to deliver
coal under the customer’s coal sales contract. If we are able
to withhold shipments, we may decide to sell the customer’s
coal on the spot market, which may be at prices lower than the
contract price, or we may be unable to sell the coal at all.
Furthermore, the bankruptcy of any of our customers could have a
material adverse effect on our financial position. In addition,
competition with other coal suppliers could force us to extend
credit to customers and on terms that could increase the risk of
payment default.
Our assets and operations are concentrated in eastern Kentucky, and
a disruption within that geographic region could adversely affect
the Company’s performance.
We
currently rely exclusively on sales generated our coal extraction
within eastern Kentucky’s Central Appalachian coal region.
Due to our lack of diversification in geographic location, an
adverse development in these areas, including adverse developments
due to catastrophic events or weather and decreases in demand for
coal or electricity, could have a significantly greater adverse
impact on our ability to operate our business and our results of
operations than if we held more diverse assets and
locations.
Some officers and management of the Company may spend a substantial
amount of time managing the business and affairs of other
businesses and of other interests.
The
officers and management of the Company have other business
interests that may require substantial time apart from management
of the Company. Furthermore, these other business interests may or
may not compete directly with the business of the Company. These
officers may face a conflict regarding the allocation of their time
between our business and the other business interests of the
Company, and as a result our business may be adversely affected if
the officers spend less time on our business and affairs than would
otherwise be available as a result of such officers’ time
being split between the management of the Company. These officers
may also be conflicted when negotiating the terms of contracts
between the Company and other company interests, although the
officers will act in the best faith of the Company, or recuse
themselves from the negotiations, should a potential conflict
arise
Our business model may result in various legal proceedings, which
may have an adverse effect on our business.
Due
to the nature of our business, at times we may be involved in legal
proceedings incidental to our normal business activities. We will
not be able to predict the outcome, and there is always the
potential that the costs of litigation in an individual matter or
the aggregation of many matters could have an adverse effect on our
cash flows, results of operations or financial
position.
Risk Related to Environmental Reclamation and
Remediation.
We
have a large amount of reclamation liability and large number of
regulatory requirements as part of our operations. Our inability to
perform our reclamation or regulatory requirements under local,
state, or federal laws may result in fines or governmental orders
that limit, impair, or stop our ability to operate. Regulatory
fines may be substantial in nature and may significantly impact our
operational results. Furthermore, we have several permit sites that
require constant water monitoring and treatment for the foreseeable
future due to the poor quality of water present within the
permit.
We do not have Proven or Probable mineral reserves for any of our
properties.
Unlike
other mining companies who have completed a feasibility study, we
do not have any Proven or Probable reserves as described and
defined in the Securities and Exchange Commission’s Industry
Guide 7. As a result, we incur additional risks as compared to
these other mining companies from the fact that we are operating
mines without establishing a Proven or Probable mineral reserve.
These risks may include, but are not limited to, the inherent risk
to commence production without a feasibility study that establishes
the economic recovery of any coal mineralization, as well as
possible volatility in earnings due to our inability to record
certain investments as assets in our financial statements, such as
new mine construction and development costs.
Risks
Related to this Offering and Our Common Stock
We have broad discretion in the use of the net proceeds we receive
from this offering and may not use them effectively.
Although we intend
to use a portion of the net proceeds we receive to repay certain
indebtedness as described under “Use of Proceeds,” we
cannot specify with certainty the particular other uses of the net
proceeds that we will receive from such purchase. Our management
will have broad discretion in the application of such proceeds,
including for any of the purposes described in “Use of
Proceeds.” Accordingly, you will have to rely upon the
judgment of our management with respect to the use of the proceeds,
with only limited information concerning management’s
specific intentions. Our management may spend a portion or all of
the net proceeds from this offering in ways that our stockholders
may not desire or that may not yield a favorable return. The
failure by our management to apply these funds effectively could
harm our business. Pending their use, we may invest the net
proceeds from this offering in a manner that does not produce
income or that loses value.
Our ability to pay dividends may be limited by the amount of cash
we generate from operations following the payment of fees and
expenses, by restrictions in any future debt instruments and by
additional factors unrelated to our profitability.
We intend to pay
special and regular quarterly dividends. The declaration and
payment of dividends, if any, is subject to the discretion of our
board of directors and the requirements of applicable law. The
timing and amount of any dividends declared will depend on, among
other things: (a) our earnings, earnings outlook financial
condition, cash flow, cash requirements and outlook on current and
future market conditions, (b) our liquidity, including our ability
to obtain debt and equity financing on acceptable terms, (c)
restrictive covenants in any future debt instruments and (d)
provisions of applicable law governing the payment of
dividends.
The metallurgical
coal industry, and the coal industry in general, is highly
volatile, and we cannot predict with certainty the amount of cash,
if any, that will be available for distribution as dividends in any
period. Also, there may be a high degree of variability from period
to period in the amount of cash, if any, that is available for the
payment of dividends. The amount of cash we generate from
operations and the actual amount of cash we will have available for
dividends will vary based upon, among other things:
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the development of
our properties into producing coal mines;
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the ability to
begin generating significant revenues and operating cash
flows;
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the market price
for coal;
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overall domestic
and global economic conditions, including the supply of and demand
for domestic and foreign coal, coke and steel;
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unexpected
operational events or geological conditions;
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our ability to
enter into agreements governing the sale of coal, which are
generally short-term in nature and subject to fluctuations in
market pricing;
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the level of our
operating costs;
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prevailing global
and regional economic and political conditions;
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changes in interest
rates;
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the impact of
domestic and foreign governmental laws and regulations, including
environmental and climate change regulations and regulations
affecting the coal mining industry;
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delays in the
receipt of, failure to receive, failure to maintain or revocation
of necessary governmental permits;
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modification or
revocation of our dividend policy by our board of directors;
and
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the amount of any
cash reserves established by our board of directors.
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The amount of cash
we generate from our operations may differ materially from our net
income or loss for the period, which will be affected by non-cash
items. We may incur other expenses or liabilities that could reduce
or eliminate the cash available for distribution as
dividends.
We currently pay a
10.0% annual dividend on our Series C preferred stock, which is
compounded on an annual basis and no accrual has been made as of
the date of this filing. In the past, we paid an 8.0% annual
dividend on our Series B preferred stock, of which an accrued
amount was recorded of $104,157, as of September 30, 2018, and
continues to accrue to the Series B preferred stock holder at
the same rate until all Series B preferred stock were converted to
common stock on November 7, 2018. A total amount of $114,290 in
Series B preferred dividend was accrued to the Series B preferred
holders and was added to the Series B preferred stock balance upon
conversion into common shares on November 7, 2018. The conversion
resulted in a total of 267,859 common shares issued to the former
Series B preferred holders.
In addition, any
future financing agreements may prohibit the payment of dividends
if an event of default has occurred and is continuing or would
occur as a result of the payment of such dividends.
We may not have
sufficient surplus or net profits in the future to pay dividends,
and our subsidiaries may not have sufficient funds, surplus or net
profits to make distributions to us. As a result of these and the
other factors mentioned above, we can give no assurance that
dividends will be paid in the future.
The requirements of being a public company, including compliance
with the reporting requirements of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and the
requirements of the Sarbanes-Oxley Act, may strain our resources,
increase our costs and distract management, and we may be unable to
comply with these requirements in a timely or cost-effective
manner.
As a public
company, we will need to comply with new laws, regulations and
requirements, certain corporate governance provisions of the
Sarbanes-Oxley Act of 2002, related regulations of the SEC.
Complying with these statutes, regulations and requirements will
occupy a significant amount of time for our board of directors and
management and will significantly increase our costs and expenses.
We will need to:
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institute a more
comprehensive compliance function;
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comply with rules
promulgated by the OTC Pink or any other exchange that lists our
shares;
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continue to prepare
and distribute periodic public reports in compliance with our
obligations under the federal securities laws;
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establish new
internal policies, such as those relating to insider trading;
and
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involve and retain
to a greater degree outside counsel and accountants in the above
activities.
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Furthermore, while
we generally must comply with Section 404 of the
Sarbanes-Oxley Act of 2002 for our fiscal years, we are not
required to have our independent registered public accounting firm
attest to the effectiveness of our internal controls until our
first annual report subsequent to our ceasing to be an
“emerging growth company” within the meaning of
Section 2(a)(19) of the Securities Act. Accordingly, we may
not be required to have our independent registered public
accounting firm attest to the effectiveness of our internal
controls until as late as our annual report for the fiscal year
ending December 31, 2018. Once it is required to do so, our
independent registered public accounting firm may issue a report
that is adverse in the event it is not satisfied with the level at
which our controls are documented, designed, operated or reviewed.
Compliance with these requirements may strain our resources,
increase our costs and distract management, and we may be unable to
comply with these requirements in a timely or cost-effective
manner.
In addition, we
expect that being a public company subject to these rules and
regulations may make it more difficult and more expensive for us to
obtain director and officer liability insurance and we may be
required to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage.
As a result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors or as
executive officers. We are currently evaluating these rules, and we
cannot predict or estimate the amount of additional costs we may
incur or the timing of such costs.
If we fail to develop or maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent fraud. As a result, current and potential
stockholders could lose confidence in our financial reporting,
which would harm our business and the trading price of our common
stock.
Effective internal
controls are necessary for us to provide reliable financial
reports, prevent fraud and operate successfully as a public
company. If we cannot provide reliable financial reports or prevent
fraud, our reputation and operating results would be
harmed.
We cannot be
certain that our efforts to develop and maintain our internal
controls will be successful, that we will be able to maintain
adequate controls over our financial processes and reporting in the
future or that we will be able to comply with our obligations under
Section 404 of the Sarbanes Oxley Act of 2002. Any failure to
develop or maintain effective internal controls, or difficulties
encountered in implementing or improving our internal controls,
could harm our operating results or cause us to fail to meet our
reporting obligations. Ineffective internal controls could also
cause investors to lose confidence in our reported financial
information, which would likely have a negative effect on the
trading price of our common stock.
The offering price of our common stock may not be indicative of the
market price of our common stock after this offering or throughout
the course of our sale of shares under this offering. In addition,
an active, liquid and orderly trading market for our common stock
may not develop or be maintained, and our stock price may be
volatile and/or decrease substantially as a result of the sale of
the shares under this offering.
Prior to this
offering, our common stock was very thinly traded on the OTC Pink
markets. An active, liquid and orderly trading market for our
common stock may not develop or be maintained after this offering.
Active, liquid and orderly trading markets usually result in less
price volatility and more efficiency in carrying out
investors’ purchase and sale orders. The market price of our
common stock could vary significantly as a result of a number of
factors, some of which are beyond our control. In the event of a
drop in the market price of our common stock, you could lose a
substantial part or all of your investment in our common stock. The
offering price will be determined by us and the underwriters in
this offering and may be more or less than the market price of our
stock after this offering. Consequently, you may not be able to
sell shares of our common stock at prices equal to or greater than
the price paid by you in this offering and the common stock offered
under this prospectus may be sold significantly less than the
market price of the stock or the anticipated offering
price.
The following
factors could affect our stock price:
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our operating and
financial performance;
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quarterly
variations in the rate of growth of our financial indicators, such
as net income per share, net income and revenues;
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the public reaction
to our press releases, our other public announcements and our
filings with the SEC;
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strategic actions
by our competitors;
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changes in revenue
or earnings estimates, or changes in recommendations or withdrawal
of research coverage, by equity research analysts;
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speculation in the
press or investment community;
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the failure of
research analysts to cover our common stock;
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sales of our common
stock by us or underwriters or the perception that such sales may
occur;
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our payment of
dividends;
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changes in
accounting principles, policies, guidance, interpretations or
standards;
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additions or
departures of key management personnel;
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actions by our
stockholders;
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general market
conditions, including fluctuations in commodity
prices;
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domestic and
international economic, legal and regulatory factors unrelated to
our performance; and
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the realization of
any risks described under this “Risk Factors”
section.
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The stock markets
in general have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the trading
price of our common stock. Securities class action litigation has
often been instituted against companies following periods of
volatility in the overall market and in the market price of a
company’s securities. Such litigation, if instituted against
us, could result in very substantial costs, divert our
management’s attention and resources and harm our business,
operating results and financial condition.
Certain of our directors, members of our management team, and
officers have significant duties with, and spend significant time
serving, other entities, including those entities that may compete
with us in seeking acquisitions and business opportunities and,
accordingly, may have conflicts of interest in allocating time or
pursuing business opportunities.
Certain of our
directors, members of our management team and/or officers (such as
Mark C. Jensen and Thomas M. Sauve, among others), who are
responsible for managing the direction of our operations and
acquisition activities, hold positions of responsibility with other
entities (including T Squared Partners LP and other entities) that
have other business interests and may find itself in the business
of identifying and acquiring coal deposits. The existing positions
held by these directors, members of our management team, and/or
officers may give rise to fiduciary or other duties (such as
devotion of time to the company) that are in conflict with the
duties they owe to us. These directors, members of our management
team, and/or officers, may become aware of business opportunities
that may be appropriate for presentation to us as well as to the
other entities with which they are or may become affiliated. Due to
these existing and potential future affiliations, they may present
potential business opportunities to other entities prior to
presenting them to us, which could cause additional conflicts of
interest. They may also decide that certain opportunities are more
appropriate for other entities with which they are affiliated, and
as a result, they may elect not to present those opportunities to
us. These conflicts may not be resolved in our favor. For
additional discussion of our management’s business
affiliations and the potential conflicts of interest of which our
stockholders should be aware, see “Certain Relationships and
Related Party Transactions.”
Our amended and restated certificate of incorporation and amended
and restated bylaws, as well as Florida law, will contain
provisions that could discourage acquisition bids or merger
proposals, which may adversely affect the market price of our
common stock.
Our amended and
restated certificate of incorporation will authorize our board of
directors to issue preferred stock without stockholder approval. If
our board of directors elects to issue preferred stock, it could be
more difficult for a third party to acquire us. In addition, some
provisions of our amended and restated certificate of incorporation
and amended and restated bylaws could make it more difficult for a
third party to acquire control of us, even if the change of control
would be beneficial to our stockholders, including:
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limitations on the
removal of directors;
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limitations on the
ability of our stockholders to call special meetings;
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establishing
advance notice provisions for stockholder proposals and nominations
for elections to the board of directors to be acted upon at
meetings of stockholders;
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providing that the
board of directors is expressly authorized to adopt, or to alter or
repeal our bylaws; and
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establishing
advance notice and certain information requirements for nominations
for election to our board of directors or for proposing matters
that can be acted upon by stockholders at stockholder
meetings.
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Investors in this offering will experience immediate and
substantial dilution.
The sale of up to
1,000,000 shares under this prospectus could result in significant
shareholder dilution and significantly negatively impact the share
price of our stock. Furthermore, some investors in our stock may
pay substantially different prices than other investors. There also
exists the possibility that a large purchaser of our stock offered
under this prospectus may negotiate a stock price that is more
favorable than another purchaser of our stock offered under this
prospectus, include the possibility of stock price that is priced
at a variable rate to the market price of our stock. This would
result in further significant and substantial dilution to all other
holders of our common stock.
Future sales of our common stock in the public market, or the
perception that such sales may occur, could reduce our stock price,
and any additional capital raised by us through the sale of equity
or convertible securities may dilute your ownership in
us.
We may issue
additional shares of common stock or convertible securities in
subsequent public offerings. After the completion of this offering,
we will have 23,298,530 outstanding shares of common stock. There
may be no market for buyers of our common stock offered under this
prospectus, or any sale of common stock under this prospectus may
be sold at a substantial discount to the market price.
At some point after
this offering, we intend to file a registration statement with the
SEC on Form S-8 providing for the registration of up to
4,000,000 shares of our common stock issued or reserved for
issuance under our equity incentive plan. Subject to the
satisfaction of vesting conditions and the expiration of lock-up
agreements, shares registered under the registration statement on
Form S-8 will be available for resale immediately in the public
market without restriction, subject to Rule 144 limitations with
respect to affiliates. In addition, the issuance of shares of
common stock upon the exercise of outstanding options will result
in dilution to the interests of other stockholders. Please read
“Description of Capital Stock— Outstanding Options or
Warrants.”
We cannot predict
the size of future issuances of our common stock or securities
convertible into common stock or the effect, if any, that future
issuances and sales of shares of our common stock will have on the
market price of our common stock or the dividend amount payable per
share on our common stock. Sales of substantial amounts of our
common stock (including shares issued in connection with an
acquisition), or the perception that such sales could occur, may
adversely affect prevailing market prices of our common stock or
the dividend amount payable per share on our common
stock.
Certain U.S. federal income tax preferences currently available
with respect to coal exploration and development may be eliminated
by future legislation.
From time to time,
legislation is proposed that could result in the reduction or
elimination of certain U.S. federal income tax preferences
currently available to companies engaged in the exploration and
development of coal. These proposals have included, but are not
limited to, (1) the elimination of current deductions, the
60-month amortization period and the 10-year amortization period
for exploration and development costs relating to coal and other
hard mineral fossil fuels, (2) the repeal of the percentage
depletion allowance with respect to coal properties, (3) the
repeal of capital gains treatment of coal and lignite royalties and
(4) the elimination of the domestic manufacturing deduction
for coal and other hard mineral fossil fuels. The passage of these
or other similar proposals could increase our taxable income and
negatively impact the value of an investment in our common
stock.
We may issue preferred stock whose terms could adversely affect the
voting power or value of our common stock.
Our amended and
restated certificate of incorporation will authorize us to issue,
without the approval of our stockholders, one or more classes or
series of preferred stock having such designations, preferences,
limitations and relative rights, including preferences over our
common stock respecting dividends and distributions, as our board
of directors may determine. The terms of one or more classes or
series of preferred stock could adversely impact the voting power
or value of our common stock. For example, we might grant holders
of preferred stock the right to elect some number of our directors
in all events or on the happening of specified events or the right
to veto specified transactions. Similarly, the repurchase or
redemption rights or liquidation preferences we might assign to
holders of preferred stock could affect the residual value of the
common stock.
For as long as we are an emerging growth company, we will not be
required to comply with certain reporting requirements, including
those relating to accounting standards and disclosure about our
executive compensation, that apply to other public
companies.
In April 2012,
President Obama signed into law the JOBS Act. We are classified as
an “emerging growth company” under the JOBS Act. For as
long as we are an emerging growth company, which may be up to five
full fiscal years subsequent to our first sale of an equity
security pursuant to registration in 2014, unlike other public
companies, we will not be required to, among other things:
(i) provide an auditor’s attestation report on
management’s assessment of the effectiveness of our system of
internal control over financial reporting pursuant to
Section 404(b) of the Sarbanes-Oxley Act; (ii) comply
with any new requirements adopted by the PCAOB requiring mandatory
audit firm rotation or a supplement to the auditor’s report
in which the auditor would be required to provide additional
information about the audit and the financial statements of the
issuer; (iii) provide certain disclosure regarding executive
compensation required of larger public companies; or (iv) hold
nonbinding advisory votes on executive compensation. We will remain
an emerging growth company for up to five years subsequent to our
first sale of an equity security pursuant to registration in 2014,
although we will lose that status sooner if we have more than $1.07
billion of revenues in a fiscal year, have more than $700.0 million
in market value of our common stock held by non-affiliates, or
issue more than $1.0 billion of non-convertible debt over a
three-year period.
To the extent that
we rely on any of the exemptions available to emerging growth
companies, you will receive less information about our executive
compensation and internal control over financial reporting than
issuers that are not emerging growth companies. If some investors
find our common stock to be less attractive as a result, there may
be a less active trading market for our common stock and our stock
price may be more volatile.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our common stock or if our operating
results do not meet their expectations, our stock price could
decline.
The trading market
for our common stock will be influenced by the research and reports
that industry or securities analysts publish about us or our
business. If one or more of these analysts cease coverage of our
company or fail to publish reports on us regularly, we could lose
visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline. Moreover, if one or more
of the analysts who cover our company downgrades our common stock
or if our operating results do not meet their expectations, our
stock price could decline.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information in this prospectus includes “forward-looking
statements.” All statements, other than statements of
historical fact included in this prospectus, regarding our
strategy, future operations, financial position, estimated revenues
and losses, projected costs, prospects, plans and objectives of
management are forward-looking statements. When used in this
prospectus, the words “could,” “believe,”
“anticipate,” “intend,”
“estimate,” “expect,” “project”
and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
such identifying words. These forward-looking statements are based
on management’s current expectations and assumptions about
future events and are based on currently available information as
to the outcome and timing of future events. When considering
forward-looking statements, you should keep in mind the risk
factors and other cautionary statements described under the heading
“Risk Factors” included in this
prospectus.
Forward-looking
statements may include statements about:
●
our
status as a recently organized corporation with limited operating
history, limited current revenue and properties that have limited
production history;
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deterioration
of economic conditions in the steel industry or other markets for
our coal, generally;
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deterioration
of economic conditions in the metallurgical and/or thermal coal
industry and other markets for our coal, generally;
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higher
than expected costs to develop our planned mining operations,
including, but not limited to, the costs to rehabilitate our
mines;
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decreases
in the estimated quantities or quality of our coal
deposits;
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changes
in the estimated geological conditions in our mines;
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our
expectations relating to dividend payments and our ability to make
such payments;
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our
inability to obtain additional financing on favorable terms, if
required, to complete the acquisition of additional metallurgical
coal deposits as currently contemplated or to fund the operations
and growth of our business;
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increased
maintenance, operating or other expenses or changes in the timing
thereof;
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impaired
financial condition and liquidity of our customers;
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increased
competition in coal markets;
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decreases
in the price of metallurgical coal and/or thermal
coal;
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the
impact of and costs of compliance with stringent domestic and
foreign laws and regulations, including environmental, climate
change and health and safety regulations, and permitting
requirements, as well as changes in the regulatory environment, the
adoption of new or revised laws, regulations and permitting
requirements;
●
the
impact of potential legal proceedings and regulatory inquiries
against us;
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our
inability to effectively deploy the net proceeds of this
offering;
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impact
of weather and natural disasters on demand, production and
transportation;
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reductions
and/or deferrals of purchases by major customers and our ability to
renew sales contracts;
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credit
and performance risks associated with customers, suppliers,
contract miners, co-shippers and trading, banks and other financial
counterparties;
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geologic,
equipment, permitting, site access, operational risks and new
technologies related to mining;
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our
ability to attract and retain employees;
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transportation
availability, performance and costs;
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availability,
timing of delivery and costs of key supplies, capital equipment or
commodities such as diesel fuel, steel, explosives and
tires;
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the
existence of registration rights with respect to the securities
being offered and the costs of compliance or penalties for
noncompliance with such rights;
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the
amount of expenses and other liabilities incurred or accrued after
the completion of this offering;
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the
lack of a public market for our securities; and
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the
other risks identified in this prospectus including, without
limitation, those under the headings “Risk Factors,”
“Business” and “Certain Relationships and Related
Party Transactions.”
We
caution you that these forward-looking statements are subject to
all of the risks and uncertainties, most of which are difficult to
predict and many of which are beyond our control, incident to the
development, production, gathering and sale of coal. These risks
include, but are not limited to, commodity price volatility, demand
for domestic and foreign steel, inflation, lack of availability of
mining equipment and services, environmental risks, operating
risks, regulatory changes, the uncertainty inherent in estimating
coal deposits and in projecting future rates of production, cash
flow and access to capital, the timing of development expenditures
and the other risks described under “Risk Factors” in
this prospectus.
Should
one or more of the risks or uncertainties described in this
prospectus occur, or should underlying assumptions prove incorrect,
our actual results and plans could differ materially from those
expressed in any forward-looking statements.
All
forward-looking statements, expressed or implied, included in this
prospectus are expressly qualified in their entirety by this
cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral
forward-looking statements that we or persons acting on our behalf
may issue.
Except
as otherwise required by applicable law, we disclaim any duty to
update any forward-looking statements, all of which are expressly
qualified by the statements in this section, to reflect events or
circumstances after the date of this prospectus.
USE
OF PROCEEDS
We expect to receive approximately
$3,720,000
of net proceeds from the sale of the common stock
offered by us, assuming the full sale of 1,000,000 common shares
registered under this prospectus, other than the 15%
underwriter’s Over-Allotment and after deducting the
underwriters discount of 7%.
We intend to use approximately
$1.0
million
for the purchase of additional surface and underground equipment
and parts and supplies for such equipment, or the rehabilitation of
our current equipment. The equipment will be used to increase
production at existing operating mines and bring other mines into
production at our various operating
subsidiaries.
We intend to use approximately
$
0.5
million
for future acquisitions of regional coal mines to complement our
current regional operations, larger coal mining complexes, and/or
other businesses related to the coal mining
industry.
We intend to use approximately
$0.59
million
for mine rehabilitation of our existing idled mines to bring these
mines in production. The mine rehabilitation costs are primarily
comprised of labor and mining supplies and are dependent on the
amount of rehabilitation and the existing conditions at the idled
mine.
We intend to use approximately
$1.07
million
for partial repayment of certain debt and payables including
amounts owed to management and related parties.
We expect to fund our remaining current
liabilities and satisfy our liquidity requirements with cash on
hand, future borrowings and cash flow from operations. If future
cash flows are insufficient to meet our liquidity needs or capital
requirements, we may reduce our mine development and/or fund a
portion of our expenditures through issuance of debt or equity
securities, the entry into debt arrangements for from other
sources, such as asset sales.
We intend to use approximately
$
0.56
million
for working capital, including the public company costs, closing
costs, and general expenses of the company.
We
do not intend to use any proceeds from this offering to satisfy
Series C preferred stock accrued dividend amounts, if any exist at
the time of this offering. The company has not yet accrued a
dividend for the Series C preferred stock as of the date of this
prospectus.
The
expected use of the net proceeds from this offering represents our
intentions based upon our current plans and business conditions,
which could change in the future as our plans and business
conditions evolve. We believe the net proceeds from this offering,
together with our current cash and investments, and projected cash
flow from future operations will be sufficient to fund our initial
phase of projected capital expenditures. However, the amounts and
timing of our actual expenditures depend on numerous factors,
including the progress of development of our properties, which
involves numerous uncertainties described under “Risk
Factors” included elsewhere in this prospectus. Accordingly,
we may choose to reallocate or otherwise use the proceeds from this
offering and will have broad discretion in the use of the net
proceeds from this offering.
CAPITALIZATION
The
following table summarizes our capitalization and cash and cash
equivalents as of September 30, 2018:
●
on
an actual basis; and
●
on an as adjusted basis to reflect (i) the sale by us of units in
this offering based on a public offering price of $4 per unit,
assuming no exercise of the underwriters’ option to purchase
additional units, and (ii) the deduction of estimated underwriting
discounts and commissions and estimated offering expenses payable
by us.
The
nature and purpose of this capitalization table is to illustrate
the pro-forma adjustments from our September 30, 2018 quarterly
statement to the current date as of this filing and including the
results of this offering.
You
should read this table together with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operation,” as well as our financial statements and related
notes and the other financial information, appearing elsewhere in
this prospectus.
|
As of September
30, 2018 (unaudited)
|
|
|
|
|
Cash & Cash
Equivalents (8)(9)(15)
|
$
343,782
|
$
9,371,000
|
$
9,714,782
|
Fixed Assets and
Coal Properties (1)(10)
|
12,118,730
|
50,106,101
|
62,224,831
|
Cash, Cash
Equivalents, Fixed Assets and Coal Properties
|
12,462,512
|
59,477,101
|
71,939,613
|
|
|
|
|
Debt:
|
|
|
|
Current Debt &
Certain Payables (1)(2)(3)(15)
|
21,543,180
|
8,222,000
|
29,765,180
|
Long Term
Debt
|
5,072,493
|
-
|
5,072,493
|
Reclamation
Liability (1)
|
22,565,375
|
234,240
|
22,799,615
|
Current Debt,
Certain Payables, Long Term Debt and Reclamation
Liability:
|
$
49,181,048
|
$
8,456,240
|
$
57,637,288
|
|
|
|
|
Class A Common
stock, $0.0001 par value, 230,000,000 shares authorized, 1,192,044
shares issued and outstanding, actual and 23,138,700 issued and
outstanding, as adjusted
(1)(2)(3)(4)(5)(6)(8)(9)(10)(11)(12)(13)(14)
|
118
|
2,196
|
2,314
|
Series A Preferred
stock, $0.0001 par value, 4,817,792 shares authorized, 4,817,792
shares issued and outstanding, actual and no issued and
outstanding, as adjusted (5)
|
482
|
(482
)
|
-
|
Series B Preferred
stock, $0.001 par value, 20,000,000 shares authorized, 850,000
shares issued and outstanding, actual and 0 issued and outstanding,
as adjusted (6)
|
850
|
(850
)
|
-
|
Series C Preferred
stock, $0.0001 par value, 20,000,000 shares authorized, 0 shares
issued and outstanding, actual and 50,000 issued and outstanding,
as adjusted (7)
|
-
|
5
|
5
|
Additional paid in
capital
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)
|
19,816,567
|
51,267,192
|
71,083,759
|
Accumulated deficit
(4)(11)
|
(50,265,183
)
|
(247,200
)
|
(50,512,383
)
|
Total
stockholders’ equity
|
(30,447,166
)
|
51,020,861
|
20,573,695
|
Total
capitalization
|
18,733,882
|
59,477,101
|
78,210,983
|
(1) Acquisition of
assets creating Wyoming County Coal LLC subsidiary. For discussion
of the terms of the acquisitions see "Management's Discussion and
Analysis". Management is still gathering the information needed to
complete the allocation of the purchase price to the assets and
acquired liabilities assumed
(2) Conversion of
$225,000 unrelated debt into 37,500 shares of Class A Common
stock
(3) Conversion of
$36,000 of unrelated payables into 6,000 shares of Class A Common
stock
(4) Pursuant to a
consulting agreement, issued 10,000 shares of Class A Common
stock
(5) Conversion
of 4,817,792 shares of Series A Preferred stock into 16,059,307
shares of Class A Common stock
(6) Conversion of
964,290 shares (including accrued dividends) of Series B Preferred
stock into 267,859 shares of Class A Common stock
(7) Sale of 50,000
shares of Series C Preferred stock
(8) Sale of
1,000,000 shares of newly registered Class A Common stock at $4.00
per share.
(9) Sale of 20,200
previously registered Class A Common Shares for cash
(10) Acquisition
of stock and membership interests of entities with non-operating
assets consisting of surface and mineral ownership and other
related agreements. The transaction is expected to close
simultaneous with this offering. Consideration is in the form of
2,000,000 Class A common shares as well as $500,000 cash and a
promissory note totaling $2,000,000 with a maturity of less than 1
year. The note is secured by a land contract on the acquired
property. Further described in the discussion of subsequent events
included in Note 8 to our consolidated interim financial statements
appearing on page F-12. Management is still gathering the
information needed to complete the allocation of the purchase price
to the assets and acquired liabilities assumed
(11) Issuance of
9,000 of previously registered Class A Common Shares
(12) Cashless
exercise of options into 668,847 Class A Common
Shares
(13) Issuance of
150,000 Class A Common Shares for services.
(14) Issuance of
500 Class A Common Shares for the settlement of $3,000 of trade
payables.
(15)
Loan agreement with
an unrelated customer for an amount up to $6,500,000 of which
$3,000,000 was advanced on December 31, 2018 and $2,000,000 was
advanced on February 1, 2019. The remaining balance of $1,500,000
remains available for draw on-demand by the company. The proceeds
of the loan are used for expansion of certain mines at the
company’s McCoy Elkhorn subsidiary and do not replace any of
the use of proceeds expected from this offering, and the company is
not required to repay any of this loan from the proceeds of this
offering. The promissory agreement carries interest at 5% annual
interest rate and payments of principal and interest shall be
repaid at a per-ton rate of coal sold to the lender. The
outstanding amount of the note has a maturity of April 1,
2020. The note is secured by the assets of the
Company
INFORMATION
WITH RESPECT TO THE REGISTRANT
Description
of Business, Principal Products, Services
We are a low-cost
producer of primarily high-quality, metallurgical coal in eastern
Kentucky. We began our Company on October 2, 2013 and changed our
name from Natural Gas Fueling and Conversion Inc. to NGFC Equities,
Inc. on February 25, 2015, and then changed our name from NGFC
Equities, Inc. to American Resources Corporation on February 17,
2017. On January 5, 2017, ARC executed a Share Exchange Agreement
between the Company and Quest Energy Inc., a private company
incorporated in the State of Indiana with offices at 9002
Technology Lane, Fishers IN 46038, and due to the fulfillment of
various conditions precedent to closing of the transaction, the
control of the Company was transferred to the Quest Energy
shareholders on February 7, 2017 resulting in Quest Energy becoming
a wholly-owned subsidiary of ARC. Through its wholly-owned
subsidiary Quest Energy, which is an Indiana corporation founded in
June 2015, ARC was able to acquire coal mining and coal processing
operations, substantially all located in eastern Kentucky. A
majority of our domestic and international target customer base
includes blast furnace steel mills and coke plants, as well as
international metallurgical coal consumers, domestic electricity
generation utilities, and other industrial customers.
Pursuant to the
definitions in Paragraph (a) (4) of the Securities and Exchange
Commission’s Industry Guide 7, our company and its business
activities are deemed to be in the exploration stage until mineral
reserves are defined on our properties.
We achieved initial
commercial production of metallurgical coal in September 2016 from
our McCoy Elkhorn Mine #15 and from our McCoy Elkhorn Carnegie 1
Mine in March 2017. In October 2017 we achieved commercial
production of thermal coal from our Deane Mining Access Energy Mine
and from our Deane Mining Razorblade Surface Mine in May 2018. We
believe that we will be able to take advantage of recent increases
in U.S. and global benchmark metallurgical and thermal coal prices
and intend to opportunistically increase the amount of our
projected production that is directed to the export market to
capture favorable differentials between domestic and global
benchmark prices. The Company commenced operations of two out of
four of its internally owned preparation plants in July of 2016
(Bevins #1 and Bevins #2 Prep Plants at McCoy Elkhorn), with a
third preparation plant commencing operation in October 2017 (Mill
Creek Prep Plant at Deane Mining).
Distribution Methods Of The Products and Services
Quest Energy has
six coal mining and processing operating subsidiaries: McCoy
Elkhorn Coal LLC (doing business as McCoy Elkhorn Coal Company,
“McCoy Elkhorn”), Knott County Coal LLC (“Knott
County Coal”), Deane Mining LLC (“Deane Mining”),
Wyoming County Coal LLC (“Wyoming County Coal”), ERC
Mining Indiana Corporation (“ERC”), and Quest
Processing LLC (“Quest Processing”), all of which are
located in eastern Kentucky and West Virginia within the Central
Appalachian coal basin, with the exception of ERC Mining Indiana
Corporation, which is located in southwestern Indiana in the
Illinois coal basin. Below is an organizational and ownership chart
of our Company.
The coal deposits
under control by the Company generally comprise of metallurgical
coal (used for steel making), pulverized coal injections
(“PCI”, used in the steel making process) and high-BTU,
low sulfur, low moisture bituminous coal used for a variety of uses
within several industries, including industrial customers,
specialty products and thermal coal used for electricity
generation.
McCoy Elkhorn Coal LLC
General:
Located primarily
within Pike County, Kentucky, McCoy Elkhorn is currently comprised
of two active mines (Mine #15 and the Carnegie 1 Mine), one mine in
“hot idle” status (the PointRock Mine), two coal
preparation facilities (Bevins #1 and Bevins #2), and other mines
in various stages of development or reclamation. McCoy Elkhorn
sells its coal to a variety of customers, both domestically and
internationally, primarily to the steel making industry as a
high-vol “B” coal or blended coal. The coal controlled
at McCoy Elkhorn (along with our other subsidiaries) has not been
classified as either “proven” or “probable”
as defined in the United States Securities and Exchange Commission
Industry Guide 7, and as a result, do not have any
“proven” or “probable” reserves under such
definition and are classified as an “Exploration Stage”
pursuant to Industry Guide 7.
Mines:
Mine #15 is an
underground mine in the Millard (also known as Glamorgan) coal seam
and located near Meta, Kentucky. Mine #15 is mined via
room-and-pillar mining methods using continuous miners, and the
coal is belted directly from the stockpile to McCoy Elkhorn’s
coal preparation facility. Mine #15 is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine. The coal from Mine #15 is
stockpiled at the mine site and belted directly to the
Company’s nearby coal preparation facilities. Production at
Mine #15 re-commenced under Quest Energy’s ownership in
September 2016.
Mine #15 has the
estimated capacity to produce up to approximately 40,000 tons per
month of coal. The Company acquired Mine #15 as an idled mine, and
since acquisition, the primary work completed at Mine #15 by the
Company includes changing working sections within the underground
mine, air ventilation enhancements primarily through brattice work
and the use of overcasts and installing underground mining
infrastructure as the mine advances due to coal extraction. In
2017, Mine #15 produced approximately
247,234 tons and sold the coal at an average price
of $67.23 per ton. In 2016, Mine #15 started production and
produced approximately 62,941 tons and sold the coal at an average
price of $82.45 per ton. During 2017 and 2016, 100% and 100%,
respectively, of the coal extracted from Mine #15 was high-vol
“B” metallurgical coal quality, of which 71% and 100%,
respectively, was sold into the metallurgical market, with the
balance sold in the thermal market.
The Carnegie 1 Mine
is an underground mine in the Alma and Upper Alma coal seams and
located near Kimper, Kentucky. In 2011, coal production from the
Carnegie 1 Mine in the Alma coal seam commenced and then
subsequently the mine was idled. Production at the Carnegie 1 Mine
was reinitiated in early 2017 under Quest Energy’s ownership
and is currently being mined via room-and-pillar mining methods
utilizing a continuous miner. The coal is stockpiled on-site and
trucked approximately 7 miles to McCoy Elkhorn’s preparation
facilities. The Carnegie 1 Mine is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine.
The Carnegie 1. Mine has the estimated capacity to
produce up to approximately 10,000 tons per month of coal. The
Company acquired the Carnegie Mine as an idled mine, and since
acquisition, the primary work completed at the Carnegie Mine by the
Company includes mine rehabilitation work in preparation for
production, changing working sections within the underground mine,
air ventilation enhancements primarily through brattice work, and
installing underground mining infrastructure as the mine advances
due to coal extraction. In 2017, the first year of the mine’s
production, the Carnegie 1 Mine produced approximately 11,974 tons
and sold the coal at an average price of $59.78. During 2017, 100%
of the coal extracted from the Carnegie Mine was high-vol
“B” metallurgical coal quality, of which 51% was sold
into the metallurgical market, with the balance sold in the thermal
market.
The PointRock Mine
is surface mine in a variety of coal seams, primarily in the Pond
Creek, the Lower Alma, the Upper Alma, and Cedar Grove coal seams
and located near Phelps, Kentucky. Coal has been produced from the
PointRock Mine in the past under different operators. Quest Energy
acquired the PointRock Mine in April 2018 and is currently
performing reclamation work in advance of re-starting production,
which is expected in later 2018. PointRock is anticipated to be
mined via contour, auger, and highwall mining techniques. The coal
will be stockpiled on-site and trucked approximately 23 miles to
McCoy Elkhorn’s preparation facilities. The PointRock Mine is
anticipated to be operated as a modified contractor mine, whereby
McCoy Elkhorn provides certain mining infrastructure and equipment
for the operations and pays a contractor a fixed per-ton fee for
managing the workforce, procuring other equipment and supplies, and
maintaining the equipment and infrastructure in proper working
order.
The PointRock Mine has the
estimated capacity to produce up to approximately 15,000 tons per
month of coal and has not yet started coal production under McCoy
Elkhorn’s ownership.
Processing & Transportation:
The Bevins #1
Preparation Plant is an 800 ton-per hour coal preparation facility
located near Meta, Kentucky, across the road from Mine #15. Bevins
#1 has raw coal stockpile storage of approximately 25,000 tons and
clean coal stockpile storage of 100,000 tons of coal. The Bevins #1
facility has a fine coal circuit and a stoker circuit that allows
for enhance coal recovery and various coal sizing options depending
on the needs of the customer.
The Company
acquired the Bevins Preparation Plants as idled facilities, and
since acquisition, the primary work completed at the Bevins
Preparation Plants by the Company includes rehabilitating the
plants’ warehouse and replacing belt
lines.
The Bevins #2
Preparation Plant is on the same permit site as Bevins #1 and is a
500 ton-per-hour processing facility with fine coal recovery and a
stoker circuit for coal sizing options. Bevins #2 has raw coal
stockpile storage of 25,000 tons of coal and a clean coal stockpile
storage of 45,000 tons of coal. We are currently utilizing less
than 10% of the available processing capacity of Bevins #1 and
Bevins #2.
Both Bevins #1 and
Bevins #2 have a batch-weight loadout and rail spur for loading
coal into trains for rail shipments. The spur has storage for 110
rail cars and is serviced by CSX Transportation and is located on
CSX’s Big Sandy, Coal Run Subdivision. Both Bevins #1 and
Bevins #2 have coarse refuse and slurry impoundments called Big
Groundhog and Lick Branch. While the Big Groundhog impoundment is
nearing the end of its useful life, the Lick Branch impoundment has
significant operating life and will be able to provide for coarse
refuse and slurry storage for the foreseeable future at Bevins #1
and Bevins #2. Coarse refuse from Bevins #1 and Bevins #2 is belted
to the impoundments. Both Bevins #1 and Bevins #2 are facilities
owned by McCoy Elkhorn, subject to certain restrictions present in
the agreement between McCoy Elkhorn and the surface land
owner.
Both Bevins #1 and
Bevins #2, as well as the rail loadout, are operational and any
work required on any of the plants or loadouts would be routine
maintenance. The allocated cost of for this property at McCoy
Elkhorn Coal paid by the company is $58,681.
Due to additional
coal processing storage capacity at Bevins #1 and Bevins #2
Preparation Plants, McCoy Elkhorn processes, stores, and loads coal
for other regional coal producers for an agreed-to
fee.
Additional Permits:
In addition to the
above mines, McCoy Elkhorn holds 11 additional coal mining permits
that are idled operations or in various stages of reclamation. For
the idled coal mining operations, McCoy Elkhorn will determine
which coal mines to bring back into production, if any, as the coal
market changes, and there are currently no other idled mines within
McCoy Elkhorn that are slated to go into production in the
foreseeable future. Any idled mines that are brought into
production would require significant upfront capital investment,
and there is no assurance of the feasibility of any such new
operations.
Below
is a map showing the material properties at McCoy
Elkhorn:
Knott County Coal LLC
General:
Located primarily
within Knott County, Kentucky (but with additional idled permits in
Leslie County, Perry County, and Breathitt County, Kentucky), Knott
County Coal is comprised of one active mine (the Wayland Surface
Mine) and 22 idled mining permits (or permits in reclamation),
including the permits associated with the idled Supreme Energy
Preparation Plant. The idled mining permits are either in various
stages of planning, idle status or reclamation. The idled mines at
Knott County Coal are primarily underground mines that utilize
room-and-pillar mining. The coal controlled at Knott County Coal
(along with our other subsidiaries) has not been classified as
either “proven” or “probable” as defined in
the United States Securities and Exchange Commission Industry Guide
7, and as a result, do not have any “proven” or
“probable” reserves under such definition and are
classified as an “Exploration Stage” pursuant to
Industry Guide 7.
Mines:
The Wayland Surface
Mine is a surface waste-rock reprocessing mine in a variety of coal
seams (primarily the Upper Elkhorn 1 coal seam) located near
Wayland, Kentucky. The Wayland Surface Mine is mined via area
mining through the reprocessing of previously processed coal, and
the coal is trucked approximately 22 miles to the Mill Creek
Preparation Plant at Deane Mining, where it is processed and sold.
The Wayland Surface Mine is currently a “company run”
mine, whereby the Company manages the workforce at the mine and
pays all expenses of the mine. During June 2018, production at the
Wayland Surface Mine commenced under Quest Energy’s
ownership. The associated permit was purchased during May
2018.
Since acquisition,
the primary work completed at the Wayland Surface Mine has been
removing overburden to access the coal.
The Wayland Surface Mine has the estimated
capacity to produce up to approximately 15,000 tons per month of
coal and started production in mid-2018 with nominal coal extracted
and sold as thermal coal.
Other potential
customers of Knott County Coal include industrial customers,
specialty customers and utilities for electricity generation,
although no definitive sales have been identified yet.
Processing & Transportation:
The idled Supreme
Energy Preparation Plant is a 400 ton-per-hour coal preparation
facility with a fine coal circuit located in Kite, Kentucky. The
Bates Branch rail loadout associated with the Supreme Energy
Preparation Plant is a batch-weigh rail loadout with 220 rail car
storage capacity and serviced by CSX Transportation in their Big
Sandy rate district. The coarse refuse is trucked to the Kings
Branch impoundment, which is approximately one mile from the
Supreme Energy facility. The slurry from coal processing is piped
from the Supreme Energy facility to the Kings Branch
impoundment.
The Supreme Energy
Preparation Plant is owned by Knott County Coal, subject to certain
restrictions present in the agreement between Knott County Coal and
the surface land owner, Land Resources & Royalties
LLC.
The Company
acquired the Supreme Energy Preparation Plants as an idled
facility, and since acquisition, no work has been performed at the
facility other than minor maintenance. Both the Supreme Energy
Preparation Plant and the rail loadout are idled and would require
an undetermined amount of work and capital to bring them into
operation. The allocated cost of for the property at Knott County
Coal paid by the company is $200,236.
Additional Permits:
In addition to the
above mines, Knott County Coal holds 20 additional coal mining
permits that are in development, idled or in various stages of
reclamation. Any idled mines that are brought into production would
require significant upfront capital investment and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the location of the idled Supreme Energy Prep
Plant, Raven Prep Plant, Loadouts, and plant impoundments at Knott
County Coal:
Deane Mining LLC
General:
Located within
Letcher County and Knott County, Kentucky, Deane Mining LLC is
comprised of one active underground coal mine (the Access Energy
Mine), one active surface mine (Razorblade Surface) and one active
coal preparation facility called Mill Creek Preparation Plant,
along with 12 additional idled mining permits (or permits in
reclamation). The idled mining permits are either in various stages
of development, reclamation or being maintained as idled, pending
any changes to the coal market that may warrant re-starting
production. The coal controlled at Deane Mining (along with our
other subsidiaries) has not been classified as either
“proven” or “probable” as defined in the
United States Securities and Exchange Commission Industry Guide 7,
and as a result, do not have any “proven” or
“probable” reserves under such definition and are
classified as an “Exploration Stage” pursuant to
Industry Guide 7.
Mines:
Access Energy is a
deep mine in the Elkhorn 3 coal seam and located in Deane,
Kentucky. Access Energy is mined via room-and-pillar mining methods
using continuous miners, and the coal is belted directly from the
mine to the raw coal stockpile at the Mill Creek Preparation Plant
across the road from Access Energy. Similar to McCoy
Elkhorn’s Carnegie 1 Mine, Access Energy is currently run as
a modified contractor mine, whereby Deane Mining provides the
mining infrastructure and equipment for the operations and pays the
contractor a fixed per-ton fee for managing the workforce,
procuring the supplies, and maintaining the equipment and
infrastructure in proper working order.
The Company
acquired Access Energy as an idled mine, and since acquisition, the
primary work completed at Access Energy by the Company includes
mine rehabilitation work in preparation for production, air
ventilation enhancements primarily through brattice work, and
installing underground mining infrastructure as the mine advances
due to coal extraction.
Access Energy
has the estimated capacity to produce up to approximately 20,000
tons per month of coal. In 2017, the first year of the mine’s
production, Access Energy produced approximately 43,286 tons and
sold the coal at an average price of $58.67 per ton. 100% of the
coal sold from Access Energy in 2017 was sold as thermal
coal.
Razorblade Surface
is a surface mine currently mining the Hazard 4 and Hazard 4 Rider
coal seams and located in Deane, Kentucky. Razorblade Surface is
mined via contour, auger, and highwall mining methods, and the coal
is stockpiled on site where it trucked to the Mill Creek
Preparation Plant approximately one mile away for processing.
Razorblade Surface is run as both a contractor mine and as a
“company run” mine for coal extraction and began
extracting coal in spring of 2018. Coal produced from Razorblade
Surface will be trucked approximately one mile to the Mill Creek
Preparation Plant. The Company acquired the Razorblade Surface mine
as a new, undisturbed mine, and since acquisition, the primary work
completed at Razorblade Surface has been some initial engineering
work and removing overburden to access the coal.
Razorblade Surface mine has the estimated capacity
to produce up to approximately 8,000 tons per month of coal and
started production in mid-2018 with nominal coal extracted and sold
as thermal coal.
The coal production
from Deane Mining LLC is currently sold a utility located in
southeast United States under a contract that expires December
2018, along with coal sold in the spot market. Deane Mining is in
discussions with various customers to sell additional production
from Access Energy, Razorblade, and Wayland Surface mines, combined
with other potential regional coal production, as pulverized coal
injection (PCI) to steel mills, industrial coal, and thermal coal
to other utilities for electricity generation.
Processing & Transportation:
The Mill Creek
Preparation Plant is an 800 ton-per-hour coal preparation facility
located in Deane, Kentucky. The associated RapidLoader rail loadout
is a batch-weight rail loadout with 110 car storage capacity and
services by CSX Transportation in their Big Sandy and Elkhorn rate
districts. The Mill Creek Preparation Plant is owned by Deane
Mining, subject to certain restrictions present in the agreement
between Deane Mining and the surface land owner, Land Resources
& Royalties LLC.
We
are currently utilizing less than 10% of the available processing
capacity of the Mill Creek Preparation Plant.
Both the Mill Creek
Preparation Plant and the rail loadout are operational, and any
work required on any of the plant or loadouts would be routine
maintenance. The allocated cost of for the property at Deane Mining
paid by the company is $2,655,505.
Additional Permits:
In addition to the
above mines and preparation facility, Deane Mining holds 12
additional coal mining permits that are in development, idled or in
various stages of reclamation. Any idled mines that are brought
into production would require significant upfront capital
investment and there is no assurance of the feasibility of any such
new operations.
Below
is a map showing the material properties at Deane
Mining:
Wyoming County Coal LLC
General:
Located within
Wyoming County, West Virginia, Wyoming County Coal is comprised of
two idled underground mining permits and the three permits
associated with the idled Pioneer Preparation Plant, the Hatcher
rail loadout, and Simmons Fork Refuse Impoundment. The two idled
mining permits are undisturbed underground mines that are
anticipated to utilize room-and-pillar mining. The coal controlled
at Wyoming County Coal (along with our other subsidiaries) has not
been classified as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7.
Mines:
The mining permits
held by Wyoming County Coal are in various stages of planning with
no mines currently in production.
Potential customers
of Wyoming County Coal would include steel mills in the United
States or international marketplace although no definitive sales
have been identified yet.
Processing & Transportation:
The idled Pioneer
Preparation Plant is a 350 ton-per-hour coal preparation facility
located near Oceana, West Virginia. The Hatcher rail loadout
associated with the Pioneer Preparation Plant is a rail loadout
serviced by Norfolk Southern Corporation. The refuse from the
preparation facility is trucked to the Simmons Fork Refuse
Impoundment, which is approximately 1.0 mile from the Pioneer
Preparation facility. The preparation plant utilizes a belt press
technology which eliminates the need for pumping slurry into a
slurry pond for storage within an impoundment.
The Company is in
the initial planning phase of getting estimates on the cost to
upgrade the preparation facility to a modern 350 ton per hour
preparation facility, although no cost estimates have yet been
received. The Company is also in the initial planning phase of
getting estimates on the cost and timing of upgrading the rail load
out facility to a modern batch weight load out system, although no
cost estimates have yet been received.
The Company
acquired the Pioneer Preparation Plants as an idled facility, and
since acquisition, no work has been performed at the facility. Both
the Pioneer Preparation Plant and the rail loadout are idled and
would require an undetermined amount of work and capital to bring
them into operation, which is currently in the initial phases of
planning and no cost estimates have been received. The allocated
cost for the property at Wyoming County Coal will pay by the
Company is $22,926,101 of which $22,326,101 has been
paid.
Permits:
Wyoming County Coal
holds two coal mining permits that are in the initial planning
phase and three permits associated with the idled Pioneer
Preparation Plant, the Hatcher rail loadout, and Simmons Fork
Refuse Impoundment. Any mine that is brought into production would
require significant upfront capital investment and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the location of the idled Pioneer Prep Plant,
Hatcher rail Loadout, and Simmons Fork Refuse Impoundment at
Wyoming County Coal:
Quest Processing LLC
Quest
Energy’s wholly-owned subsidiary, Quest Processing LLC,
manages the assets, operations, and personnel of the certain coal
processing and transportation facilities of Quest Energy’s
various other subsidiaries, namely the Supreme Energy Preparation
Facility (of Knott County Coal LLC), the Raven Preparation Facility
(of Knott County Coal LLC), and the Mill Creek Preparation Facility
(of Deane Mining LLC). Quest Processing LLC was the recipient of a
New Markets Tax Credit loan that allowed for the payment of certain
expenses of these preparation facilities. As part of that financing
transaction, Quest Energy loaned Quest MGMT LLC, an entity owned by
members of Quest Energy, Inc.’s management, $4,120,000 to
facilitate the New Markets Tax Credit loan, of which is all
outstanding as of December 31, 2017.
ERC Mining Indiana Corporation (the Gold Star Mine)
General:
Quest Energy,
through its wholly-owned subsidiary, ERC Mining Indiana Corporation
(“ERC”), has a management agreement with an unrelated
entity, LC Energy Operations LLC, to manage an underground coal
mine, clean coal processing facility and rail loadout located in
Greene County, Indiana (referred to as the “Gold Star
Mine”) for a monthly cash and per-ton fee. As part of that
management agreement, ERC manages the operations of the Gold Star
Mine, is the holder of the mining permit, provides the reclamation
bonding, is the owner of some of the equipment located at the Gold
Star Mine, and provides the employment for the personnel located at
the Gold Star Mine. LC Energy Operations LLC owns the remaining
equipment and infrastructure, is the lessee of the mineral (and the
owner of some of the mineral and surface) and provides funding for
the operations. Currently the coal mining operations at the Gold
Star Mine are idled. Any cash flow from the operations of the Gold
Star Mine for the foreseeable future will go to LC Energy
Operations LLC to satisfy prior debt advanced to the Gold Star
Mine.
Mine:
The Gold Star Mine,
which is currently the only coal mining operation within ERC Mining
Indiana Corporation (a wholly-owned subsidiary of Quest Energy
Inc.). The Gold Star Mine is an underground mine located in the
Indiana IV (aka Survant) coal seam, which is a low sulfur coal
relative to other coal mining operations in the region. With a
sulfur ranging from 1.0% to 1.5%, the coal has historically been
sold to local power generating facilities that lack more advanced
sulfur capture technologies, as well as to other regional coal
producers to blend their sulfur lower to sell their coal at a
premium.
Processing & Transportation:
Coal extracted from
the Gold Star Mine is belted directly to the preparation facility
on site. The coal can either be loaded to rail or transported via
truck. The rail spur at Gold Star is serviced by the Indiana Rail
Road Company and holds up to 116 rail cars.
The Gold Star Mine
is currently idled and ARC management is pursuing potential sales
orders for the coal. Any re-initiation of coal mining operations at
the Gold Star Mine would require capital investment.
In addition to the
current owned permits and controlled coal deposits described within
the above operating subsidiaries, ARC may, from time to time, and
frequently, acquire additional coal mining permits or coal
deposits, or dispose of coal mining permits or coal deposits
currently held by ARC, as management of the Company deems
appropriate.
Status
of any publicly announced new products or services
McCoy Elkhorn Coal LLC:
We are currently
producing at Mine #15 and Carnegie 1 Mine at McCoy Elkhorn Coal and
both of our preparation plants (Bevins 1 and Bevins 2) are
operational, as is the rail loadout facility. Our PointRock surface
mine is currently idled as we interview contractors for future
production. We continue to develop our Carnegie 2 deep mine in the
Alma coal seam and are working on other permit acquisition and/or
development activities in the area of McCoy Elkhorn.
Knott County Coal LLC:
We are currently
producing at our Wayland Surface mine. The coal from this mine
processed and loaded to rail at the Mill Creek Preparation Plant
and RapidLoader loadout of Deane Mining LLC. We continue permitting
and development work on several other permits, including the Topper
mine.
While Knott County
Coal owns the Supreme Energy Preparation Plant and Bates Branch
rail loadout, those facilities are currently idled and would
require capital to rehabilitate to operational
condition.
Deane Mining LLC:
We are currently
producing at the Access Energy Mine, underground room and pillar
operations, the Razorblade Surface mine, and our Mill Creek
Preparation Plant is operational, as is the rail loadout facility.
We continue to analyze additional coal mines that could be brought
into production, assuming we achieve coal sales for such
operations.
Wyoming County Coal LLC:
We currently do not
have any operations at Wyoming County Coal LLC and do not
anticipate having operations for the foreseeable future. While
Wyoming County Coal LLC owns a preparation plan and rail loadout
those facilities are currently idled and would require capital to
rehabilitate to operational condition.
ERC Mining Indiana Corporation:
We have completed
the rehabilitation of the Gold Star underground mine at ERC Mining
Indiana Corp. and are working to obtain sales for this mine,
although no time frame for production is currently anticipated. The
coal will be belted directly to the on-site processing facility for
coal processing and then anticipated to be loaded to rail or truck,
depending on the customer’s requirements. ERC Mining Indiana
Corp. has a management agreement with an unrelated entity, LC
Energy Operations LLC to manage an underground coal mine, clean
coal processing facility and rail loadout for a monthly cash and
per-ton fee. As part of that management agreement, LC Energy
Operations LLC is required to provide funding for the operations at
the Gold Star mine, and any cash flow from the operations of the
Gold Star Mine for the foreseeable future will go to LC Energy
Operations LLC to satisfy prior debt advanced to the Gold Star
Mine.
Competitive
Business Conditions And The Smaller Reporting Company’s
Competitive Position In The Industry And Methods Of
Competition
The coal industry
is intensely competitive. The most important factors on which the
Company competes are coal quality, delivered costs to the customer
and reliability of supply. Our principal domestic competitors will
include Alpha Natural Resources, Ramaco Resources, Blackhawk
Mining, Coronado Coal, Arch Coal, Contura Energy, Warrior Met Coal,
Alliance Resource Partners, and ERP Compliance Fuels. Many of these
coal producers may have greater financial resources and larger coal
deposit bases than we do. We also compete in international markets
directly with domestic companies and with companies that produce
coal from one or more foreign countries, such as Australia,
Colombia, Indonesia and South Africa.
Coal prices differ
substantially by region and are impacted by many factors including
the overall economy, demand for steel, demand for electricity,
location, market, quality and type of coal, mine operation costs
and the cost of customer alternatives. The major factors
influencing our business are the global economy, the demand for
steel, and the amount of coal being consumed for electricity
generation.
Our initial
marketing strategy is to focus on U.S.- and internationally-based
blast furnace still mills and coke plants, and other customers
where our coal is in demand. Our current sales are primarily
conducted through the use of intermediaries and brokers who have
established relationships with our potential end-customers,
although we may develop and employ an in-house marketing team in
the future.
The Company sells
its coal to domestic and international customers, some which blend
the Company’s coal at east coast ports with other qualities
of coal for export. Coal sales currently come from the
Company’s McCoy Elkhorn’s Mine #15, McCoy
Elkhorn’s Carnegie Mine, and Deane Mining’s Access
Energy Mine. The Company may, at times, purchase coal from other
regional producers to sell on its contracts.
Coal sales at the
Company is primarily outsource to third party intermediaries who
act on the Company’s behalf to source potential coal sales
and contracts. The third-party intermediaries have no ability to
bind the Company to any contracts, and all coal sales are approved
by management of the Company.
Sources
And Availability Of Raw Materials And The Names Of Principal
Suppliers
Supplies used in
our business include petroleum-based fuels, explosives, tires,
conveyance structure, roof support supplies, ventilation supplies,
lubricants and other raw materials as well as spare parts and other
consumables used in the mining process. We use third-party
suppliers for a significant portion of our equipment rebuilds and
repairs, drilling services and construction. We also may utilize
contract miners at our various operations. We believe adequate
substitute suppliers and contractors are available and we are not
dependent on any one supplier or contractor. We continually seek to
develop relationships with suppliers and contractors that focus on
reducing our costs while improving quality and service. Principal
suppliers for our business include Drill Steel, Banks Miller,
Mineral Labs, Jones Oil, and Maggard Sales & Service, among
other regional and national suppliers of the Company.
Dependence
On One Or A Few Customers
As of December 31,
2017, and 2016 63% and 78% of revenue and 99% and 97% of
outstanding accounts receivable came from three and two customers,
respectively. As of September 30, 2018, and 2017 76% and 100% of
outstanding accounts receivable came from three and one customers,
respectively. As of September 30, 2018, and 2017 85% and 72% of
revenue came from three and four customers, respectively. Through
our network of intermediaries, coal consolidators and end users,
interested potential customers outpace our ability to fulfill
potential orders. The Company’s desire is to expand the
customer base and those who have purchased our
product.
Patents,
Trademarks, Licenses, Franchises, Concessions, Royalty Agreements
Or Labor Contracts, Including Duration
We do not have any
registered trademarks or trade names for our products, services or
subsidiaries, and we do not believe that any trademark or trade
name is material to our business. However, the names of the seams
in which we have coal deposits, and attributes thereof, are widely
recognized in the coal markets. We are not a party to any union or
collective bargaining agreements.
Coal mining and
processing involves the extraction of coal (mineral) and the use of
surface property incidental to such extraction and processing. All
the material mineral and surface related to the Company’s
coal mining operations is leased from various mineral and surface
owners (the “Leases”). The Company’s operating
subsidiaries, collectively, are parties to approximately 200
various Leases and other agreements required for the
Company’s coal mining and processing operations. The Leases
are with a variety of Lessors, from individuals to professional
land management firms such as the Elk Horn Coal Company LLC and
Alma Land Company. In some instances, the Company has leases with
Land Resources & Royalties LLC (LRR), a professional leasing
firm that is an entity wholly owned by Quest MGMT LLC, an entity
owned by members of Quest Energy Inc.’s
management.
Need
For Any Government Approval Of Principal Products Or
Services
Prior to conducting
any mining activities, we first need approval from various local
and federal agencies. From our various acquisitions in 2015 and
2016, we are the holder of 56 coal mining permits issued by
Kentucky Department of Natural Resources and one coal mining permit
issued by Indiana Department of Natural Resources. The coal mining
permits we hold are primarily located in eastern Kentucky, in the
counties of Pike, Knott, Letcher, Perry, Floyd, Breathitt, and
Leslie.
Effect
Of Existing Or Probable Governmental Regulations On The
Business
Our operations are
subject to federal, state, and local laws and regulations, such as
those relating to matters such as permitting and licensing,
employee health and safety, reclamation and restoration of mining
properties, water discharges, air emissions, plant and wildlife
protection, the storage, treatment and disposal of wastes,
remediation of contaminants, surface subsidence from underground
mining and the effects of mining on surface water and groundwater
conditions. In addition, we may become subject to additional costs
for benefits for current and retired coal miners. These
environmental laws and regulations include, but are not limited to,
SMCRA with respect to coal mining activities and ancillary
activities; the CAA with respect to air emissions; the CWA with
respect to water discharges and the permitting of key operational
infrastructure such as impoundments; RCRA with respect to solid and
hazardous waste management and disposal, as well as the regulation
of underground storage tanks; the Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA” or
“Superfund”) with respect to releases, threatened
releases and remediation of hazardous substances; the Endangered
Species Act of 1973 (“ESA”) with respect to threatened
and endangered species; and the National Environmental Policy Act
of 1969 (“NEPA”) with respect to the evaluation of
environmental impacts related to any federally issued permit or
license. Many of these federal laws have state and local
counterparts which also impose requirements and potential liability
on our operations.
Compliance with
these laws and regulations may be costly and time-consuming and may
delay commencement, continuation or expansion of exploration or
production at our facilities. They may also depress demand for our
products by imposing more stringent requirements and limits on our
customers’ operations. Moreover, these laws are constantly
evolving and are becoming increasingly complex and stringent over
time. These laws and regulations, particularly new legislative or
administrative proposals, or judicial interpretations of existing
laws and regulations related to the protection of the environment
could result in substantially increased capital, operating and
compliance costs. Individually and collectively, these developments
could have a material adverse effect on our operations directly
and/or indirectly, through our customers’ inability to use
our products.
Certain
implementing regulations for these environmental laws are
undergoing revision or have not yet been promulgated. As a result,
we cannot always determine the ultimate impact of complying with
existing laws and regulations.
Due in part to
these extensive and comprehensive regulatory requirements and ever-
changing interpretations of these requirements, violations of these
laws can occur from time to time in our industry and also in our
operations. Expenditures relating to environmental compliance are a
major cost consideration for our operations and safety and
compliance is a significant factor in mine design, both to meet
regulatory requirements and to minimize long-term environmental
liabilities. To the extent that these expenditures, as with all
costs, are not ultimately reflected in the prices of our products
and services, operating results will be reduced.
In addition, our
customers are subject to extensive regulation regarding the
environmental impacts associated with the combustion or other use
of coal, which may affect demand for our coal. Changes in
applicable laws or the adoption of new laws relating to energy
production, GHG emissions and other emissions from use of coal
products may cause coal to become a less attractive source of
energy, which may adversely affect our mining operations, the cost
structure and, the demand for coal. For example, if the emissions
rates or caps adopted under the CPP on GHGs are upheld or a tax on
carbon is imposed, the market share of coal as fuel used to
generate electricity would be expected to decrease.
We believe that our
competitors with operations in the United States are confronted by
substantially similar conditions. However, foreign producers and
operators may not be subject to similar requirements and may not be
required to undertake equivalent costs in or be subject to similar
limitations on their operations. As a result, the costs and
operating restrictions necessary for compliance with United States
environmental laws and regulations may have an adverse effect on
our competitive position with regard to those foreign competitors.
The specific impact on each competitor may vary depending on a
number of factors, including the age and location of its operating
facilities, applicable legislation and its production
methods.
Surface Mining Control and Reclamation Act
SMCRA establishes
operational, reclamation and closure standards for our mining
operations and requires that comprehensive environmental protection
and reclamation standards be met during the course of and following
completion of mining activities. SMCRA also stipulates compliance
with many other major environmental statutes, including the CAA,
the CWA, the ESA, RCRA and CERCLA. Permits for all mining
operations must be obtained from the United States Office of
Surface Mining (“OSM”) or, where state regulatory
agencies have adopted federally approved state programs under
SMCRA, the appropriate state regulatory authority. Our operations
are located in states which have achieved primary jurisdiction for
enforcement of SMCRA through approved state programs.
SMCRA imposes a
complex set of requirements covering all facets of coal mining.
SMCRA regulations govern, among other things, coal prospecting,
mine plan development, topsoil or growth medium removal and
replacement, disposal of excess spoil and coal refuse, protection
of the hydrologic balance, and suitable post mining land
uses.
From time to time,
OSM will also update its mining regulations under SMCRA. For
example, in December 2016, OSM finalized a new version of the
Stream Protection Rule which became effective in January 2017. The
rule would have impacted both surface and underground mining
operations, as it would have imposed stricter guidelines on
conducting coal mining operations, and would have required more
extensive baseline data on hydrology, geology and aquatic biology
in permit applications. The rule also required the collection of
increased pre-mining data about the site of the proposed mining
operation and adjacent areas to establish a baseline for evaluation
of the impacts of mining and the effectiveness of reclamation
associated with returning streams to pre-mining conditions.
However, in February 2017, both the House and Senate passed a
resolution disapproving of the Stream Protection Rule pursuant to
the Congressional Review Act (“CRA”). President Trump
signed the resolution on February 16, 2017 and, pursuant to the
CRA, the Stream Protection Rule “shall have no force or
effect” and cannot be replaced by a similar rule absent
future legislation. On November 17, 2017, OSMRE published a Federal
Register notice that removed the text of the Stream Protection Rule
from the Code of Federal Regulations. Whether Congress will enact
future legislation to require a new Stream Protection Rule remains
uncertain. The existing rules, or other new SMCRA regulations,
could result in additional material costs, obligations and
restrictions upon our operations.
Abandoned Mine Lands Fund
SMCRA also imposes
a reclamation fee on all current mining operations, the proceeds of
which are deposited in the AML Fund, which is used to restore
unreclaimed and abandoned mine lands mined before 1977. The current
per ton fee is $0.280 per ton for surface mined coal and $0.120 per
ton for underground mined coal. These fees are currently scheduled
to be in effect until September 30, 2021.
Mining Permits and Approvals
Numerous
governmental permits and approvals are required for mining
operations. We are required to prepare and present to federal,
state, and local authorities data detailing the effect or impact
that any proposed exploration project for production of coal may
have upon the environment, the public and our employees. The
permitting rules, and the interpretations of these rules, are
complex, change frequently, and may be subject to discretionary
interpretations by regulators. The requirements imposed by these
permits and associated regulations can be costly and time-consuming
and may delay commencement or continuation of exploration,
production or expansion at our operations. The governing laws,
rules, and regulations authorize substantial fines and penalties,
including revocation or suspension of mining permits under some
circumstances. Monetary sanctions and, in certain circumstances,
even criminal sanctions may be imposed for failure to comply with
these laws.
Applications for
permits and permit renewals at our mining operations are also
subject to public comment and potential legal challenges from third
parties seeking to prevent a permit from being issued, or to
overturn the applicable agency’s grant of the permit. Should
our permitting efforts become subject to such challenges, they
could delay commencement, continuation or expansion of our mining
operations. If such comments lead to a formal challenge to the
issuance of these permits, the permits may not be issued in a
timely fashion, may involve requirements which restrict our ability
to conduct our mining operations or to do so profitably, or may not
be issued at all. Any delays, denials, or revocation of these or
other similar permits we need to operate could reduce our
production and materially adversely impact our cash flow and
results of our operations.
In order to obtain
mining permits and approvals from state regulatory authorities,
mine operators must also submit a reclamation plan for restoring
the mined property to its prior condition, productive use or other
permitted condition. The conditions of certain permits also require
that we obtain surface owner consent if the surface estate has been
split from the mineral estate. This requires us to negotiate with
third parties for surface access that overlies coal we acquired or
intend to acquire. These negotiations can be costly and
time-consuming, lasting years in some instances, which can create
additional delays in the permitting process. If we cannot
successfully negotiate for land access, we could be denied a permit
to mine coal we already own.
Finally, we
typically submit necessary mining permit applications several
months, or even years, before we anticipate mining a new area.
However, we cannot control the pace at which the government issues
permits needed for new or ongoing operations. For example, the
process of obtaining CWA permits can be particularly time-consuming
and subject to delays and denials. The EPA also has the authority
to veto permits issued by the Corps under the CWA’s Section
404 program that prohibits the discharge of dredged or fill
material into regulated waters without a permit. Even after we
obtain the permits that we need to operate, many of the permits
must be periodically renewed, or may require modification. There is
some risk that not all existing permits will be approved for
renewal, or that existing permits will be approved for renewal only
upon terms that restrict or limit our operations in ways that may
be material.
Financial Assurance
Federal and state
laws require a mine operator to secure the performance of its
reclamation and lease obligations under SMCRA through the use of
surety bonds or other approved forms of financial security for
payment of certain long-term obligations, including mine closure or
reclamation costs. The changes in the market for coal used to
generate electricity in recent years have led to bankruptcies
involving prominent coal producers. Several of these companies
relied on self-bonding to guarantee their responsibilities under
the SMCRA permits including for reclamation. In response to these
bankruptcies, OSMRE issued a Policy Advisory in August 2016 to
state agencies that are authorized under the SMCRA to implement the
act in their states. Certain states, including Virginia, had
previously announced that it would no longer accept self-bonding to
secure reclamation obligations under the state mining laws. This
Policy Advisory is intended to discourage authorized states from
approving self-bonding arrangements and may lead to increased
demand for other forms of financial assurance, which may strain
capacity for those instruments and increase our costs of obtaining
and maintaining the amounts of financial assurance needed for our
operations. In addition, OSMRE announced in August 2016 that it
would initiate a rulemaking under SMCRA to revise the requirements
for self-bonding. Individually and collectively, these revised
various financial assurance requirements may increase the amount of
financial assurance needed and limit the types of acceptable
instruments, straining the capacity of the surety markets to meet
demand. This may delay the timing for and increase the costs of
obtaining the required financial assurance.
We may use surety
bonds, trusts and letters of credit to provide financial assurance
for certain transactions and business activities. Federal and state
laws require us to obtain surety bonds to secure payment of certain
long-term obligations including mine closure or reclamation costs
and other miscellaneous obligations. The bonds are renewable on a
yearly basis. Surety bond rates have increased in recent years and
the market terms of such bonds have generally become less
favorable. Sureties typically require coal producers to post
collateral, often having a value equal to 40% or more of the face
amount of the bond. As a result, we may be required to provide
collateral, letters of credit or other assurances of payment in
order to obtain the necessary types and amounts of financial
assurance. Under our surety bonding program, we are not currently
required to post any letters of credit or other collateral to
secure the surety bonds; obtaining letters of credit in lieu of
surety bonds could result in a significant cost increase. Moreover,
the need to obtain letters of credit may also reduce amounts that
we can borrow under any senior secured credit facility for other
purposes. If, in the future, we are unable to secure surety bonds
for these obligations, and are forced to secure letters of credit
indefinitely or obtain some other form of financial assurance at
too high of a cost, our profitability may be negatively
affected.
Although our
current bonding capacity approved by our surety, Lexon Insurance
Company, is substantial and enough to cover our current and
anticipated future bonding needs, this amount may increase or
decrease over time. As of December 31, 2018 and September 30, 2018,
we had outstanding surety bonds at all of our mining operations
totaling approximately $26.66 million, respectively. As of December
31, 2017, we had outstanding surety bonds at all of our mining
operations totaling approximately $24.80 million. While we
anticipate reducing the outstanding surety bonds through continued
reclamation of many of our permits, that number may increase should
we acquire additional mining permits, acquire additional mining
operations, expand our mining operations that result in additional
reclamation bonds, or if any of our sites encounters additional
environmental liability that may require additional reclamation
bonding. While we intend to maintain a credit profile that
eliminates the need to post collateral for our surety bonds, our
surety has the right to demand additional collateral at its
discretion.
Mine Safety and Health
The Mine Act and
the MINER Act, and regulations issued under these federal statutes,
impose stringent health and safety standards on mining operations.
The regulations that have been adopted under the Mine Act and the
MINER Act are comprehensive and affect numerous aspects of mining
operations, including training of mine personnel, mining
procedures, roof control, ventilation, blasting, use and
maintenance of mining equipment, dust and noise control,
communications, emergency response procedures, and other matters.
MSHA regularly inspects mines to ensure compliance with regulations
promulgated under the Mine Act and MINER Act.
From time to time
MSHA will also publish new regulations imposing additional
requirements and costs on our operations. For example, MSHA
implemented a rule in August 2014 to lower miners’ exposure
to respirable coal mine dust. The rule requires shift dust to be
monitored and reduces the respirable dust standard for designated
occupants and miners. MSHA also finalized a new rule in January
2015 on proximity detection systems for continuous mining machines,
which requires underground coal mine operators to equip continuous
mining machines, except full-face continuous mining machines, with
proximity detection systems.
Kentucky, West
Virginia, and Virginia all have similar programs for mine safety
and health regulation and enforcement. The various requirements
mandated by federal and state statutes, rules, and regulations
place restrictions on our methods of operation and result in fees
and civil penalties for violations of such requirements or criminal
liability for the knowing violation of such standards,
significantly impacting operating costs and productivity. The
regulations enacted under the Mine Act and MINER Act as well as
under similar state acts are routinely expanded or made more
stringent, raising compliance costs and increasing potential
liability. Our compliance with current or future mine health and
safety regulations could increase our mining costs. At this time,
it is not possible to predict the full effect that new or proposed
statutes, regulations and policies will have on our operating
costs, but any expansion of existing regulations, or making such
regulations more stringent may have a negative impact on the
profitability of our operations. If we were to be found in
violation of mine safety and health regulations, we could face
penalties or restrictions that may materially and adversely impact
our operations, financial results and liquidity.
In addition,
government inspectors have the authority to issue orders to shut
down our operations based on safety considerations under certain
circumstances, such as imminent dangers, accidents, failures to
abate violations, and unwarrantable failures to comply with
mandatory safety standards. If an incident were to occur at one of
our operations, it could be shut down for an extended period of
time, and our reputation with prospective customers could be
materially damaged. Moreover, if one of our operations is issued a
notice of pattern of violations, then MSHA can issue an order
withdrawing the miners from the area affected by any enforcement
action during each subsequent significant and substantial
(“S&S”) citation until the S&S citation or
order is abated. In 2013 MSHA modified the pattern of violations
regulation, allowing, among other things, the use of non-final
citations and orders in determining whether a pattern of violations
exists at a mine.
Workers’ Compensation and Black Lung
We are insured for
workers’ compensation benefits for work related injuries that
occur within our United States operations. We retain exposure for
the first $10,000 per accident for all of our subsidiaries and are
insured above the deductible for statutory limits. Workers’
compensation liabilities, including those related to claims
incurred but not reported, are recorded principally using annual
valuations based on discounted future expected payments using
historical data of the operating subsidiary or combined insurance
industry data when historical data is limited. State workers’
compensation acts typically provide for an exception to an
employer’s immunity from civil lawsuits for workplace
injuries in the case of intentional torts. However,
Kentucky’s workers’ compensation act provides a much
broader exception to workers’ compensation immunity. The
exception allows an injured employee to recover against his or her
employer where he or she can show damages caused by an unsafe
working condition of which the employer was aware that was a
violation of a statute, regulation, rule or consensus industry
standard. These types of lawsuits are not uncommon and could have a
significant impact on our operating costs.
The Patient
Protection and Affordable Care Act includes significant changes to
the federal black lung program including an automatic survivor
benefit paid upon the death of a miner with an awarded black lung
claim and the establishment of a rebuttable presumption with regard
to pneumoconiosis among miners with 15 or more years of coal mine
employment that are totally disabled by a respiratory condition.
These changes could have a material impact on our costs expended in
association with the federal black lung program. In addition to
possibly incurring liability under federal statutes, we may also be
liable under state laws for black lung claims.
Clean Air Act
The CAA and
comparable state laws that regulate air emissions affect coal
mining operations both directly and indirectly. Direct impacts on
coal mining and processing operations include CAA permitting
requirements and emission control requirements relating to air
pollutants, including particulate matter such as fugitive dust. The
CAA indirectly affects coal mining operations by extensively
regulating the emissions of particulate matter, sulfur dioxide,
nitrogen oxides, mercury and other compounds emitted by coal-fired
power plants. In addition to the GHG issues discussed below, the
air emissions programs that may materially and adversely affect our
operations, financial results, liquidity, and demand for our coal,
directly or indirectly, include, but are not limited to, the
following:
●
Clean Air Interstate Rule and Cross-State Air
Pollution Rule
. the Clean Air Interstate Rule
(“CAIR”) calls for power plants in 28 states and the
District of Columbia to reduce emission levels of sulfur dioxide
and nitrogen oxide pursuant to a cap-and-trade program similar to
the system now in effect for acid rain. In June 2011, the EPA
finalized the Cross-State Air Pollution Rule (“CSAPR”),
a replacement rule to CAIR, which requires 28 states in the Midwest
and eastern seaboard of the U.S. to reduce power plant emissions
that cross state lines and contribute to ozone and/or fine particle
pollution in other states. Following litigation over the rule, the
EPA issued an interim final rule reconciling the CSAPR rule with a
court order, which calls for Phase 1 implementation of CSAPR in
2015 and Phase 2 implementation in 2017. In September 2016, the EPA
finalized an update to CSAPR for the 2008 ozone NAAQS by issuing
the final CSAPR Update. Beginning in May 2017, this rule will
reduce summertime (May—September) nitrogen oxide emissions
from power plants in 22 states in the eastern United States. For
states to meet their requirements under CSAPR, a number of
coal-fired electric generating units will likely need to be
retired, rather than retrofitted with the necessary emission
control technologies, reducing demand for thermal coal. However,
the practical impact of CSAPR may be limited because utilities in
the U.S. have continued to take steps to comply with CAIR, which
requires similar power plant emissions reductions, and because
utilities are preparing to comply with the Mercury and Air Toxics
Standards (“MATS”) regulations, which require
overlapping power plant emissions reductions.
●
Acid Rain
. Title IV of the CAA requires
reductions of sulfur dioxide emissions by electric utilities and
applies to all coal-fired power plants generating greater than 25
Megawatts of power. Affected power plants have sought to reduce
sulfur dioxide emissions by switching to lower sulfur fuels,
installing pollution control devices, reducing electricity
generating levels or purchasing or trading sulfur dioxide emission
allowances. These reductions could impact our customers in the
electric generation industry. These requirements are not supplanted
by CSAPR.
●
NAAQS for Criterion Pollutants
. The CAA
requires the EPA to set standards, referred to as NAAQS, for six
common air pollutants: carbon monoxide, nitrogen dioxide, lead,
ozone, particulate matter and sulfur dioxide. Areas that are not in
compliance (referred to as non-attainment areas) with these
standards must take steps to reduce emissions levels. The EPA has
adopted more stringent NAAQS for nitrogen oxide, sulfur dioxide,
particulate matter and ozone. As a result, some states will be
required to amend their existing individual state implementation
plans (“SIPs”) to achieve compliance with the new air
quality standards. Other states will be required to develop new
plans for areas that were previously in “attainment,”
but do not meet the revised standards. For example, in October
2015, the EPA finalized the NAAQS for ozone pollution and reduced
the limit to parts per billion (ppb) from the previous 75 ppb
standard. Under the revised ozone NAAQS, significant additional
emissions control expenditures may be required at coal-fired power
plants. The final rules and new standards may impose additional
emissions control requirements on our customers in the electric
generation, steelmaking, and coke industries. Because coal mining
operations emit particulate matter and sulfur dioxide, our mining
operations could be affected when the new standards are implemented
by the states.
●
Nitrogen Oxide SIP Call
. The nitrogen
oxide SIP Call program was established by the EPA in October 1998
to reduce the transport of nitrogen oxide and ozone on prevailing
winds from the Midwest and South to states in the Northeast, which
alleged that they could not meet federal air quality standards
because of migrating pollution. The program is designed to reduce
nitrogen oxide emissions by one million tons per year in 22 eastern
states and the District of Columbia. As a result of the program,
many power plants have been or will be required to install
additional emission control measures, such as selective catalytic
reduction devices. Installation of additional emission control
measures will make it costlier to operate coal-fired power plants,
potentially making coal a less attractive fuel.
●
Mercury and Hazardous Air Pollutants
.
In February 2012, the EPA formally adopted the MATS rule to
regulate emissions of mercury and other metals, fine particulates,
and acid gases such as hydrogen chloride from coal- and oil-fired
power plants. Following a legal challenge to MATS, the EPA issued a
new determination in April 2016 that it is appropriate and
necessary to regulate these pollutants from power plants. Like
CSAPR, MATS and other similar future regulations could accelerate
the retirement of a significant number of coal-fired power plants.
Such retirements would likely adversely impact our
business.
Global Climate Change
Climate change
continues to attract considerable public and scientific attention.
There is widespread concern about the contributions of human
activity to such changes, especially through the emission of GHGs.
There are three primary sources of GHGs associated with the coal
industry. First, the end use of our coal by our customers in
electricity generation, coke plants, and steelmaking is a source of
GHGs. Second, combustion of fuel by equipment used in coal
production and to transport our coal to our customers is a source
of GHGs. Third, coal mining itself can release methane, which is
considered to be a more potent GHG than CO2, directly into the
atmosphere. These emissions from coal consumption, transportation
and production are subject to pending and proposed regulation as
part of initiatives to address global climate change.
As a result,
numerous proposals have been made and are likely to continue to be
made at the international, national, regional and state levels of
government to monitor and limit emissions of GHGs. Collectively,
these initiatives could result in higher electric costs to our
customers or lower the demand for coal used in electric generation,
which could in turn adversely impact our business.
At present, we are
principally focused on metallurgical coal production, which is not
used in connection with the production of power generation.
However, we may seek to sell greater amounts of our coal into the
power-generation market in the future. The market for our coal may
be adversely impacted if comprehensive legislation or regulations
focusing on GHG emission reductions are adopted, or if our
customers are unable to obtain financing for their operations. At
the international level, the United Nations Framework Convention on
Climate Change released an international climate agreement in
December 2015. The agreement has been ratified by more than 70
countries, and entered into force in November 2016. Although this
agreement does not create any binding obligations for nations to
limit their GHG emissions, it does include pledges to voluntarily
limit or reduce future emissions. In addition, in November 2014,
President Obama announced that the United States would seek to cut
net GHG emissions 26-28 percent below 2005 levels by 2025 in return
for China’s commitment to seek to peak emissions around 2030,
with concurrent increases in renewable energy.
At the federal
level, no comprehensive climate change legislation has been
implemented to date. The EPA has, however, has determined that
emissions of GHGs present an endangerment to public health and the
environment, because emissions of GHGs are, according to the EPA,
contributing to the warming of the earth’s atmosphere and
other climatic changes. Based on these findings, the EPA has begun
adopting and implementing regulations to restrict emissions of GHGs
under existing provisions of the CAA. For example, in August 2015,
EPA finalized the CPP to cut carbon emissions from existing power
plants. The CPP creates individualized emission guidelines for
states to follow and requires each state to develop an
implementation plan to meet the individual state’s specific
targets for reducing GHG emissions. The EPA also proposed a federal
compliance plan to implement the CPP in the event that a state does
not submit an approvable plan to the EPA. In February 2016, the
U.S. Supreme Court granted a stay of the implementation of the CPP.
This stay suspends the rule and will remain in effect until the
completion of the appeals process. The Supreme Court’s stay
only applies to EPA’s regulations for CO2 emissions from
existing power plants and will not affect EPA’s standards for
new power plants. If the CPP is ultimately upheld and depending on
how it is implemented by the states, it could have an adverse
impact on the demand for coal for electric generation.
At the state level,
several states have already adopted measures requiring GHG
emissions to be reduced within state boundaries, including
cap-and-trade programs and the imposition of renewable energy
portfolio standards. Various states and regions have also adopted
GHG initiatives and certain governmental bodies, have imposed, or
are considering the imposition of, fees or taxes based on the
emission of GHGs by certain facilities. A number of states have
also enacted legislative mandates requiring electricity suppliers
to use renewable energy sources to generate a certain percentage of
power.
The uncertainty
over the outcome of litigation challenging the CPP and the extent
of future regulation of GHG emissions may inhibit utilities from
investing in the building of new coal-fired plants to replace older
plants or investing in the upgrading of existing coal-fired plants.
Any reduction in the amount of coal consumed by electric power
generators as a result of actual or potential regulation of GHG
emissions could decrease demand for our coal, thereby reducing our
revenues and materially and adversely affecting our business and
results of operations. We or prospective customers may also have to
invest in CO2 capture and storage technologies in order to burn
coal and comply with future GHG emission standards.
Finally, there have
been attempts to encourage greater regulation of coalbed methane
because methane has a greater GHG effect than CO2. Methane from
coal mines can give rise to safety concerns and may require that
various measures be taken to mitigate those risks. If new laws or
regulations were introduced to reduce coalbed methane emissions,
those rules could adversely affect our costs of operations by
requiring installation of air pollution controls, higher taxes, or
costs incurred to purchase credits that permit us to continue
operations.
Clean Water Act
The CWA and
corresponding state laws and regulations affect coal mining
operations by restricting the discharge of pollutants, including
dredged or fill materials, into waters of the United States.
Likewise, permits are required under the CWA to construct
impoundments, fills or other structure in areas that are designated
as waters of the United States. The CWA provisions and associated
state and federal regulations are complex and subject to
amendments, legal challenges and changes in implementation. Recent
court decisions, regulatory actions and proposed legislation have
created uncertainty over CWA jurisdiction and permitting
requirements.
Prior to
discharging any pollutants into waters of the United States, coal
mining companies must obtain a National Pollutant Discharge
Elimination System (“NPDES”) permit from the
appropriate state or federal permitting authority. NPDES permits
include effluent limitations for discharged pollutants and other
terms and conditions, including required monitoring of discharges.
Failure to comply with the CWA or NPDES permits can lead to the
imposition of significant penalties, litigation, compliance costs
and delays in coal production. Changes and proposed changes in
state and federally recommended water quality standards may result
in the issuance or modification of permits with new or more
stringent effluent limits or terms and conditions. For instance,
waters.
For instance,
waters that states have designated as impaired (i.e., as not
meeting present water quality standards) are subject to Total
Maximum Daily Load regulations, which may lead to the adoption of
more stringent discharge standards for our coal mines and could
require more costly treatment. Likewise, the water quality of
certain receiving streams requires an anti-degradation review
before approving any discharge permits. TMDL regulations and
anti-degradation policies may increase the cost, time and
difficulty associated with obtaining and complying with NPDES
permits.
In addition, in
certain circumstances private citizens may challenge alleged
violations of NPDES permit limits in court. While it is difficult
to predict the outcome of any potential or future suits, such
litigation could result in increased compliance costs following the
completion of mining at our operations.
Finally, in June
2015, the EPA and the Corps published a new definition of
“waters of the United States” (“WOTUS”)
that became effective on August 28, 2015. Many groups have filed
suit to challenge the validity of this rule. The U.S. Court of
Appeals for the Sixth Circuit stayed the rule nationwide pending
the outcome of this litigation. On January 22, 2018, the Supreme
Court held that the courts of appeals do not have original
jurisdiction to review challenges to the 2015 Rule. With this final
rule, the agencies intend to maintain the status quo by adding an
applicability date to the 2015 Rule and thus providing continuity
and regulatory certainty for regulated entities, the States and
Tribes, and the public while the agencies continue to consider
possible revisions to the 2015 Rule. In light of this holding, in
February 2018 the agencies published a final rule adding an
applicability date to the 2015 Rule of February 6, 2020. We
anticipate that the WOTUS rules, if upheld in litigation, will
expand areas requiring NPDES or Corps Section 404 permits. If so,
the CWA permits we need may not be issued, may not be issued in a
timely fashion, or may be issued with new requirements which
restrict our ability to conduct our mining operations or to do so
profitably.
Resource Conservation and Recovery Act
RCRA and
corresponding state laws establish standards for the management of
solid and hazardous wastes generated at our various facilities.
Besides affecting current waste disposal practices, RCRA also
addresses the environmental effects of certain past hazardous waste
treatment, storage and disposal practices. In addition, RCRA
requires certain of our facilities to evaluate and respond to any
past release, or threatened release, of a hazardous substance that
may pose a risk to human health or the environment.
RCRA may affect
coal mining operations by establishing requirements for the proper
management, handling, transportation and disposal of solid and
hazardous wastes. Currently, certain coal mine wastes, such as
earth and rock covering a mineral deposit (commonly referred to as
overburden) and coal cleaning wastes, are exempted from hazardous
waste management under RCRA. Any change or reclassification of this
exemption could significantly increase our coal mining
costs.
EPA began
regulating coal ash as a solid waste under Subtitle D of RCRA in
2015. The EPA’s rule requires closure of sites that fail to
meet prescribed engineering standards, regular inspections of
impoundments, and immediate remediation and closure of unlined
ponds that are polluting ground water. The rule also establishes
limits for the location of new sites. However, the rule does not
regulate closed coal ash impoundments unless they are located at
active power plants. These requirements, as well as any future
changes in the management of coal combustion residues, could
increase our customers’ operating costs and potentially
reduce their ability or need to purchase coal. In addition,
contamination caused by the past disposal of coal combustion
residues, including coal ash, could lead to material liability for
our customers under RCRA or other federal or state laws and
potentially further reduce the demand for coal.
Comprehensive Environmental Response, Compensation and Liability
Act
CERCLA and similar
state laws affect coal mining operations by, among other things,
imposing cleanup requirements for threatened or actual releases of
hazardous substances into the environment. Under CERCLA and similar
state laws, joint and several liabilities may be imposed on
hazardous substance generators, site owners, transporters, lessees
and others regardless of fault or the legality of the original
disposal activity. Although the EPA excludes most wastes generated
by coal mining and processing operations from the primary hazardous
waste laws, such wastes can, in certain circumstances, constitute
hazardous substances for the purposes of CERCLA. In addition, the
disposal, release or spilling of some products used by coal
companies in operations, such as chemicals, could trigger the
liability provisions of CERCLA or similar state laws. Thus, we may
be subject to liability under CERCLA and similar state laws for
coal mines that we currently own, lease or operate or that we or
our predecessors have previously owned, leased or operated, and
sites to which we or our predecessors sent hazardous substances.
These liabilities could be significant and materially and adversely
impact our financial results and liquidity.
Endangered Species and Bald and Golden Eagle Protection
Acts
The ESA and similar
state legislation protect species designated as threatened,
endangered or other special status. The U.S. Fish and Wildlife
Service (the “USFWS”) works closely with the OSM and
state regulatory agencies to ensure that species subject to the ESA
are protected from mining-related impacts. Several species
indigenous to the areas in which we operate area protected under
the ESA. Other species in the vicinity of our operations may have
their listing status reviewed in the future and could also become
protected under the ESA. In addition, the USFWS has identified bald
eagle habitat in some of the counties where we operate. The Bald
and Golden Eagle Protection Act prohibits taking certain actions
that would harm bald or golden eagles without obtaining a permit
from the USFWS. Compliance with the requirements of the ESA and the
Bald and Golden Eagle Protection Act could have the effect of
prohibiting or delaying us from obtaining mining permits. These
requirements may also include restrictions on timber harvesting,
road building and other mining or agricultural activities in areas
containing the affected species or their habitats.
Use of Explosives
Our surface mining
operations are subject to numerous regulations relating to blasting
activities. Due to these regulations, we will incur costs to design
and implement blast schedules and to conduct pre-blast surveys and
blast monitoring, either directly or through the costs of a
contractor we may employ. In addition, the storage of explosives is
subject to various regulatory requirements. For example, pursuant
to a rule issued by the Department of Homeland Security in 2007,
facilities in possession of chemicals of interest (including
ammonium nitrate at certain threshold levels) are required to
complete a screening review. Our mines are low risk, Tier 4
facilities which are not subject to additional security plans. In
2008, the Department of Homeland Security proposed regulation of
ammonium nitrate under the ammonium nitrate security rule.
Additional requirements may include tracking and verifications for
each transaction related to ammonium nitrate, though a final rule
has yet to be issued. Finally, in December 2014, the OSM announced
its decision to pursue a rulemaking to revise regulations under
SMCRA which will address all blast generated fumes and toxic gases.
OSM has not yet issued a proposed rule to address these blasts. The
outcome of these rulemakings could materially adversely impact our
cost or ability to conduct our mining operations.
National Environmental Policy Act
NEPA requires
federal agencies, including the Department of Interior, to evaluate
major agency actions that have the potential to significantly
impact the environment, such as issuing a permit or other approval.
In the course of such evaluations, an agency will typically prepare
an environmental assessment to determine the potential direct,
indirect and cumulative impacts of a proposed project. Where the
activities in question have significant impacts to the environment,
the agency must prepare an environmental impact statement.
Compliance with NEPA can be time-consuming and may result in the
imposition of mitigation measures that could affect the amount of
coal that we are able to produce from mines on federal lands and
may require public comment. Furthermore, whether agencies have
complied with NEPA is subject to protest, appeal or litigation,
which can delay or halt projects. The NEPA review process,
including potential disputes regarding the level of evaluation
required for climate change impacts, may extend the time and/or
increase the costs and difficulty of obtaining necessary
governmental approvals, and may lead to litigation regarding the
adequacy of the NEPA analysis, which could delay or potentially
preclude the issuance of approvals or grant of leases.
The Council on
Environmental Quality recently released guidance discussing how
federal agencies should consider the effects of GHG emissions and
climate change in their NEPA evaluations. The guidance encourages
agencies to provide more detailed discussion of the direct,
indirect, and cumulative impacts of a proposed action’s
reasonably foreseeable emissions and effects. This guidance could
create additional delays and costs in the NEPA review process or in
our operations, or even an inability to obtain necessary federal
approvals for our operations due to the increased risk of legal
challenges from environmental groups seeking additional analysis of
climate impacts.
Other Environmental Laws
We are required to
comply with numerous other federal, state, and local environmental
laws and regulations in addition to those previously discussed.
These additional laws include but are not limited to the Safe
Drinking Water Act, the Toxic Substances Control Act, and the
Emergency Planning and Community Right-to-Know Act. Each of these
laws can impact permitting or planned operations and can result in
additional costs or operational delays.
Estimate
Of The Amount Of Money Spent During Each Of The Last Two Fiscal
Years On Research And Development
The Company spent a
de-minimus amount on research and development during its last two
fiscal years.
Costs
and Effects Of Compliance With Environmental Laws
As of December 31,
2017, and 2016, the cost of compliance with environmental laws
amounted to $190,940 and $9,806, respectively. This amount
represents the costs of the company associated with fines incurred
from various regulations regarding environmental and safety
compliance; please see elsewhere in this prospectus for additional
detail regarding other reclamation and remediation costs, including
the discussion surrounding our Asset Retirement Obligations (ARO)
in Note 1 of the Notes to Consolidated Financial Statements located
in the Index to Financial Statements.
DESCRIPTION
OF PROPERTY
Our principal
offices are located at 9002 Technology Lane, Fishers, Indiana
46038. We pay $2,500 per month in rent for the office space and the
rental lease expires in December 2018. We also rent office space
from an affiliated entity, LRR, at 11000 Highway 7 South, Kite,
Kentucky 41828 and pay $500 per month rent and the rental lease
expires October 30, 2021.
The Company also
utilizes various office spaces on-site at its active coal mining
operations and coal preparation plant locations in eastern
Kentucky, with such rental payments covered under any surface lease
contracts with any of the surface land owners. At McCoy Elkhorn
Coal, located near Kimper, Kentucky, the Company owns two coal
preparation facilities, a train loadout, and two active mines (Mine
#15 and the Carnegie 1 Mine). At Knott County Coal, located in
Kite, Kentucky, the Company owns one coal preparation facility, a
train loadout, and one active mine (Wayland Surface). At Deane
Mining, located in Deane, Kentucky, the Company owns one coal
preparation facility, a train loadout, and two active mines (Access
Energy and Razorblade Surface). At Wyoming County Coal, located in
Oceana, West Virginia, the Company owns one coal preparation
facility and a train loadout. At ERC, located near Jasonville,
Indiana, the Company manages a coal processing facility, train
loadout, and one underground mine (the Gold Star Mine). We lease
the mineral and surface at all our key locations, with lease terms
at our currently-operating, key properties typically expiring upon
exhaustion of the mineral. Across our key properties, our mineral
royalty rates payable to the mineral owner range from 5.0% to 11.0%
of the gross sales price of our coal. All permits required to
operate our material properties have been obtained. The source of
power for all our key properties is Kentucky Power, and the source
of water for all our key properties is either the local
municipality or our existing water withdrawal permits that allow us
to pull water from nearby streams
.
See “
Distribution Methods Of The Products and
Services
” starting on page 46 for additional
information and description of each mine. See “
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
”
starting on page 63 for additional discussion around the capacity
and utilization rate of our material properties and the work
completed on our material properties.
We have not
classified, and as a result, do not have any “proven”
or “probable” reserves as defined in United States
Securities and Exchange Commission Industry Guide 7. As a result,
we are considered an exploration stage company pursuant to
Paragraph (a) (4) of Industry Guide 7.
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
Currently we are
trading on the OTC Pink markets under the symbol “AREC”
and we have been approved for listing on the NASDAQ Global Select
Market under the symbol “AREC”. There is presently very
limited liquidity for our shares of Class A Common Stock and we can
provide no assurance that our shares of Class A Common Stock will
trade or that a public market will materialize.
(b) Holders
As of February
14, 2019, the Company had 217 shareholders of its Class A Common
Stock, no shareholders of its Series A Preferred Stock, and 1
shareholder of its Series C Preferred Stock.
(c) Dividends
While we have not
paid any dividends on our common stock since our inception, our
longer-term objective is to pay dividends in order to enhance
stockholder returns when the Board of Directors deems such action
as in the best interest of its shareholders. Our Series C preferred
stock, however, receives an 10.0% annual dividend, that accrues
annually in arrears. As of the date of this prospectus, no Series C
preferred stock dividend has accrued to any respective
holder(s).
Any determination
to declare a dividend, as well as the amount of any dividend that
may be declared, will be based on the board of director’s
consideration of our financial position, earnings, earnings
outlook, capital spending plans, outlook on current and future
market conditions, alternative stockholder return methods such as
share repurchases, and other factors that our board of directors
considers relevant at that time. Our dividend policy may change
from time to time, and there can be no assurance that we will
declare any dividends at all or in any particular amounts. Please
see “Risk Factors.”
(d) Securities authorized for issuance under equity compensation
plans
We currently have
an employee incentive stock option plan (“Employee Incentive
Stock Option Plan”) in place that could result in additional
options being issued to management at the discretion of the board
of directors. To date there has been a total of 636,830 options
issued under the Employee Incentive Stock Option Plan issued to
various employees of the Company, of which 25,000 options vested
immediately, with the remainder vesting equally over three years.
In the future, we may file a registration statement on Form S-8
under the Securities Act to register any or all shares issuable
under that Employee Incentive Stock Option Plan. Accordingly,
should a Form S-8 become effective, shares registered under such
registration statement may be made available for sale in the open
market following the effective date, unless such shares are subject
to vesting restrictions with us, Rule 144 restrictions applicable
to our affiliates or the lock-up restrictions described
above.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the “Selected Historical Financial Data” and the
accompanying financial statements and related notes included
elsewhere in this prospectus. The following discussion contains
forward-looking statements that reflect our future plans,
estimates, beliefs and expected performance. The forward-looking
statements are dependent upon events, risks and uncertainties that
may be outside our control. Our actual results could differ
materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to such
differences are discussed elsewhere in this prospectus,
particularly in “Risk Factors” and “Cautionary
Statement Regarding Forward-Looking Statements,” all of which
are difficult to predict. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed may not
occur. We do not undertake any obligation to publicly update any
forward-looking statements except as otherwise required by
applicable law.
Company
Overview
We are a low-cost
producer of primarily high-quality, metallurgical coal in eastern
Kentucky. We began our Company on October 2, 2013 and changed our
name from Natural Gas Fueling and Conversion Inc. to NGFC Equities,
Inc. on February 25, 2015, and then changed our name from NGFC
Equities, Inc. to American Resources Corporation on February 17,
2017. On January 5, 2017, ARC executed a Share Exchange Agreement
between the Company and Quest Energy Inc., a private company
incorporated in the State of Indiana with offices at 9002
Technology Lane, Fishers IN 46038, and due to the fulfillment of
various conditions precedent to closing of the transaction, the
control of the Company was transferred to the Quest Energy
shareholders on February 7, 2017 resulting in Quest Energy becoming
a wholly-owned subsidiary of ARC. Through its wholly-owned
subsidiary Quest Energy, which is an Indiana corporation founded in
June 2015, ARC was able to acquire coal mining and coal processing
operations, substantially all located in eastern Kentucky. A
majority of our domestic and international target customer base
includes blast furnace steel mills and coke plants, as well as
international metallurgical coal consumers, domestic electricity
generation utilities, and other industrial customers.
Pursuant to the
definitions in Paragraph (a) (4) of the Securities and Exchange
Commission’s Industry Guide 7, our company and its business
activities are deemed to be in the exploration stage until mineral
reserves are defined on our properties.
We achieved initial
commercial production of metallurgical coal in September 2016 from
our McCoy Elkhorn Mine #15 and from our McCoy Elkhorn Carnegie 1
Mine in March 2017. In October 2017 we achieved commercial
production of thermal coal from our Deane Mining Access Energy Mine
and from our Deane Mining Razorblade Surface Mine in May 2018. We
believe that we will be able to take advantage of recent increases
in U.S. and global benchmark metallurgical and thermal coal prices
and intend to opportunistically increase the amount of our
projected production that is directed to the export market to
capture favorable differentials between domestic and global
benchmark prices. The Company commenced operations of two out of
four of its internally owned preparation plants in July of 2016
(Bevins #1 and Bevins #2 Prep Plants at McCoy Elkhorn), with a
third preparation plant commencing operation in October 2017 (Mill
Creek Prep Plant at Deane Mining).
Current
Projects
Quest Energy has
six coal mining and processing operating subsidiaries: McCoy
Elkhorn Coal LLC (doing business as McCoy Elkhorn Coal Company,
“McCoy Elkhorn”), Knott County Coal LLC (“Knott
County Coal”), Deane Mining LLC (“Deane Mining”),
Wyoming County Coal LLC (“Wyoming County Coal”), ERC
Mining Indiana Corporation (“ERC”), and Quest
Processing LLC (“Quest Processing”), all of which are
located in eastern Kentucky and West Virginia within the Central
Appalachian coal basin, with the exception of ERC Mining Indiana
Corporation, which is located in southwestern Indiana in the
Illinois coal basin. Below is an organizational and ownership chart
of our Company.
The coal deposits
under control by the Company generally comprise of metallurgical
coal (used for steel making), pulverized coal injections
(“PCI”, used in the steel making process) and high-BTU,
low sulfur, low moisture bituminous coal used for a variety of uses
within several industries, including industrial customers,
specialty products and thermal coal used for electricity
generation.
McCoy Elkhorn Coal LLC
General:
Located primarily
within Pike County, Kentucky, McCoy Elkhorn is currently comprised
of two active mines (Mine #15 and the Carnegie 1 Mine), one mine in
“hot idle” status (the PointRock Mine), two coal
preparation facilities (Bevins #1 and Bevins #2), and other mines
in various stages of development or reclamation. McCoy Elkhorn
sells its coal to a variety of customers, both domestically and
internationally, primarily to the steel making industry as a
high-vol “B” coal or blended coal. The coal controlled
at McCoy Elkhorn (along with our other subsidiaries) has not been
classified as either “proven” or “probable”
as defined in the United States Securities and Exchange Commission
Industry Guide 7, and as a result, do not have any
“proven” or “probable” reserves under such
definition and are classified as an “Exploration Stage”
pursuant to Industry Guide 7.
Mines:
Mine #15 is an
underground mine in the Millard (also known as Glamorgan) coal seam
and located near Meta, Kentucky. Mine #15 is mined via
room-and-pillar mining methods using continuous miners, and the
coal is belted directly from the stockpile to McCoy Elkhorn’s
coal preparation facility. Mine #15 is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine. The coal from Mine #15 is
stockpiled at the mine site and belted directly to the
Company’s nearby coal preparation facilities. Production at
Mine #15 re-commenced under Quest Energy’s ownership in
September 2016.
Mine #15 has the
estimated capacity to produce up to approximately 40,000 tons per
month of coal. The Company acquired Mine #15 as an idled mine, and
since acquisition, the primary work completed at Mine #15 by the
Company includes changing working sections within the underground
mine, air ventilation enhancements primarily through brattice work
and the use of overcasts and installing underground mining
infrastructure as the mine advances due to coal extraction. In
2017, Mine #15 produced approximately 247,234 tons and sold the
coal at an average price of $67.23 per ton. In 2016, Mine #15
started production and produced approximately 62,941 tons and sold
the coal at an average price of $82.45 per ton. During 2017 and
2016, 100% and 100%, respectively, of the coal extracted from Mine
#15 was high-vol “B” metallurgical coal quality, of
which 71% and 100%, respectively, was sold into the metallurgical
market, with the balance sold in the thermal
market.
The Carnegie 1 Mine
is an underground mine in the Alma and Upper Alma coal seams and
located near Kimper, Kentucky. In 2011, coal production from the
Carnegie 1 Mine in the Alma coal seam commenced and then
subsequently the mine was idled. Production at the Carnegie 1 Mine
was reinitiated in early 2017 under Quest Energy’s ownership
and is currently being mined via room-and-pillar mining methods
utilizing a continuous miner. The coal is stockpiled on-site and
trucked approximately 7 miles to McCoy Elkhorn’s preparation
facilities. The Carnegie 1 Mine is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine.
The Carnegie 1 Mine has the estimated capacity to
produce up to approximately 10,000 tons per month of coal. The
Company acquired the Carnegie Mine as an idled mine, and since
acquisition, the primary work completed at the Carnegie Mine by the
Company includes mine rehabilitation work in preparation for
production, changing working sections within the underground mine,
air ventilation enhancements primarily through brattice work, and
installing underground mining infrastructure as the mine advances
due to coal extraction. In 2017, the first year of the mine’s
production, the Carnegie 1 Mine produced approximately 11,974 tons
and sold the coal at an average price of $59.78. During 2017, 100%
of the coal extracted from the Carnegie Mine was high-vol
“B” metallurgical coal quality, of which 51% was sold
into the metallurgical market, with the balance sold in the thermal
market.
The PointRock Mine
is surface mine in a variety of coal seams, primarily in the Pond
Creek, the Lower Alma, the Upper Alma, and Cedar Grove coal seams
and located near Phelps, Kentucky. Coal has been produced from the
PointRock Mine in the past under different operators. Quest Energy
acquired the PointRock Mine in April 2018 and is currently
performing reclamation work in advance of re-starting production,
which is expected in later 2018. PointRock is anticipated to be
mined via contour, auger, and highwall mining techniques. The coal
will be stockpiled on-site and trucked approximately 23 miles to
McCoy Elkhorn’s preparation facilities. The PointRock Mine is
anticipated to be operated as a modified contractor mine, whereby
McCoy Elkhorn provides certain mining infrastructure and equipment
for the operations and pays a contractor a fixed per-ton fee for
managing the workforce, procuring other equipment and supplies, and
maintaining the equipment and infrastructure in proper working
order.
The
PointRock Mine has the estimated capacity to produce up to
approximately 15,000 tons per month of coal and has not yet started
production under McCoy Elkhorn’s
ownership.
Processing & Transportation:
The Bevins #1
Preparation Plant is an 800 ton-per hour coal preparation facility
located near Meta, Kentucky, across the road from Mine #15. Bevins
#1 has raw coal stockpile storage of approximately 25,000 tons and
clean coal stockpile storage of 100,000 tons of coal. The Bevins #1
facility has a fine coal circuit and a stoker circuit that allows
for enhance coal recovery and various coal sizing options depending
on the needs of the customer. The Company acquired the Bevins
Preparation Plants as idled facilities, and since acquisition, the
primary work completed at the Bevins Preparation Plants by the
Company includes rehabilitating the plants’ warehouse and
replacing belt lines.
The Bevins #2
Preparation Plant is on the same permit site as Bevins #1 and is a
500 ton-per-hour processing facility with fine coal recovery and a
stoker circuit for coal sizing options. Bevins #2 has raw coal
stockpile storage of 25,000 tons of coal and a clean coal stockpile
storage of 45,000 tons of coal. We are currently utilizing less
than 10% of the available processing capacity of Bevins #1 and
Bevins #2.
Both Bevins #1 and
Bevins #2 have a batch-weight loadout and rail spur for loading
coal into trains for rail shipments. The spur has storage for 110
rail cars and is serviced by CSX Transportation and is located on
CSX’s Big Sandy, Coal Run Subdivision. Both Bevins #1 and
Bevins #2 have coarse refuse and slurry impoundments called Big
Groundhog and Lick Branch. While the Big Groundhog impoundment is
nearing the end of its useful life, the Lick Branch impoundment has
significant operating life and will be able to provide for coarse
refuse and slurry storage for the foreseeable future at Bevins #1
and Bevins #2. Coarse refuse from Bevins #1 and Bevins #2 is belted
to the impoundments. Both Bevins #1 and Bevins #2 are facilities
owned by McCoy Elkhorn, subject to certain restrictions present in
the agreement between McCoy Elkhorn and the surface land
owner.
Both Bevins #1 and
Bevins #2, as well as the rail loadout, are operational and any
work required on any of the plants or loadouts would be routine
maintenance. The allocated cost of for the property at McCoy
Elkhorn Coal paid by the company is $58,681.
Due to additional
coal processing storage capacity at Bevins #1 and Bevins #2
Preparation Plants, McCoy Elkhorn processes, stores, and loads coal
for other regional coal producers for an agreed-to
fee.
Additional Permits:
In addition to the
above mines, McCoy Elkhorn holds 11 additional coal mining permits
that are idled operations or in various stages of reclamation. For
the idled coal mining operations, McCoy Elkhorn will determine
which coal mines to bring back into production, if any, as the coal
market changes, and there are currently no other idled mines within
McCoy Elkhorn that are slated to go into production in the
foreseeable future. Any idled mines that are brought into
production would require significant upfront capital investment and
there is no assurance of the feasibility of any such new
operations.
Below
is a map showing the material properties at McCoy
Elkhorn:
Knott County Coal LLC
General:
Located primarily
within Knott County, Kentucky (but with additional idled permits in
Leslie County, Perry County, and Breathitt County, Kentucky), Knott
County Coal is comprised of one active mine (the Wayland Surface
Mine) and 22 idled mining permits (or permits in reclamation),
including the permits associated with the idled Supreme Energy
Preparation Plant. The idled mining permits are either in various
stages of planning, idle status or reclamation. The idled mines at
Knott County Coal are primarily underground mines that utilize
room-and-pillar mining. The coal controlled at Knott County Coal
(along with our other subsidiaries) has not been classified as
either “proven” or “probable” as defined in
the United States Securities and Exchange Commission Industry Guide
7, and as a result, do not have any “proven” or
“probable” reserves under such definition and are
classified as an “Exploration Stage” pursuant to
Industry Guide 7.
Mines:
The Wayland Surface
Mine is a surface waste-rock reprocessing mine in a variety of coal
seams (primarily the Upper Elkhorn 1 coal seam) located near
Wayland, Kentucky. The Wayland Surface Mine is mined via area
mining through the reprocessing of previously processed coal, and
the coal is trucked approximately 22 miles to the Mill Creek
Preparation Plant at Deane Mining, where it is processed and sold.
The Wayland Surface Mine is currently a “company run”
mine, whereby the Company manages the workforce at the mine and
pays all expenses of the mine.
The Company
acquired the Wayland Surface Mine as an idled mine, and since
acquisition, the primary work completed at the Wayland Surface Mine
has been removing overburden to access the coal.
The Wayland Surface Mine has the estimated
capacity to produce up to approximately 15,000 tons per month of
coal and started production in mid-2018 with nominal coal extracted
and sold as thermal coal.
During June 2018,
production at the Wayland Surface Mine commenced under Quest
Energy’s ownership. The associated permit was purchased
during May 2018.
Other potential
customers of Knott County Coal include industrial customers,
specialty customers and utilities for electricity generation,
although no definitive sales have been identified yet.
Processing & Transportation:
The idled Supreme
Energy Preparation Plant is a 400 ton-per-hour coal preparation
facility with a fine coal circuit located in Kite, Kentucky. The
Bates Branch rail loadout associated with the Supreme Energy
Preparation Plant is a batch-weigh rail loadout with 220 rail car
storage capacity and serviced by CSX Transportation in their Big
Sandy rate district. The coarse refuse is trucked to the Kings
Branch impoundment, which is approximately one mile from the
Supreme Energy facility. The slurry from coal processing is piped
from the Supreme Energy facility to the Kings Branch
impoundment.
The Supreme Energy
Preparation Plant is owned by Knott County Coal, subject to certain
restrictions present in the agreement between Knott County Coal and
the surface land owner, Land Resources & Royalties
LLC.
The Company
acquired the Supreme Energy Preparation Plants as an idled
facility, and since acquisition, no work has been performed at the
facility other than minor maintenance. Both the Supreme Energy
Preparation Plant and the rail loadout are idled and would require
an undetermined amount of work and capital to bring them into
operation. The allocated cost of for the property at Knott County
Coal paid by the company is $200,236.
Additional Permits:
In addition to the
above mines, Knott County Coal holds 20 additional coal mining
permits that are in development, idled or in various stages of
reclamation. Any idled mines that are brought into production would
require significant upfront capital investment and there is no
assurance of the feasibility of any such new
operations..
Below
is a map showing the location of the idled Supreme Energy Prep
Plant, Raven Prep Plant, Loadouts, and plant impoundments at Knott
County Coal:
Deane Mining LLC
General:
Located within
Letcher County and Knott County, Kentucky, Deane Mining LLC is
comprised of one active underground coal mine (the Access Energy
Mine), one active surface mine (Razorblade Surface) and one active
coal preparation facility called Mill Creek Preparation Plant,
along with 12 additional idled mining permits (or permits in
reclamation). The idled mining permits are either in various stages
of development, reclamation or being maintained as idled, pending
any changes to the coal market that may warrant re-starting
production. . The coal controlled at Deane Mining (along with our
other subsidiaries) has not been classified as either
“proven” or “probable” as defined in the
United States Securities and Exchange Commission Industry Guide 7,
and as a result, do not have any “proven” or
“probable” reserves under such definition and are
classified as an “Exploration Stage” pursuant to
Industry Guide 7.
Mines:
Access Energy is a
deep mine in the Elkhorn 3 coal seam and located in Deane,
Kentucky. Access Energy is mined via room-and-pillar mining methods
using continuous miners, and the coal is belted directly from the
mine to the raw coal stockpile at the Mill Creek Preparation Plant
across the road from Access Energy. Similar to McCoy
Elkhorn’s Carnegie 1 Mine, Access Energy is currently run as
a modified contractor mine, whereby Deane Mining provides the
mining infrastructure and equipment for the operations and pays the
contractor a fixed per-ton fee for managing the workforce,
procuring the supplies, and maintaining the equipment and
infrastructure in proper working order. The Company acquired Access
Energy as an idled mine, and since acquisition, the primary work
completed at Access Energy by the Company includes mine
rehabilitation work in preparation for production, air ventilation
enhancements primarily through brattice work, and installing
underground mining infrastructure as the mine advances due to coal
extraction.
Access Energy has the
estimated capacity to produce up to approximately 20,000 tons per
month of coal. In 2017, the first year of the mine’s
production, Access Energy produced approximately 43,286 tons and
sold the coal at an average price of $58.67 per ton. 100% of the
coal sold from Access Energy in 2017 was sold as thermal
coal.
Razorblade Surface
is a surface mine currently mining the Hazard 4 and Hazard 4 Rider
coal seams and located in Deane, Kentucky. Razorblade Surface is
mined via contour, auger, and highwall mining methods, and the coal
is stockpiled on site where it trucked to the Mill Creek
Preparation Plant approximately one mile away for processing.
Razorblade Surface is run as both a contractor mine and as a
“company run” mine for coal extraction and began
extracting coal in spring of 2018. Coal produced from Razorblade
Surface will be trucked approximately one mile to the Mill Creek
Preparation Plant. The Company acquired the Razorblade Surface mine
as a new, undisturbed mine, and since acquisition, the primary work
completed at Razorblade Surface has been some initial engineering
work and removing overburden to access the coal.
Razorblade Surface mine has the estimated capacity
to produce up to approximately 8,000 tons per month of coal and
started production in mid-2018 with nominal coal extracted and sold
as thermal coal.
The coal production
from Deane Mining LLC is currently sold a utility located in
southeast United States under a contract that expires December
2018, along with coal sold in the spot market. Deane Mining is in
discussions with various customers to sell additional production
from Access Energy, Razorblade, and Wayland Surface mines, combined
with other potential regional coal production, as pulverized coal
injection (PCI) to steel mills, industrial coal, and thermal coal
to other utilities for electricity generation.
Processing & Transportation:
The Mill Creek
Preparation Plant is an 800 ton-per-hour coal preparation facility
located in Deane, Kentucky. The associated RapidLoader rail loadout
is a batch-weight rail loadout with 110 car storage capacity and
services by CSX Transportation in their Big Sandy and Elkhorn rate
districts. The Mill Creek Preparation Plant is owned by Deane
Mining, subject to certain restrictions present in the agreement
between Deane Mining and the surface land owner, Land Resources
& Royalties LLC.
We
are currently utilizing less than 10% of the available processing
capacity of the Mill Creek Preparation Plant.
Both the Mill Creek
Preparation Plant and the rail loadout are operational, and any
work required on any of the plant or loadouts would be routine
maintenance. The total cost of for the property at Deane Mining
paid by the company is $2,655,505.
Additional Permits:
In addition to the
above mines and preparation facility, Deane Mining holds 12
additional coal mining permits that are in development, idled or in
various stages of reclamation. Any idled mines that are brought
into production would require significant upfront capital
investment and there is no assurance of the feasibility of any such
new operations..
Below
is a map showing the material properties at Deane
Mining:
Wyoming County Coal LLC
General:
Located within
Wyoming County, West Virginia, Wyoming County Coal is comprised of
two idled underground mining permits and the three permits
associated with the idled Pioneer Preparation Plant, the Hatcher
rail loadout, and Simmons Fork Refuse Impoundment. The two idled
mining permits are undisturbed underground mines that are
anticipated to utilize room-and-pillar mining. The coal controlled
at Wyoming County Coal (along with our other subsidiaries) has not
been classified as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7.
Mines:
The mining permits
held by Wyoming County Coal are in various stages of planning with
no mines currently in production.
Potential customers
of Wyoming County Coal would include steel mills in the United
States or international marketplace although no definitive sales
have been identified yet.
Processing & Transportation:
The idled Pioneer
Preparation Plant is a 350 ton-per-hour coal preparation facility
located near Oceana, West Virginia. The Hatcher rail loadout
associated with the Pioneer Preparation Plant is a rail loadout
serviced by Norfolk Southern Corporation. The refuse from the
preparation facility is trucked to the Simmons Fork Refuse
Impoundment, which is approximately 1.0 mile from the Pioneer
Preparation facility. The preparation plant utilizes a belt press
technology which eliminates the need for pumping slurry into a
slurry pond for storage within an impoundment.
The Company is in
the initial planning phase of getting estimates on the cost to
upgrade the preparation facility to a modern 350 ton per hour
preparation facility, although no cost estimates have yet been
received. The Company is also in the initial planning phase of
getting estimates on the cost and timing of upgrading the rail load
out facility to a modern batch weight load out system, although no
cost estimates have yet been received.
The Company
acquired the Pioneer Preparation Plants as an idled facility, and
since acquisition, no work has been performed at the facility. Both
the Pioneer Preparation Plant and the rail loadout are idled and
would require an undetermined amount of work and capital to bring
them into operation, which is currently in the initial phases of
planning and no cost estimates have been received. The allocated
cost for the property at Wyoming County Coal paid by the Company is
$22,926,101.
Permits:
Wyoming County Coal
holds two coal mining permits that are in the initial planning
phase and three permits associated with the idled Pioneer
Preparation Plant, the Hatcher rail loadout, and Simmons Fork
Refuse Impoundment. Any mine that is brought into production would
require significant upfront capital investment and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the location of the idled Pioneer Prep Plant,
Hatcher rail Loadout, and Simmons Fork Refuse Impoundment at
Wyoming County Coal:
Quest Processing LLC
Quest
Energy’s wholly-owned subsidiary, Quest Processing LLC,
manages the assets, operations, and personnel of the certain coal
processing and transportation facilities of Quest Energy’s
various other subsidiaries, namely the Supreme Energy Preparation
Facility (of Knott County Coal LLC), the Raven Preparation Facility
(of Knott County Coal LLC), and the Mill Creek Preparation Facility
(of Deane Mining LLC). Quest Processing LLC was the recipient of a
New Markets Tax Credit loan that allowed for the payment of certain
expenses of these preparation facilities. As part of that financing
transaction, Quest Energy loaned Quest MGMT LLC, an entity owned by
members of Quest Energy, Inc.’s management, $4,120,000 to
facilitate the New Markets Tax Credit loan, of which is all
outstanding as of December 31, 2017.
ERC Mining Indiana Corporation (the Gold Star Mine)
General:
Quest Energy,
through its wholly-owned subsidiary, ERC Mining Indiana Corporation
(“ERC”), has a management agreement with an unrelated
entity, LC Energy Operations LLC, to manage an underground coal
mine, clean coal processing facility and rail loadout located in
Greene County, Indiana (referred to as the “Gold Star
Mine”) for a monthly cash and per-ton fee. As part of that
management agreement, ERC manages the operations of the Gold Star
Mine, is the holder of the mining permit, provides the reclamation
bonding, is the owner of some of the equipment located at the Gold
Star Mine, and provides the employment for the personnel located at
the Gold Star Mine. LC Energy Operations LLC owns the remaining
equipment and infrastructure, is the lessee of the mineral (and the
owner of some of the mineral and surface), and provides funding for
the operations. Currently the coal mining operations at the Gold
Star Mine are idled. Any cash flow from the operations of the Gold
Star Mine for the foreseeable future will go to LC Energy
Operations LLC to satisfy prior debt advanced to the Gold Star
Mine.
Mine:
The Gold Star Mine,
which is currently the only coal mining operation within ERC Mining
Indiana Corporation (a wholly-owned subsidiary of Quest Energy
Inc.). The Gold Star Mine is an underground mine located in the
Indiana IV (aka Survant) coal seam, which is a low sulfur coal
relative to other coal mining operations in the region. With a
sulfur ranging from 1.0% to 1.5%, the coal has historically been
sold to local power generating facilities that lack more advanced
sulfur capture technologies, as well as to other regional coal
producers to blend their sulfur lower to sell their coal at a
premium.
Processing & Transportation:
Coal extracted from
the Gold Star Mine is belted directly to the preparation facility
on site. The coal can either be loaded to rail or transported via
truck. The rail spur at Gold Star is serviced by the Indiana Rail
Road Company and holds up to 116 rail cars.
The Gold Star Mine
is currently idled and ARC management is pursuing potential sales
orders for the coal. Any re-initiation of coal mining operations at
the Gold Star Mine would require capital investment.
In addition to the
current owned permits and controlled coal deposits described within
the above operating subsidiaries, ARC may, from time to time, and
frequently, acquire additional coal mining permits or coal
deposits, or dispose of coal mining permits or coal deposits
currently held by ARC, as management of the Company deems
appropriate.
Mineral and Surface Leases
Coal mining and
processing involves the extraction of coal (mineral) and the use of
surface property incidental to such extraction and processing. All
of the mineral and surface related to the Company’s coal
mining operations is leased from various mineral and surface owners
(the “Leases”). The Company’s operating
subsidiaries, collectively, are parties to approximately 200
various Leases and other agreements required for the
Company’s coal mining and processing operations. The Leases
are with a variety of Lessors, from individuals to professional
land management firms such as the Elk Horn Coal Company LLC and
Alma Land Company. In some instances, the Company has leases with
Land Resources & Royalties LLC (LRR), a professional leasing
firm that is an entity wholly owned by Quest MGMT LLC, an entity
owned by members of Quest Energy Inc.’s
management.
Production Plans
We expect to fund
our projected capital expenditures primarily with our current cash
and investments, cash flow from operations and the net proceeds
from this offering. However, if needed, we may seek additional
sources of financing, including revolving credit arrangements. The
majority of our capital expenditure budget through 2018 is focused
on the development of our current projects with a goal to have the
projects fully developed by 2020. We are currently in production at
McCoy Elkhorn Coal’s Mine #15, McCoy Elkhorn Coal’s
Carnegie 1 Mine, Deane Mining’s Access Energy mine, Deane
Mining’s Razorblade Surface mine, and Knott County
Coal’s Wayland Surface mine. We are currently rehabbing or
developing new mines at our McCoy Elkhorn’s Carnegie 2 Mine,
McCoy Elkhorn’s PointRock mine, Deane Mining’s Love
Branch mine, and Knott County Coal’s Topper mine, and we
expect to have these projects fully developed and/or producing by
the first half of 2019, pending successful sales efforts and
additional capital investment.
Permitting
From our various
acquisitions from 2015 to 2018, we are the holder of 58 coal mining
permits issued by Kentucky Department of Natural Resources and one
coal mining permit issued by Indiana Department of Natural
Resources. The coal mining permits we hold are primarily located in
eastern Kentucky, in the counties of Pike, Knott, Letcher, Perry,
Floyd, Breathitt, and Leslie.
Marketing, Sales and Customers
Coal prices differ
substantially by region and are impacted by many factors including
the overall economy, demand for steel, demand for electricity,
location, market, quality and type of coal, mine operation costs
and the cost of customer alternatives. The major factors
influencing our business are the global economy, the demand for
steel, and the amount of coal being consumed for electricity
generation.
Our initial
marketing strategy is to focus on U.S.- and internationally-based
blast furnace still mills and coke plants, and other customers
where our coal is in demand. Our current sales are primarily
conducted through the use of intermediaries and brokers who have
established relationships with our potential end-customers,
although we may develop and employ an in-house marketing team in
the future.
The Company sells
its coal to domestic and international customers, some which blend
the Company’s coal at east coast ports with other qualities
of coal for export. Coal sales currently come from the
Company’s McCoy Elkhorn’s Mine #15, McCoy
Elkhorn’s Carnegie 1 mine, Deane Mining’s Access Energy
mine, Deane Mining’s Razorblade Surface mine, and Knott
County Coal’s Wayland Surface mine. The Company may, at
times, purchase coal from other regional producers to sell on its
contracts.
Historical
pricing for the two primary types of coal we produce are as
follows:
Historic
Metallurgical Coal Prices
|
|
Historic
CAPP Thermal Coal Prices
|
Year
End
|
|
Hampton
Road Index HCC - High
|
|
Year
End
|
|
Big
Sandy / Kanawha Rate District
|
2013
|
|
$110.30
|
|
2013
|
|
64.09
|
2014
|
|
$100.35
|
|
2014
|
|
56.00
|
2015
|
|
$80.25
|
|
2015
|
|
45.55
|
2016
|
|
$223.00
|
|
2016
|
|
50.65
|
2017
|
|
$210.00
|
|
2017
|
|
60.90
|
Coal sales at the
Company is primarily outsource to third party intermediaries who
act on the Company’s behalf to source potential coal sales
and contracts. The third-party intermediaries have no ability to
bind the Company to any contracts, and all coal sales are approved
by management of the Company.
Development Activities
McCoy Elkhorn Coal LLC:
We are currently
producing at Mine #15 and Carnegie 1 Mine at McCoy Elkhorn Coal and
both of our preparation plants (Bevins 1 and Bevins 2) are
operational, as is the rail loadout facility. Our PointRock surface
mine is currently idled as we interview contractors for future
production. We continue to develop our Carnegie 2 deep mine in the
Alma coal seam and are working on other permit acquisition and/or
development activities in the area of McCoy Elkhorn.
Knott County Coal LLC:
We are currently
producing at our Wayland Surface mine. The coal from this mine
processed and loaded to rail at the Mill Creek Preparation Plant
and RapidLoader loadout of Deane Mining LLC. We continue permitting
and development work on several other permits, including the Topper
mine.
While Knott County
Coal owns the Supreme Energy Preparation Plant and Bates Branch
rail loadout, those facilities are currently idled and would
require capital to rehabilitate to operational
condition.
Deane Mining LLC:
We are currently
producing at the Access Energy Mine, underground room and pillar
operations, the Razorblade Surface mine, and our Mill Creek
Preparation Plant is operational, as is the rail loadout facility.
We continue to analyze additional coal mines that could be brought
into production, assuming we achieve coal sales for such
operations.
Wyoming County Coal LLC:
We currently do not
have any operations at Wyoming County Coal LLC and do not
anticipate having operations for the foreseeable future. While
Wyoming County Coal LLC owns a preparation plan and rail loadout
those facilities are currently idled and would require capital to
rehabilitate to operational condition.
ERC Mining Indiana Corporation:
We have completed
the rehabilitation of the Gold Star underground mine at ERC Mining
Indiana Corp. and are working to obtain sales for this mine,
although no time frame for production is currently anticipated. The
coal will be belted directly to the on-site processing facility for
coal processing and then anticipated to be loaded to rail or truck,
depending on the customer’s requirements. ERC Mining Indiana
Corp. has a management agreement with an unrelated entity, LC
Energy Operations LLC to manage an underground coal mine, clean
coal processing facility and rail loadout for a monthly cash and
per-ton fee. As part of that management agreement, LC Energy
Operations LLC is required to provide funding for the operations at
the Gold Star mine, and any cash flow from the operations of the
Gold Star Mine for the foreseeable future will go to LC Energy
Operations LLC to satisfy prior debt advanced to the Gold Star
Mine.
Trade Names, Trademarks and Patents
We do not have any
registered trademarks or trade names for our products, services or
subsidiaries, and we do not believe that any trademark or trade
name is material to our business. However, the names of the seams
in which we have coal deposits, and attributes thereof, are widely
recognized in the coal markets.
Competition
The coal industry
is intensely competitive. The most important factors on which the
Company competes are coal quality, delivered costs to the customer
and reliability of supply. Our principal domestic competitors will
include Alpha Natural Resources, Ramaco Resources, Blackhawk
Mining, Coronado Coal, Arch Coal, Contura Energy, Warrior Met Coal,
Alliance Resource Partners, and ERP Compliance Fuels. Many of these
coal producers may have greater financial resources and larger coal
deposit bases than we do. We also compete in international markets
directly with domestic companies and with companies that produce
coal from one or more foreign countries, such as Australia,
Colombia, Indonesia and South Africa.
Suppliers
Supplies used in
our business include petroleum-based fuels, explosives, tires,
conveyance structure, roof support supplies, ventilation supplies,
lubricants and other raw materials as well as spare parts and other
consumables used in the mining process. We use third-party
suppliers for a significant portion of our equipment rebuilds and
repairs, drilling services and construction. We also may utilize
contract miners at our various operations. We believe adequate
substitute suppliers and contractors are available and we are not
dependent on any one supplier or contractor. We continually seek to
develop relationships with suppliers and contractors that focus on
reducing our costs while improving quality and
service.
Environmental and Other Regulatory Matters
Our operations are
subject to federal, state, and local laws and regulations, such as
those relating to matters such as permitting and licensing,
employee health and safety, reclamation and restoration of mining
properties, water discharges, air emissions, plant and wildlife
protection, the storage, treatment and disposal of wastes,
remediation of contaminants, surface subsidence from underground
mining and the effects of mining on surface water and groundwater
conditions. In addition, we may become subject to additional costs
for benefits for current and retired coal miners. These
environmental laws and regulations include, but are not limited to,
SMCRA with respect to coal mining activities and ancillary
activities; the CAA with respect to air emissions; the CWA with
respect to water discharges and the permitting of key operational
infrastructure such as impoundments; RCRA with respect to solid and
hazardous waste management and disposal, as well as the regulation
of underground storage tanks; the Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA” or
“Superfund”) with respect to releases, threatened
releases and remediation of hazardous substances; the Endangered
Species Act of 1973 (“ESA”) with respect to threatened
and endangered species; and the National Environmental Policy Act
of 1969 (“NEPA”) with respect to the evaluation of
environmental impacts related to any federally issued permit or
license. Many of these federal laws have state and local
counterparts which also impose requirements and potential liability
on our operations.
Compliance with
these laws and regulations may be costly and time-consuming and may
delay commencement, continuation or expansion of exploration or
production at our facilities. They may also depress demand for our
products by imposing more stringent requirements and limits on our
customers’ operations. Moreover, these laws are constantly
evolving and are becoming increasingly complex and stringent over
time. These laws and regulations, particularly new legislative or
administrative proposals, or judicial interpretations of existing
laws and regulations related to the protection of the environment
could result in substantially increased capital, operating and
compliance costs. Individually and collectively, these developments
could have a material adverse effect on our operations directly
and/or indirectly, through our customers’ inability to use
our products.
Certain
implementing regulations for these environmental laws are
undergoing revision or have not yet been promulgated. As a result,
we cannot always determine the ultimate impact of complying with
existing laws and regulations.
Due in part to
these extensive and comprehensive regulatory requirements and ever-
changing interpretations of these requirements, violations of these
laws can occur from time to time in our industry and also in our
operations. Expenditures relating to environmental compliance are a
major cost consideration for our operations and safety and
compliance is a significant factor in mine design, both to meet
regulatory requirements and to minimize long-term environmental
liabilities. To the extent that these expenditures, as with all
costs, are not ultimately reflected in the prices of our products
and services, operating results will be reduced.
In addition, our
customers are subject to extensive regulation regarding the
environmental impacts associated with the combustion or other use
of coal, which may affect demand for our coal. Changes in
applicable laws or the adoption of new laws relating to energy
production, GHG emissions and other emissions from use of coal
products may cause coal to become a less attractive source of
energy, which may adversely affect our mining operations, the cost
structure and, the demand for coal. For example, if the emissions
rates or caps adopted under the CPP on GHGs are upheld or a tax on
carbon is imposed, the market share of coal as fuel used to
generate electricity would be expected to decrease.
We believe that our
competitors with operations in the United States are confronted by
substantially similar conditions. However, foreign producers and
operators may not be subject to similar requirements and may not be
required to undertake equivalent costs in or be subject to similar
limitations on their operations. As a result, the costs and
operating restrictions necessary for compliance with United States
environmental laws and regulations may have an adverse effect on
our competitive position with regard to those foreign competitors.
The specific impact on each competitor may vary depending on a
number of factors, including the age and location of its operating
facilities, applicable legislation and its production
methods.
Surface Mining Control and Reclamation Act
SMCRA establishes
operational, reclamation and closure standards for our mining
operations and requires that comprehensive environmental protection
and reclamation standards be met during the course of and following
completion of mining activities. SMCRA also stipulates compliance
with many other major environmental statutes, including the CAA,
the CWA, the ESA, RCRA and CERCLA. Permits for all mining
operations must be obtained from the United States Office of
Surface Mining (“OSM”) or, where state regulatory
agencies have adopted federally approved state programs under
SMCRA, the appropriate state regulatory authority. Our operations
are located in states which have achieved primary jurisdiction for
enforcement of SMCRA through approved state programs.
SMCRA imposes a
complex set of requirements covering all facets of coal mining.
SMCRA regulations govern, among other things, coal prospecting,
mine plan development, topsoil or growth medium removal and
replacement, disposal of excess spoil and coal refuse, protection
of the hydrologic balance, and suitable post mining land
uses.
From time to time,
OSM will also update its mining regulations under SMCRA. For
example, in December 2016, OSM finalized a new version of the
Stream Protection Rule which became effective in January 2017. The
rule would have impacted both surface and underground mining
operations, as it would have imposed stricter guidelines on
conducting coal mining operations, and would have required more
extensive baseline data on hydrology, geology and aquatic biology
in permit applications. The rule also required the collection of
increased pre-mining data about the site of the proposed mining
operation and adjacent areas to establish a baseline for evaluation
of the impacts of mining and the effectiveness of reclamation
associated with returning streams to pre-mining conditions.
However, in February 2017, both the House and Senate passed a
resolution disapproving of the Stream Protection Rule pursuant to
the Congressional Review Act (“CRA”). President Trump
signed the resolution on February 16, 2017 and, pursuant to the
CRA, the Stream Protection Rule “shall have no force or
effect” and cannot be replaced by a similar rule absent
future legislation. On November 17, 2017, OSMRE published a Federal
Register notice that removed the text of the Stream Protection Rule
from the Code of Federal Regulations. Whether Congress will enact
future legislation to require a new Stream Protection Rule remains
uncertain. The existing rules, or other new SMCRA regulations,
could result in additional material costs, obligations and
restrictions upon our operations.
Abandoned Mine Lands Fund
SMCRA also imposes
a reclamation fee on all current mining operations, the proceeds of
which are deposited in the AML Fund, which is used to restore
unreclaimed and abandoned mine lands mined before 1977. The current
per ton fee is $0.280 per ton for surface mined coal and $0.120 per
ton for underground mined coal. These fees are currently scheduled
to be in effect until September 30, 2021.
Mining Permits and Approvals
Numerous
governmental permits and approvals are required for mining
operations. We are required to prepare and present to federal,
state, and local authorities data detailing the effect or impact
that any proposed exploration project for production of coal may
have upon the environment, the public and our employees. The
permitting rules, and the interpretations of these rules, are
complex, change frequently, and may be subject to discretionary
interpretations by regulators. The requirements imposed by these
permits and associated regulations can be costly and time-consuming
and may delay commencement or continuation of exploration,
production or expansion at our operations. The governing laws,
rules, and regulations authorize substantial fines and penalties,
including revocation or suspension of mining permits under some
circumstances. Monetary sanctions and, in certain circumstances,
even criminal sanctions may be imposed for failure to comply with
these laws.
Applications for
permits and permit renewals at our mining operations are also
subject to public comment and potential legal challenges from third
parties seeking to prevent a permit from being issued, or to
overturn the applicable agency’s grant of the permit. Should
our permitting efforts become subject to such challenges, they
could delay commencement, continuation or expansion of our mining
operations. If such comments lead to a formal challenge to the
issuance of these permits, the permits may not be issued in a
timely fashion, may involve requirements which restrict our ability
to conduct our mining operations or to do so profitably, or may not
be issued at all. Any delays, denials, or revocation of these or
other similar permits we need to operate could reduce our
production and materially adversely impact our cash flow and
results of our operations.
In order to obtain
mining permits and approvals from state regulatory authorities,
mine operators must also submit a reclamation plan for restoring
the mined property to its prior condition, productive use or other
permitted condition. The conditions of certain permits also require
that we obtain surface owner consent if the surface estate has been
split from the mineral estate. This requires us to negotiate with
third parties for surface access that overlies coal we acquired or
intend to acquire. These negotiations can be costly and
time-consuming, lasting years in some instances, which can create
additional delays in the permitting process. If we cannot
successfully negotiate for land access, we could be denied a permit
to mine coal we already own.
Finally, we
typically submit necessary mining permit applications several
months, or even years, before we anticipate mining a new area.
However, we cannot control the pace at which the government issues
permits needed for new or ongoing operations. For example, the
process of obtaining CWA permits can be particularly time-consuming
and subject to delays and denials. The EPA also has the authority
to veto permits issued by the Corps under the CWA’s Section
404 program that prohibits the discharge of dredged or fill
material into regulated waters without a permit. Even after we
obtain the permits that we need to operate, many of the permits
must be periodically renewed, or may require modification. There is
some risk that not all existing permits will be approved for
renewal, or that existing permits will be approved for renewal only
upon terms that restrict or limit our operations in ways that may
be material.
Financial Assurance
Federal and state
laws require a mine operator to secure the performance of its
reclamation and lease obligations under SMCRA through the use of
surety bonds or other approved forms of financial security for
payment of certain long-term obligations, including mine closure or
reclamation costs. The changes in the market for coal used to
generate electricity in recent years have led to bankruptcies
involving prominent coal producers. Several of these companies
relied on self-bonding to guarantee their responsibilities under
the SMCRA permits including for reclamation. In response to these
bankruptcies, OSMRE issued a Policy Advisory in August 2016 to
state agencies that are authorized under the SMCRA to implement the
act in their states. Certain states, including Virginia, had
previously announced that it would no longer accept self-bonding to
secure reclamation obligations under the state mining laws. This
Policy Advisory is intended to discourage authorized states from
approving self-bonding arrangements and may lead to increased
demand for other forms of financial assurance, which may strain
capacity for those instruments and increase our costs of obtaining
and maintaining the amounts of financial assurance needed for our
operations. In addition, OSMRE announced in August 2016 that it
would initiate a rulemaking under SMCRA to revise the requirements
for self-bonding. Individually and collectively, these revised
various financial assurance requirements may increase the amount of
financial assurance needed and limit the types of acceptable
instruments, straining the capacity of the surety markets to meet
demand. This may delay the timing for and increase the costs of
obtaining the required financial assurance.
We may use surety
bonds, trusts and letters of credit to provide financial assurance
for certain transactions and business activities. Federal and state
laws require us to obtain surety bonds to secure payment of certain
long-term obligations including mine closure or reclamation costs
and other miscellaneous obligations. The bonds are renewable on a
yearly basis. Surety bond rates have increased in recent years and
the market terms of such bonds have generally become less
favorable. Sureties typically require coal producers to post
collateral, often having a value equal to 40% or more of the face
amount of the bond. As a result, we may be required to provide
collateral, letters of credit or other assurances of payment in
order to obtain the necessary types and amounts of financial
assurance. Under our surety bonding program, we are not currently
required to post any letters of credit or other collateral to
secure the surety bonds; obtaining letters of credit in lieu of
surety bonds could result in a significant cost increase. Moreover,
the need to obtain letters of credit may also reduce amounts that
we can borrow under any senior secured credit facility for other
purposes. If, in the future, we are unable to secure surety bonds
for these obligations, and are forced to secure letters of credit
indefinitely or obtain some other form of financial assurance at
too high of a cost, our profitability may be negatively
affected.
Although our
current bonding capacity approved by our surety, Lexon Insurance
Company, is substantial and enough to cover our current and
anticipated future bonding needs, this amount may increase or
decrease over time. As of December 31, 2018, and September 30,
2018, we had outstanding surety bonds at all of our mining
operations totaling approximately$26.66 million. respectively. As
of December 31, 2017 we had outstanding surety bonds at all of our
mining operations totaling approximately $24.80 million. While we
anticipate reducing the outstanding surety bonds through continued
reclamation of many of our permits, that number may increase should
we acquire additional mining permits, acquire additional mining
operations, expand our mining operations that result in additional
reclamation bonds, or if any of our sites encounters additional
environmental liability that may require additional reclamation
bonding. While we intend to maintain a credit profile that
eliminates the need to post collateral for our surety bonds, our
surety has the right to demand additional collateral at its
discretion.
Mine Safety and Health
The Mine Act and
the MINER Act, and regulations issued under these federal statutes,
impose stringent health and safety standards on mining operations.
The regulations that have been adopted under the Mine Act and the
MINER Act are comprehensive and affect numerous aspects of mining
operations, including training of mine personnel, mining
procedures, roof control, ventilation, blasting, use and
maintenance of mining equipment, dust and noise control,
communications, emergency response procedures, and other matters.
MSHA regularly inspects mines to ensure compliance with regulations
promulgated under the Mine Act and MINER Act.
From time to time
MSHA will also publish new regulations imposing additional
requirements and costs on our operations. For example, MSHA
implemented a rule in August 2014 to lower miners’ exposure
to respirable coal mine dust. The rule requires shift dust to be
monitored and reduces the respirable dust standard for designated
occupants and miners. MSHA also finalized a new rule in January
2015 on proximity detection systems for continuous mining machines,
which requires underground coal mine operators to equip continuous
mining machines, except full-face continuous mining machines, with
proximity detection systems.
Kentucky, West
Virginia, and Virginia all have similar programs for mine safety
and health regulation and enforcement. The various requirements
mandated by federal and state statutes, rules, and regulations
place restrictions on our methods of operation and result in fees
and civil penalties for violations of such requirements or criminal
liability for the knowing violation of such standards,
significantly impacting operating costs and productivity. The
regulations enacted under the Mine Act and MINER Act as well as
under similar state acts are routinely expanded or made more
stringent, raising compliance costs and increasing potential
liability. Our compliance with current or future mine health and
safety regulations could increase our mining costs. At this time,
it is not possible to predict the full effect that new or proposed
statutes, regulations and policies will have on our operating
costs, but any expansion of existing regulations, or making such
regulations more stringent may have a negative impact on the
profitability of our operations. If we were to be found in
violation of mine safety and health regulations, we could face
penalties or restrictions that may materially and adversely impact
our operations, financial results and liquidity.
In addition,
government inspectors have the authority to issue orders to shut
down our operations based on safety considerations under certain
circumstances, such as imminent dangers, accidents, failures to
abate violations, and unwarrantable failures to comply with
mandatory safety standards. If an incident were to occur at one of
our operations, it could be shut down for an extended period of
time, and our reputation with prospective customers could be
materially damaged. Moreover, if one of our operations is issued a
notice of pattern of violations, then MSHA can issue an order
withdrawing the miners from the area affected by any enforcement
action during each subsequent significant and substantial
(“S&S”) citation until the S&S citation or
order is abated. In 2013 MSHA modified the pattern of violations
regulation, allowing, among other things, the use of non-final
citations and orders in determining whether a pattern of violations
exists at a mine.
Workers’ Compensation and Black Lung
We are insured for
workers’ compensation benefits for work related injuries that
occur within our United States operations. We retain exposure for
the first $10,000 per accident for all of our subsidiaries and are
insured above the deductible for statutory limits. Workers’
compensation liabilities, including those related to claims
incurred but not reported, are recorded principally using annual
valuations based on discounted future expected payments using
historical data of the operating subsidiary or combined insurance
industry data when historical data is limited. State workers’
compensation acts typically provide for an exception to an
employer’s immunity from civil lawsuits for workplace
injuries in the case of intentional torts. However,
Kentucky’s workers’ compensation act provides a much
broader exception to workers’ compensation immunity. The
exception allows an injured employee to recover against his or her
employer where he or she can show damages caused by an unsafe
working condition of which the employer was aware that was a
violation of a statute, regulation, rule or consensus industry
standard. These types of lawsuits are not uncommon and could have a
significant impact on our operating costs.
The Patient
Protection and Affordable Care Act includes significant changes to
the federal black lung program including an automatic survivor
benefit paid upon the death of a miner with an awarded black lung
claim and the establishment of a rebuttable presumption with regard
to pneumoconiosis among miners with 15 or more years of coal mine
employment that are totally disabled by a respiratory condition.
These changes could have a material impact on our costs expended in
association with the federal black lung program. In addition to
possibly incurring liability under federal statutes, we may also be
liable under state laws for black lung claims.
Clean Air Act
The CAA and
comparable state laws that regulate air emissions affect coal
mining operations both directly and indirectly. Direct impacts on
coal mining and processing operations include CAA permitting
requirements and emission control requirements relating to air
pollutants, including particulate matter such as fugitive dust. The
CAA indirectly affects coal mining operations by extensively
regulating the emissions of particulate matter, sulfur dioxide,
nitrogen oxides, mercury and other compounds emitted by coal-fired
power plants. In addition to the GHG issues discussed below, the
air emissions programs that may materially and adversely affect our
operations, financial results, liquidity, and demand for our coal,
directly or indirectly, include, but are not limited to, the
following:
●
Clean Air Interstate Rule and Cross-State Air
Pollution Rule
. the Clean Air Interstate Rule
(“CAIR”) calls for power plants in 28 states and the
District of Columbia to reduce emission levels of sulfur dioxide
and nitrogen oxide pursuant to a cap-and-trade program similar to
the system now in effect for acid rain. In June 2011, the EPA
finalized the Cross-State Air Pollution Rule (“CSAPR”),
a replacement rule to CAIR, which requires 28 states in the Midwest
and eastern seaboard of the U.S. to reduce power plant emissions
that cross state lines and contribute to ozone and/or fine particle
pollution in other states. Following litigation over the rule, the
EPA issued an interim final rule reconciling the CSAPR rule with a
court order, which calls for Phase 1 implementation of CSAPR in
2015 and Phase 2 implementation in 2017. In September 2016, the EPA
finalized an update to CSAPR for the 2008 ozone NAAQS by issuing
the final CSAPR Update. Beginning in May 2017, this rule will
reduce summertime (May—September) nitrogen oxide emissions
from power plants in 22 states in the eastern United States. For
states to meet their requirements under CSAPR, a number of
coal-fired electric generating units will likely need to be
retired, rather than retrofitted with the necessary emission
control technologies, reducing demand for thermal coal. However,
the practical impact of CSAPR may be limited because utilities in
the U.S. have continued to take steps to comply with CAIR, which
requires similar power plant emissions reductions, and because
utilities are preparing to comply with the Mercury and Air Toxics
Standards (“MATS”) regulations, which require
overlapping power plant emissions reductions.
●
Acid Rain
. Title IV of the CAA requires
reductions of sulfur dioxide emissions by electric utilities and
applies to all coal-fired power plants generating greater than 25
Megawatts of power. Affected power plants have sought to reduce
sulfur dioxide emissions by switching to lower sulfur fuels,
installing pollution control devices, reducing electricity
generating levels or purchasing or trading sulfur dioxide emission
allowances. These reductions could impact our customers in the
electric generation industry. These requirements are not supplanted
by CSAPR.
●
NAAQS for Criterion Pollutants
. The CAA
requires the EPA to set standards, referred to as NAAQS, for six
common air pollutants: carbon monoxide, nitrogen dioxide, lead,
ozone, particulate matter and sulfur dioxide. Areas that are not in
compliance (referred to as non-attainment areas) with these
standards must take steps to reduce emissions levels. The EPA has
adopted more stringent NAAQS for nitrogen oxide, sulfur dioxide,
particulate matter and ozone. As a result, some states will be
required to amend their existing individual state implementation
plans (“SIPs”) to achieve compliance with the new air
quality standards. Other states will be required to develop new
plans for areas that were previously in “attainment,”
but do not meet the revised standards. For example, in October
2015, the EPA finalized the NAAQS for ozone pollution and reduced
the limit to parts per billion (ppb) from the previous 75 ppb
standard. Under the revised ozone NAAQS, significant additional
emissions control expenditures may be required at coal-fired power
plants. The final rules and new standards may impose additional
emissions control requirements on our customers in the electric
generation, steelmaking, and coke industries. Because coal mining
operations emit particulate matter and sulfur dioxide, our mining
operations could be affected when the new standards are implemented
by the states.
●
Nitrogen Oxide SIP Call
. The nitrogen
oxide SIP Call program was established by the EPA in October 1998
to reduce the transport of nitrogen oxide and ozone on prevailing
winds from the Midwest and South to states in the Northeast, which
alleged that they could not meet federal air quality standards
because of migrating pollution. The program is designed to reduce
nitrogen oxide emissions by one million tons per year in 22 eastern
states and the District of Columbia. As a result of the program,
many power plants have been or will be required to install
additional emission control measures, such as selective catalytic
reduction devices. Installation of additional emission control
measures will make it costlier to operate coal-fired power plants,
potentially making coal a less attractive fuel.
●
Mercury and Hazardous Air Pollutants
.
In February 2012, the EPA formally adopted the MATS rule to
regulate emissions of mercury and other metals, fine particulates,
and acid gases such as hydrogen chloride from coal- and oil-fired
power plants. Following a legal challenge to MATS, the EPA issued a
new determination in April 2016 that it is appropriate and
necessary to regulate these pollutants from power plants. Like
CSAPR, MATS and other similar future regulations could accelerate
the retirement of a significant number of coal-fired power plants.
Such retirements would likely adversely impact our
business.
Global Climate Change
Climate change
continues to attract considerable public and scientific attention.
There is widespread concern about the contributions of human
activity to such changes, especially through the emission of GHGs.
There are three primary sources of GHGs associated with the coal
industry. First, the end use of our coal by our customers in
electricity generation, coke plants, and steelmaking is a source of
GHGs. Second, combustion of fuel by equipment used in coal
production and to transport our coal to our customers is a source
of GHGs. Third, coal mining itself can release methane, which is
considered to be a more potent GHG than CO2, directly into the
atmosphere. These emissions from coal consumption, transportation
and production are subject to pending and proposed regulation as
part of initiatives to address global climate change.
As a result,
numerous proposals have been made and are likely to continue to be
made at the international, national, regional and state levels of
government to monitor and limit emissions of GHGs. Collectively,
these initiatives could result in higher electric costs to our
customers or lower the demand for coal used in electric generation,
which could in turn adversely impact our business.
At present, we are
principally focused on metallurgical coal production, which is not
used in connection with the production of power generation.
However, we may seek to sell greater amounts of our coal into the
power-generation market in the future. The market for our coal may
be adversely impacted if comprehensive legislation or regulations
focusing on GHG emission reductions are adopted, or if our
customers are unable to obtain financing for their operations. At
the international level, the United Nations Framework Convention on
Climate Change released an international climate agreement in
December 2015. The agreement has been ratified by more than 70
countries, and entered into force in November 2016.Although this
agreement does not create any binding obligations for nations to
limit their GHG emissions, it does include pledges to voluntarily
limit or reduce future emissions. In addition, in November 2014,
President Obama announced that the United States would seek to cut
net GHG emissions 26-28 percent below 2005 levels by 2025 in return
for China’s commitment to seek to peak emissions around 2030,
with concurrent increases in renewable energy.
At the federal
level, no comprehensive climate change legislation has been
implemented to date. The EPA has, however, has determined that
emissions of GHGs present an endangerment to public health and the
environment, because emissions of GHGs are, according to the EPA,
contributing to the warming of the earth’s atmosphere and
other climatic changes. Based on these findings, the EPA has begun
adopting and implementing regulations to restrict emissions of GHGs
under existing provisions of the CAA. For example, in August 2015,
EPA finalized the CPP to cut carbon emissions from existing power
plants. The CPP creates individualized emission guidelines for
states to follow, and requires each state to develop an
implementation plan to meet the individual state’s specific
targets for reducing GHG emissions. The EPA also proposed a federal
compliance plan to implement the CPP in the event that a state does
not submit an approvable plan to the EPA. In February 2016, the
U.S. Supreme Court granted a stay of the implementation of the CPP.
This stay suspends the rule and will remain in effect until the
completion of the appeals process. The Supreme Court’s stay
only applies to EPA’s regulations for CO2 emissions from
existing power plants and will not affect EPA’s standards for
new power plants. If the CPP is ultimately upheld, and depending on
how it is implemented by the states, it could have an adverse
impact on the demand for coal for electric generation.
At the state level,
several states have already adopted measures requiring GHG
emissions to be reduced within state boundaries, including
cap-and-trade programs and the imposition of renewable energy
portfolio standards. Various states and regions have also adopted
GHG initiatives and certain governmental bodies, have imposed, or
are considering the imposition of, fees or taxes based on the
emission of GHGs by certain facilities. A number of states have
also enacted legislative mandates requiring electricity suppliers
to use renewable energy sources to generate a certain percentage of
power.
The uncertainty
over the outcome of litigation challenging the CPP and the extent
of future regulation of GHG emissions may inhibit utilities from
investing in the building of new coal-fired plants to replace older
plants or investing in the upgrading of existing coal-fired plants.
Any reduction in the amount of coal consumed by electric power
generators as a result of actual or potential regulation of GHG
emissions could decrease demand for our coal, thereby reducing our
revenues and materially and adversely affecting our business and
results of operations. We or prospective customers may also have to
invest in CO2 capture and storage technologies in order to burn
coal and comply with future GHG emission standards.
Finally, there have
been attempts to encourage greater regulation of coalbed methane
because methane has a greater GHG effect than CO2. Methane from
coal mines can give rise to safety concerns, and may require that
various measures be taken to mitigate those risks. If new laws or
regulations were introduced to reduce coalbed methane emissions,
those rules could adversely affect our costs of operations by
requiring installation of air pollution controls, higher taxes, or
costs incurred to purchase credits that permit us to continue
operations.
Clean Water Act
The CWA and
corresponding state laws and regulations affect coal mining
operations by restricting the discharge of pollutants, including
dredged or fill materials, into waters of the United States.
Likewise, permits are required under the CWA to construct
impoundments, fills or other structure in areas that are designated
as waters of the United States. The CWA provisions and associated
state and federal regulations are complex and subject to
amendments, legal challenges and changes in implementation. Recent
court decisions, regulatory actions and proposed legislation have
created uncertainty over CWA jurisdiction and permitting
requirements.
Prior to
discharging any pollutants into waters of the United States, coal
mining companies must obtain a National Pollutant Discharge
Elimination System (“NPDES”) permit from the
appropriate state or federal permitting authority. NPDES permits
include effluent limitations for discharged pollutants and other
terms and conditions, including required monitoring of discharges.
Failure to comply with the CWA or NPDES permits can lead to the
imposition of significant penalties, litigation, compliance costs
and delays in coal production. Changes and proposed changes in
state and federally recommended water quality standards may result
in the issuance or modification of permits with new or more
stringent effluent limits or terms and conditions.
For instance,
waters that states have designated as impaired (i.e., as not
meeting present water quality standards) are subject to Total
Maximum Daily Load regulations, which may lead to the adoption of
more stringent discharge standards for our coal mines and could
require more costly treatment. Likewise, the water quality of
certain receiving streams requires an anti-degradation review
before approving any discharge permits. TMDL regulations and
anti-degradation policies may increase the cost, time and
difficulty associated with obtaining and complying with NPDES
permits.
In addition, in
certain circumstances private citizens may challenge alleged
violations of NPDES permit limits in court. While it is difficult
to predict the outcome of any potential or future suits, such
litigation could result in increased compliance costs following the
completion of mining at our operations.
Finally, in June
2015, the EPA and the Corps published a new definition of
“waters of the United States” (“WOTUS”)
that became effective on August 28, 2015. Many groups have filed
suit to challenge the validity of this rule. The U.S. Court of
Appeals for the Sixth Circuit stayed the rule nationwide pending
the outcome of this litigation. On January 22, 2018, the Supreme
Court held that the courts of appeals do not have original
jurisdiction to review challenges to the 2015 Rule. With this final
rule, the agencies intend to maintain the status quo by adding an
applicability date to the 2015 Rule and thus providing continuity
and regulatory certainty for regulated entities, the States and
Tribes, and the public while the agencies continue to consider
possible revisions to the 2015 Rule. In light of this holding, in
February 2018 the agencies published a final rule adding an
applicability date to the 2015 Rule of February 6, 2020. We
anticipate that the WOTUS rules, if upheld in litigation, will
expand areas requiring NPDES or Corps Section 404 permits. If so,
the CWA permits we need may not be issued, may not be issued in a
timely fashion, or may be issued with new requirements which
restrict our ability to conduct our mining operations or to do so
profitably.
Resource Conservation and Recovery Act
RCRA and
corresponding state laws establish standards for the management of
solid and hazardous wastes generated at our various facilities.
Besides affecting current waste disposal practices, RCRA also
addresses the environmental effects of certain past hazardous waste
treatment, storage and disposal practices. In addition, RCRA
requires certain of our facilities to evaluate and respond to any
past release, or threatened release, of a hazardous substance that
may pose a risk to human health or the environment.
RCRA may affect
coal mining operations by establishing requirements for the proper
management, handling, transportation and disposal of solid and
hazardous wastes. Currently, certain coal mine wastes, such as
earth and rock covering a mineral deposit (commonly referred to as
overburden) and coal cleaning wastes, are exempted from hazardous
waste management under RCRA. Any change or reclassification of this
exemption could significantly increase our coal mining
costs.
EPA began
regulating coal ash as a solid waste under Subtitle D of RCRA in
2015. The EPA’s rule requires closure of sites that fail to
meet prescribed engineering standards, regular inspections of
impoundments, and immediate remediation and closure of unlined
ponds that are polluting ground water. The rule also establishes
limits for the location of new sites. However, the rule does not
regulate closed coal ash impoundments unless they are located at
active power plants. These requirements, as well as any future
changes in the management of coal combustion residues, could
increase our customers’ operating costs and potentially
reduce their ability or need to purchase coal. In addition,
contamination caused by the past disposal of coal combustion
residues, including coal ash, could lead to material liability for
our customers under RCRA or other federal or state laws and
potentially further reduce the demand for coal.
Comprehensive Environmental Response, Compensation and Liability
Act
CERCLA and similar
state laws affect coal mining operations by, among other things,
imposing cleanup requirements for threatened or actual releases of
hazardous substances into the environment. Under CERCLA and similar
state laws, joint and several liability may be imposed on hazardous
substance generators, site owners, transporters, lessees and others
regardless of fault or the legality of the original disposal
activity. Although the EPA excludes most wastes generated by coal
mining and processing operations from the primary hazardous waste
laws, such wastes can, in certain circumstances, constitute
hazardous substances for the purposes of CERCLA. In addition, the
disposal, release or spilling of some products used by coal
companies in operations, such as chemicals, could trigger the
liability provisions of CERCLA or similar state laws. Thus, we may
be subject to liability under CERCLA and similar state laws for
coal mines that we currently own, lease or operate or that we or
our predecessors have previously owned, leased or operated, and
sites to which we or our predecessors sent hazardous substances.
These liabilities could be significant and materially and adversely
impact our financial results and liquidity.
Endangered Species and Bald and Golden Eagle Protection
Acts
The ESA and similar
state legislation protect species designated as threatened,
endangered or other special status. The U.S. Fish and Wildlife
Service (the “USFWS”) works closely with the OSM and
state regulatory agencies to ensure that species subject to the ESA
are protected from mining-related impacts. Several species
indigenous to the areas in which we operate area protected under
the ESA. Other species in the vicinity of our operations may have
their listing status reviewed in the future and could also become
protected under the ESA. In addition, the USFWS has identified bald
eagle habitat in some of the counties where we operate. The Bald
and Golden Eagle Protection Act prohibits taking certain actions
that would harm bald or golden eagles without obtaining a permit
from the USFWS. Compliance with the requirements of the ESA and the
Bald and Golden Eagle Protection Act could have the effect of
prohibiting or delaying us from obtaining mining permits. These
requirements may also include restrictions on timber harvesting,
road building and other mining or agricultural activities in areas
containing the affected species or their habitats.
Use of Explosives
Our surface mining
operations are subject to numerous regulations relating to blasting
activities. Due to these regulations, we will incur costs to design
and implement blast schedules and to conduct pre-blast surveys and
blast monitoring, either directly or through the costs of a
contractor we may employ. In addition, the storage of explosives is
subject to various regulatory requirements. For example, pursuant
to a rule issued by the Department of Homeland Security in 2007,
facilities in possession of chemicals of interest (including
ammonium nitrate at certain threshold levels) are required to
complete a screening review. Our mines are low risk, Tier 4
facilities which are not subject to additional security plans. In
2008, the Department of Homeland Security proposed regulation of
ammonium nitrate under the ammonium nitrate security rule.
Additional requirements may include tracking and verifications for
each transaction related to ammonium nitrate, though a final rule
has yet to be issued. Finally, in December 2014, the OSM announced
its decision to pursue a rulemaking to revise regulations under
SMCRA which will address all blast generated fumes and toxic gases.
OSM has not yet issued a proposed rule to address these blasts. The
outcome of these rulemakings could materially adversely impact our
cost or ability to conduct our mining operations.
National Environmental Policy Act
NEPA requires
federal agencies, including the Department of Interior, to evaluate
major agency actions that have the potential to significantly
impact the environment, such as issuing a permit or other approval.
In the course of such evaluations, an agency will typically prepare
an environmental assessment to determine the potential direct,
indirect and cumulative impacts of a proposed project. Where the
activities in question have significant impacts to the environment,
the agency must prepare an environmental impact statement.
Compliance with NEPA can be time-consuming and may result in the
imposition of mitigation measures that could affect the amount of
coal that we are able to produce from mines on federal lands, and
may require public comment. Furthermore, whether agencies have
complied with NEPA is subject to protest, appeal or litigation,
which can delay or halt projects. The NEPA review process,
including potential disputes regarding the level of evaluation
required for climate change impacts, may extend the time and/or
increase the costs and difficulty of obtaining necessary
governmental approvals, and may lead to litigation regarding the
adequacy of the NEPA analysis, which could delay or potentially
preclude the issuance of approvals or grant of leases.
The Council on
Environmental Quality recently released guidance discussing how
federal agencies should consider the effects of GHG emissions and
climate change in their NEPA evaluations. The guidance encourages
agencies to provide more detailed discussion of the direct,
indirect, and cumulative impacts of a proposed action’s
reasonably foreseeable emissions and effects. This guidance could
create additional delays and costs in the NEPA review process or in
our operations, or even an inability to obtain necessary federal
approvals for our operations due to the increased risk of legal
challenges from environmental groups seeking additional analysis of
climate impacts.
Other Environmental Laws
We are required to
comply with numerous other federal, state, and local environmental
laws and regulations in addition to those previously discussed.
These additional laws include but are not limited to the Safe
Drinking Water Act, the Toxic Substances Control Act, and the
Emergency Planning and Community Right-to-Know Act. Each of these
laws can impact permitting or planned operations and can result in
additional costs or operational delays.
Seasonality
Our primary
business is not materially impacted by seasonal fluctuations.
Demand for metallurgical coal, thermal coal, and the other coals we
intend to produce is generally more heavily influenced by other
factors such as the general economy, interest rates and commodity
prices.
Employees
The Company,
through its operating subsidiaries, employs a combination of
company employees and contract labor to mine coal, process coal,
and related functions. The Company is continually evaluating the
use of company employees and contract labor to determine the
optimal mix of each, given the needs of the Company. Currently,
McCoy Elkhorn’s Mine #15, Carnegie 1 Mine, and Deane
Mining’s Access Energy mine are primarily run by company
employees, while Deane Mining’s Razorblade Surface mine,
Knott County Coals’ Wayland Surface mine, and McCoy
Elkhorn’s PointRock mine are primarily run (or expected to be
run) by contract labor, and the Company’s various coal
preparation facilities are run by company employees.
The Company
currently has approximately 216 employees
(excluding personnel hired through
contractors)
, with a substantial majority based in eastern
Kentucky. The Company is headquartered in Fishers, Indiana with six
members of the Company’s executive team based at this
location.
Results of Operations For The Nine Month Period Ended September 30,
2018
Our
consolidated operations had operating revenues of $9,038,268 and
$23,386,684 for the three-months and nine-months ended September
30, 2018 and $4,351,968 and $15,334,047 operating revenue for the
three-months and nine-months ended September 30, 2017.
For
the three-months and nine-months ended September 30, 2018 we have
incurred net loss attributable to American Resources Corporation
shareholders in the amount of $3,628,226 and $8,245,588. For the
three-months and nine-months ended September 30, 2017 we have
incurred net loss attributable to American Resources Corporation
shareholders in the amount of $1,809,643 and
$9,012,121.
The
primary driver for increased revenue was the commencement of
underground mining operations at the Access Energy Mine in
September 2017 along with more production from McCoy’s Mine
#15 and Carnegie mine. The primary driver for decreased net loss
was an increased gross margin during 2018 and higher revenue
volume. Additionally, more coal was sold into the export market
lowering the taxes paid on customer sales.
From
our inception to-date our activities have been primarily financed
from the proceeds of our acquisitions, Series B equity investments
and loans.
For
the three months ended September 30, 2018 and 2017, coal sales and
processing expenses were $6,690,698 and $2,797,140 respectively,
development costs, including loss on settlement of ARO were
$2,188,833 and$1,065,341, respectively, and production taxes and
royalties $1,041,667 and $865,950, respectively. Depreciation
expense for the same periods ended September 30, 2018 and 2017 were
$649,983 and $697,214 respectively.
For
the nine months ended September, 2018 and 2017, coal sales and
processing expenses were $16,783,801 and $12,307,399 respectively,
development costs, including loss on settlement of ARO were
$5,908,207 and $4,454,666, respectively, and production taxes and
royalties $2,769,584 and $3,464,611, respectively. Depreciation
expense for the same periods ended September 30, 2018 and 2017 were
$1,779,539 and $1,856,442 respectively.
Liquidity and Capital Resources
As
of September 30, 2018, our available cash was $343,782. We expect
to fund our liquidity requirements with cash on hand, future
borrowings and cash flow from operations. If future cash flows are
insufficient to meet our liquidity needs or capital requirements,
we may reduce our mine development and/or fund a portion of our
expenditures through issuance of debt or equity securities, the
entry into debt arrangements for from other sources, such as asset
sales.
For
the nine months ending September 30, 2018 our net cash flow used in
operating activities was $4,076,157 and for the nine months ending
September 30, 2017 the net cash flow used in operating activities
was $951,367.
For
the nine months ending September 30, 2018 and 2017 our net cash
flows used in investing activities were $5,235 and provided by
investing activities $218,048 respectively.
For
the nine months ending September 30, 2018 and 2017 net cash
proceeds from financing activities were $4,039,509 and $479,847,
respectively.
As
a public company, we will be subject to certain reporting and other
compliance requirements of a publicly reporting company. We will be
subject to certain costs for such compliance which private
companies may not choose to make. We have identified such costs as
being primarily for audits, legal services, filing expenses,
financial and reporting controls and shareholder communications and
estimate the cost to be approximately $10,000 monthly if the
activities of our Company remain somewhat the same for the next few
months. We have included such costs in our monthly cash flow needs
and expect to pay such costs from a combination of cash from
operations.
Off Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements that we are required
to disclose pursuant to these regulations. In the ordinary course
of business, we enter into operating lease commitments, purchase
commitments and other contractual obligations. These transactions
are recognized in our financial statements in accordance with
generally accepted accounting principles in the United
States.
Results of Operations for the years ended December 31,
2017 and December 31, 2016.
Revenues.
Revenues
for the period ended December 31, 2017 was $20,820,998 and 2016 was
$7,601,194, respectively. The primary drivers for revenue growth
was a full year of production from the Mine #15 of McCoy Elkhorn
and the beginning of production at the Access Energy mine of Deane
Mining in September 2017. Increase mine production was necessary to
fulfill market demands and customer orders.
Expenses.
Total
Operating Expenses for the period ended December 31, 2017 was
$34,839,884 and 2016 was $29,452,263, respectively. The primary
drivers for increase in operating expenses was a full year of
production from the Mine #15 of McCoy Elkhorn and the beginning of
production at the Access Energy mine of Deane Mining in September
2017. Production expenses, such as underground mine roof control,
mining consumables and wages increased as coal mining production
increased. The increased need for production expenses was caused to
the increased demand for the end product due to market demands and
customer orders. If demand from customers for our coal continues to
increase, we anticipate these production expenses will also
increase.
Total
Other Expenses for the period ended December 31, 2017 was $6,580
and 2016 was $238,213, respectively. The primary driver for
decrease in other expenses was an increase in royalty and interest
income from consolidated subsidiaries.
Financial Condition.
Total
Assets as of December 31, 2017 amounted to $18,263,385 and 2016
amounted to $20,273,829, respectively. The primary drivers for
lower asset balance is current year depreciation and lower accounts
receivable balance.
Total
Liabilities as of December 31, 2017 amounted to $58,356,449 and
2016 amounted to $47,781,427, respectively. The primary drivers for
the increase in liability balance is an increase in accounts
payable and equipment and term debt.
Liquidity and Capital Resources.
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern which contemplates,
among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business.
We
are not aware of any trends or known demands, commitments, events
or uncertainties that will result in or that are reasonably likely
to result in material increases or decreases in
liquidity.
Capital Resources.
We
had no material commitments for capital expenditures as of December
31, 2017.
Off-Balance Sheet Arrangements
We
have made no off-balance sheet arrangements that have or 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 is material to investors.
DIRECTORS
AND EXECUTIVE OFFICERS
The following sets
forth information regarding our directors and executive
officers.
Name
|
|
Age
|
|
Positions
|
|
|
|
|
|
Mark C.
Jensen
|
|
39
|
|
Chief Executive
Officer, Chairman of the Board of Directors
|
|
|
|
|
|
Thomas M.
Sauve
|
|
39
|
|
President,
Director
|
|
|
|
|
|
Kirk P.
Taylor
|
|
39
|
|
Chief Financial
Officer
|
|
|
|
|
|
Tarlis R.
Thompson
|
|
35
|
|
Chief Operating
Officer
|
|
|
|
|
|
Randal V.
Stephenson
|
|
58
|
|
Director
|
|
|
|
|
|
Ian
Sadler
|
|
67
|
|
Director
|
|
|
|
|
|
Courtenay O.
Taplin
|
|
69
|
|
Director
|
Mark C. Jensen - Chairman
& Chief Executive Officer
: Mark has been an operator,
investor and consultant in various natural resources and energy
businesses.Prior to forming Quest Energy in 2015, he has been
highly involved in the navigation of numerous growth businesses to
mature businesses, working as a managing member at T Squared
Capital LLC since 2007, an investment firm focused on private
equity styled investing in start-up businesses. Upon the merger
with NGFC, Mark continued his role as Chief Executive Officer. As
Chief Executive Officer, Mark’s duties include setting
overall Company strategy, acquisition due diligence and
communicating on a periodic basis with the Board of Directors. Mark
has significant experience with major Wall Street firms such as
Citigroup and graduated from the Kelley School of Business at
Indiana University with a BS in Finance and International Studies
with a focus on Business. Mark also studied in Sydney Australia
through Boston University completing his International Studies
degree with a focus on East Asian culture and business. There are
no arrangements or understandings between Mark and any other
persons pursuant to which he was selected as an officer. He has no
direct or indirect material interest in any transaction required to
be disclosed pursuant to Item 404(a) of Regulation
S-K.
Thomas M. Sauve - President
& Director
: Tom has been involved a number of energy
related businesses. Prior he had been an investor and partner in
various natural resources assets over the last seven years
including coal mining operations and various oil and gas wells
throughout Texas and the Appalachia region. Prior to forming Quest
Energy in 2015, Tom worked as a managing member at T Squared
Capital LLC, an investment firm focused on private equity styled
investing in start-up businesses. Upon the merger with NGFC, Tom
continued his role as President. As President, Tom’s duties
include overseeing day-to-day operations, acquisition due diligence
and communicating on a periodic basis with the Board of Directors.
Tom received his Bachelor's degree in Economics, magna cum laude,
from the University of Rochester, New York, with additional studies
at the Simon Graduate School of Business. There are no arrangements
or understandings between Tom and any other persons pursuant to
which he was selected as an officer. He has no direct or indirect
material interest in any transaction required to be disclosed
pursuant to Item 404(a) of Regulation S-K.
Kirk P. Taylor, CPA - Chief
Financial Officer
: Kirk conducts all tax and financial
accounting roles of the organization, and has substantial
experience in tax credit analysis and financial structure.
Kirk’s main focus over his 13 years in public accounting had
been the auditing, tax compliance, financial modeling and reporting
on complex real estate and business transactions utilizing numerous
federal and state tax credit and incentive programs. Prior to
joining American Resources Corporation, Kirk was Chief Financial
Officer of Quest Energy, Inc., ARC’s wholly-owned subsidiary.
Prior to forming Quest Energy in 2015, he was a Manager at K.B.
Parrish & Co. LLP where he worked since 2014. Prior to that, he
worked at Katz Sapper Miller since 2012 as Manager. Upon the merger
with NGFC, Kirk continued his role as Chief Financial Officer. As
Chief Financial Officer, Kirk’s duties include overseeing
day-to-day financial operations, financial reporting and
communicating on a periodic basis with regulatory bodies. In
addition, Kirk is an instructor for the CPA examination and has
spoken at several training and industry conferences. He received a
BS in Accounting and a BS in Finance from the Kelley School of
Business at Indiana University, Bloomington Indiana and is
currently completing his Masters of Business Administration from
the University of Saint Francis at Fort Wayne, Indiana. Kirk serves
his community in various ways including as the board treasurer for
a community development corporation in Indianapolis, Indiana. Kirk
does not have any family relationships with any of the Company's
directors or executive officers. There are no arrangements or
understandings between Kirk and any other persons pursuant to which
he was selected as an officer. He has no direct or indirect
material interest in any transaction required to be disclosed
pursuant to Item 404(a) of Regulation S-K.
Tarlis R. Thompson - Chief
Operating Officer
: Tarlis overseas all operations at
American Resources’ Central Appalachian subsidiaries, which
includes McCoy Elkhorn, Deane Mining, and Knott County Coal. In
this role, Tarlis manages the activities at the company’s
various coal processing facilities and loadout, coordinates coal
production at the company’s various mines, manages
environmental compliance and reclamation, and is responsible for
coal quality control and shipments to customers. Tarlis graduated
from Millard High School in Kentucky in 2001 and subsequently
worked for Commercial Testing and Engineering, working underground,
performing surveying services and coal sampling. In 2002 he joined
SGS Minerals, working as a Quality Control Manager. Shortly
thereafter, he joined Massey Energy, working as logistics manager
for coal shipments via truck and train, as well as a coal quality
manager, working under Jim Slater and Mike Smith. After several
years at Massey, Tarlis joined Central Appalachian Mining (CAM), in
charge of lab analysis and environmental compliance at CAM’s
various processing plants and loadouts. Tarlis graduated from
Millard High School and has additional courses in Mining
Engineering from Virginia Tech (Training), Business Administration
Management from National College in Pikeville, and LECO Certified
Course from West Virginia Training Institute. Tarlis does not have
any family relationships with any of the Company's directors or
executive officers. There are no arrangements or understandings
between Tarlis and any other persons pursuant to which he was
selected as an officer. He has no direct or indirect material
interest in any transaction required to be disclosed pursuant to
Item 404(a) of Regulation S-K.
Randal V. Stephenson -
Director
: Randal serves as Director of American Resources
Corporation. He was previously co-founder and CEO of a boutique
FINRA-licensed broker dealer focused in the natural resources
industry from 2012 to 2018 and has started and expanded several
successful investment banking platforms previously at Merrill Lynch
(from 2000 to 2002), Jefferies (from 2002 to 2006), CIT Group (from
2006 to 2007) and Duff & Phelps (from 2010 to 2012). Randal
started and managed a mining & metals equity investment
subsidiary of a global trading company, acquiring over $1.0 billion
in operating businesses and assets starting from just a corporate
development plan. He has worldwide relationships with corporations,
financial sponsors, entrepreneurs and governments and has closed
over 200 transactions valued in excess of $40 billion. Randal
graduated with a Bachelor of Arts degree from the University of
Michigan, Ann Arbor and has a Master of Business Administration
degree from Harvard University in 1990 and his Juris Doctorate
(with honors) from Boston College Law School in 1986. He is an
attorney admitted to practice in New York, and holds the Series 7,
79, 63 and 24 securities licenses. The Board nominated Randal to
serve as a director because of his leadership experience and
leadership in the finance industry and assisting companies with
capital raising.
Ian Sadler -
Director
: Ian serves as Director of American Resources
Corporation. He brings decades of direct leadership and experience
in the steel industry and has demonstrated expertise in
successfully leading rapidly-growing companies, optimizing
operational efficiencies and performance enhancements. He has
experience in due diligence, joint ventures and mergers and
acquisitions with a history of successfully assimilating acquired
businesses into value creating enterprises. Prior to retirement, in
2002 Ian was the President and CEO of Miller Centrifugal Casting
International in Cecil, PA. He has a history of leadership with the
Pennsylvania Foundry Group from 2001 to 2002, Shenango LLC from
1994 to 2001, Johnstown Corporation from 1989 to 1994, Blaw-Knox
Corp. from 1988 to 1989, and National Roll Company from 1984 to
1988. He received his Bachelor’s Degree, with First Class
Honors, and Master’s Degree in Metallurgy from Cambridge
University in 1972 and 1976, respectively and was a prior President
of the American Institute of Mining, Metallurgical and Petroleum
Engineers (AIME) and previously served as President of the Iron and
Steel Society. The Board nominated Ian to serve as a director
because of his executive management experience and experience with
growing companies in an efficient and cost-effective
manner.
Courtenay O. Taplin -
Director
: Courtenay serves as Director of American Resources
Corporation. He brings over 40 years of experience of sourcing and
supplying iron ore, coke and metallurgical coal to the steel
industry to assist American Resources with their supply chain,
logistics, customers, overall corporate strategy. He has a vast
knowledge of both the global and domestic marketplace where he
works with both suppliers and consumers. Courtenay is currently
Managing Director of Compass Point Resources, LLC which he founded
in 2007. His prior experience includes Crown Coal & Coke
Company from 1989 to 2007 and Pickands Mather & Company out of
Cleveland, OH from 1974 to 1989. Mr. Taplin attended Hobart College
from 1968 to 1971 and received his degree from Case Western Reserve
University in 1974. The Board nominated Courtenay to serve as a
director because of his experience and relationships in the raw
materials and coking sector and his experience in managing growing
businesses.
None of the
officers and directors have been involved in any legal proceedings
that would require a disclosure under Item 401 of Regulation
SK.
Board
of Directors
Our board of
directors currently consists of five members, including our
Chairman and Chief Executive Officer, our President, and three
independent directors.
In evaluating
director candidates, we will assess whether a candidate possesses
the integrity, judgment, knowledge, experience, skills and
expertise that are likely to enhance the board of directors’
ability to manage and direct our affairs and business, including,
when applicable, to enhance the ability of the committees of the
board of directors to fulfill their duties. Our directors hold
office until the earlier of their death, resignation, retirement,
disqualification or removal or until their successors have been
duly elected and qualified.
Director
Compensation
We currently have
not established standard compensation arrangements for our
directors and the compensation payable to each individual for their
service on our Board will be determined from time to time by our
board of directors based upon the amount of time expended by each
of the directors on our behalf. Currently, executive officers of
our company who are also members of the board of directors do not
receive any compensation specifically for their services as
directors.
Director
Independence
Currently our board
of directors consist of Mark C. Jensen, our Chief Executive
Officer, Thomas M. Sauve, our President, Randal V. Stephenson, Ian
Sadler, and Courtenay O. Taplin, of which Messrs Stephenson,
Sadler, and Taplin are considered independent in accordance under
the requirements of the NASDAQ, NYSE and SEC.
Committees
of the Board of Directors
Currently, our
board of directors has three committee: an Audit Committee, a
Compensation Committee, and a Safety and Environmental Committee.
The Audit Committee and Compensation Committee are both comprised
of the three in independent directors of the company. The Safety
and Environmental Committee is comprised of Thomas M. Sauve and
Mark C. Jensen. The composition and responsibilities of the three
committees are described below.
Audit
Committee
As required by the
rules of the SEC, the audit committee consists solely of
independent directors, which is Messrs Stephenson, Sadler, and
Taplin. SEC rules also require that a public company disclose
whether or not its audit committee has an “audit committee
financial expert” as a member. An “audit committee
financial expert” is defined as a person who, based on his or
her experience, possesses the attributes outlined in such
rules.
This committee
oversees, reviews, acts on and reports on various auditing and
accounting matters to our board of directors, including: the
selection of our independent accountants, the scope of our annual
audits, fees to be paid to the independent accountants, the
performance of our independent accountants and our accounting
practices. In addition, the audit committee oversees our compliance
programs relating to legal and regulatory requirements. We have
adopted an audit committee charter defining the committee’s
primary duties in a
manner consistent with the rules
of the SEC and applicable stock exchange or market
standards.
Compensation
Committee
As required by the
rules of the SEC, the compensation committee consists solely of
independent directors, which is Messrs Stephenson, Sadler, and
Taplin. The purpose of this committee shall be to (i) assist the
board of directors in the oversight of the Company’s
executive officer and director compensation programs, (ii)
discharge the board of director’s duties relating to
administration of the Company’s incentive compensation and
any other stock- based plans, and (iii) act on specific matters
within its delegated authority, as determined by the board of
directors from time to time.
Safety
and Environmental Committee
The board of
directors formed a Safety and Environmental Committee, which is
comprised of Messrs Jensen and Sauve. The purpose of this committee
is to assist the board in fulfilling its responsibilities by
providing oversight and support in assessing the effectiveness of
the Company’s environmental, health, and safety policies,
programs and initiatives. This committee will monitor the continued
effectiveness of these policies and procedures by periodically
reviewing the applicable environmental, health and safety laws,
rules and regulations. The Committee will also perform such other
functions as the Board may assign to the Committee from time to
time.
Code
of Business Conduct and Ethics
We have adopted a
Code of Business Conduct and Ethics that applies to all of our
employees, officers and directors. In addition to the Code of
Business Conduct and Ethics, our principal executive officer,
principal financial officer and principal accounting officer are
also subject to written policies and standards that are reasonably
designed to deter wrongdoing and to promote: honest and ethical
conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships; full, fair, accurate, timely and understandable
disclosure in reports and documents that are filed with, or
submitted to the SEC and in other public communications made by us;
compliance with applicable government laws, rules and regulations;
the prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
accountability for adherence to the code. We have posted the text
of our Code of Business Conduct and Ethics on our internal network.
We intend to disclose future amendments to, or waivers from,
certain provisions of our Code of Business Conduct and Ethics as
applicable.
EXECUTIVE
COMPENSATION
The
following table sets forth information concerning the annual and
long-term compensation of our executive officers for services
rendered in all capacities to us during the last two completed
fiscal years. The listed individuals shall hereinafter be referred
to as the “Named Executive Officers.” We also have
included below a table regarding compensation paid to our directors
who served during the last completed fiscal year. The address for
all individuals identified in the following tables is 9002
Technology Lane, Fishers, IN 46038.
Summary
Compensation Table - Officers
(a)
|
(b)
|
|
|
|
|
|
|
|
|
Name and
principal position
|
|
|
|
|
|
Non-equity
Incentive plan
Compensation
($)
|
Nonqualified
deferred compensation earnings
($)
|
All other
Compensation
($)
|
|
I. Andrew
Weeraratne,
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
(1) CEO,
CFO
|
2017
|
5,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
5,000
|
|
|
|
|
|
|
|
|
|
Mark C. Jensen, (2)
CEO
|
2018
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
16,326
|
172,326
|
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
Thomas M. Sauve,
(3) President
|
2018
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
16,326
|
172,326
|
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
Kirk P. Taylor, (4)
CFO
|
2018
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
23,006
|
179,006
|
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
Tarlis R Thompson,
(5) COO
|
2018
|
117,055
|
-0-
|
-0-
|
76,624
|
-0-
|
-0-
|
-0-
|
193,679
|
|
2017
|
111,280
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
111,280
|
_______________
(1)
|
The amount of value
for the services of Mr. Weeraratne was determined by agreement for
shares in which he received as a founder for (1) control, (2)
willingness to serve on the Board of Directors and (3)
participation in the foundational days of the corporation. Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(2)
|
Of the 2017 salary
amount listed in this table, $32,000 was accrued and unpaid in
2017. On January 2, 2018, the Company entered into an employment
agreement with Mr. Jensen, at an annual salary rate of $156,000.
The Company also has provided for a discretionary quarterly
performance bonus of up to $.64 per clean ton of coal mined. The
payment of such bonus shall be in the sole discretion of the
Company’s management and/or applicable Board of Directors.
Other compensation totaling $16,326 included $16,326 health
insurance reimbursement.
|
|
|
(3)
|
Of the 2017 salary
amount listed in this table, $32,000 was accrued and unpaid in
2017. On January 2, 2018, the Company entered into an employment
agreement with Mr. Sauve, at an annual salary rate of $156,000. The
Company also has provided for a discretionary quarterly performance
bonus of up to $.54 per clean ton of coal mined. The payment of
such bonus shall be in the sole discretion of the Company’s
management and/or applicable Board of Directors. Other compensation
totaling $16,326 included $16,326 health insurance
reimbursement.
|
|
|
(4)
|
Of the 2017 salary
amount listed in this table, $26,293 was accrued and unpaid in
2017. On January 2, 2018, the Company entered into an employment
agreement with Mr. Taylor, at an annual rate of $156,000. The
Company also has provided for a discretionary quarterly performance
bonus of up to $.20 per clean ton of coal mined. The payment of
such bonus shall be in the sole discretion of the Company’s
management and/or applicable Board of Directors. Other compensation
totaling $20,006 included $18,200 health insurance reimbursement
and $4,806 of 2017 accrued salary.
|
(5)
|
There is no
employment agreement in place for Mr. Thompson. In 2018, Mr.
Thompson was awarded 136,830 options as part of the company’s
2018 stock option plan. The options to Mr. Thompson vest equally
over the course of three years, and as of December 31, 2018, none
of the options have vested.
|
(a)
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or Paid in
Cash
|
|
|
Non-Equity Incentive Plan
Compensation
|
Nonqualified deferred compensation
earnings
|
|
|
Name and
principal position
|
|
|
|
|
|
|
|
|
Mark C. Jensen
(1)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Thomas M. Sauve
(2)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Randal V.
Stephenson (3)
|
2018
|
-0-
|
-0-
|
120,450
|
-0-
|
-0-
|
1,496
|
121,946
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Ian Sadler
(4)
|
2018
|
-0-
|
-0-
|
120,450
|
-0-
|
-0-
|
-0-
|
120,450
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Courtenay O. Taplin
(5)
|
2018
|
-0-
|
-0-
|
120,450
|
-0-
|
-0-
|
-0-
|
120,450
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
James C. New
(6)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
I. Andrew
Weeraratne (7)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Eugene Nichols
(8)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Bo G. Engberg
(9)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
William D. Bishop
(10)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
50,000
|
-0-
|
-0-
|
-0-
|
50,000
|
____________
(1)
Mr.
Jensen was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Jensen, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.64 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Jensen is not paid separately
for his services as a director for the Company.
(2)
Mr.
Sauve was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Sauve, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.54 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Sauve is not paid separately for
his services as a director for the Company.
(3)
Mr.
Stephenson was appointed as a director on November 15, 2018. In
2018, Mr. Stephenson was awarded 15,000 options for services
rendered as a director. The options to Mr. Stephenson vest equally
over the course of three years, and as of December 31, 2018, none
of the options have vested. Other Compensation includes $1,496 of
health insurance premiums paid by the Company.
(4)
Mr.
Sadler was appointed as a director on November 15, 2018. In 2018,
Mr. Sadler was awarded 15,000 options for services rendered as a
director. The options to Mr. Sadler vest equally over the course of
three years, and as of December 31, 2018, none of the options have
vested.
(5)
Mr.
Taplin was appointed as a director on November 15, 2018. In 2018,
Mr. Taplin was awarded 15,000 options for services rendered as a
director. The options to Mr. Taplin vest equally over the course of
three years, and as of December 31, 2018, none of the options have
vested.
(6)
Mr. New
submitted his resignation to the Company on February 7, 2017 in
connection with a change of control of the Company.
(7)
Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
(8)
Mr.
Nichols submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
(9)
Mr.
Engberg submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
(10)
Mr.
Bishop was appointed as director on May 10, 2017 and as
compensation to Bill Bishop for his service on the Board of
Directors, the Company issued Mr. Bishop a three-year option to
purchase up to 8,334 common shares of our company at an exercise
price of $3.60 per share, subject to certain price adjustments and
other provisions found within the option issued to Mr. Bishop.
Effective November 8, 2017, Mr. Bishop resigned as a director of
the Company and Mr. Bishop’s resignation from the Board of
Directors did not result from any disagreement with the
Company.
No retirement,
pension, profit sharing, stock option or insurance programs or
other similar programs have been adopted by the Company for the
benefit of its employees.
There are no
understandings or agreements regarding compensation our management
will receive after a business combination that is required to be
included in this table, or otherwise.
Employment
Agreements
Except for our
Chief Operating Officer, we have employment agreements with the
Named Executive Officers that provide for the base salaries and a
discretionary annual performance bonus of up to three times their
annual base salary, plus potential participation in the
Company’s Employee Incentive Stock Option Plan. The payment
of such bonus and/or incentive stock options shall be in the sole
discretion of the Company’s Board of
Directors.
Outstanding
Equity Awards
None of our current
executive officers received any equity awards, including, options,
restricted stock or other equity incentives from the Company as of
the date hereof, other than our Chief Operating Officer, who was
issued options under our Employee Incentive Stock Option Plan on
September 12, 2018 to purchase up to 136,830 shares of our company
at $1.00 per share. Those options vest equally over the course of
three years.
DESCRIPTION
OF SECURITIES
General
Upon completion of
this offering, the authorized capital stock of American Resources
Corporation will consist of 230,000,000 shares of Class A Common
Stock, $0.0001 par value per share, of which 23,298,530 Class A
Common Shares will be issued and outstanding post this offering
(assuming the full underwriter’s Over-Allotment of 15%),
5,000,000 shares of Series A Preferred shares, $0.0001 par value
per share, of which no Series A Preferred shares will be issued and
outstanding, 20,000,000 shares of Series C Preferred shares,
$0.0001 par value per share, 50,000 of which will be issued and
outstanding (see “Series C Preferred Stock” below), and
5,000,000 “blank check” preferred, of which none will
be issued and outstanding.
The following
summary of the capital stock and certificate of incorporation and
bylaws of American Resources Corporation does not purport to be
complete and is qualified in its entirety by reference to the
provisions of applicable law and to our certificate of
incorporation and by-laws, which are filed as exhibits to the
registration statement of which this prospectus is a
part.
Common Stock
Voting Rights
. Holders of shares of
common stock are entitled to one vote per share held of record on
all matters to be voted upon by the stockholders. The holders of
common stock do not have cumulative voting rights in the election
of directors.
Dividend Rights
. Holders of shares of
our common stock are entitled to ratably receive dividends when and
if declared by our board of directors out of funds legally
available for that purpose, subject to any statutory or contractual
restrictions on the payment of dividends and to any prior rights
and preferences that may be applicable to any outstanding preferred
stock. Please read “Dividend Policy.”
Liquidation Rights
. Upon our
liquidation, dissolution, distribution of assets or other winding
up, the holders of common stock are entitled to receive ratably the
assets available for distribution to the stockholders after payment
of liabilities and the liquidation preference of any of our
outstanding shares of preferred stock.
Other Matters
. The shares of common
stock have no preemptive or conversion rights and are not subject
to further calls or assessment by us. There are no redemption or
sinking fund provisions applicable to the common stock. All
outstanding shares of our common stock, including the common stock
offered in this offering, are fully paid and
non-assessable.
Series A Preferred Stock
Our certificate of
incorporation authorizes our board of directors, subject to any
limitations prescribed by law, without further stockholder
approval, to establish and to issue from time to time our Series A
Preferred stock, par value $0.0001 per share, covering up to an
aggregate of 5,000,000 shares of Series A Preferred stock. The
Series A Preferred stock will cover the number of shares and will
have the powers, preferences, rights, qualifications, limitations
and restrictions determined by the board of directors, which may
include, among others, dividend rights, liquidation preferences,
voting rights, conversion rights, preemptive rights and redemption
rights. Except as provided by law or in a preferred stock
designation, the holders of preferred stock will not be entitled to
vote at or receive notice of any meeting of stockholders. As of the
date of this offering, no shares of Series A Preferred stock are
outstanding. See “Security Ownership of Certain Beneficial
Owners and Management” for more detail on the Series A
Preferred stock holders. Effective February 13, 2019, all Series A
Preferred stock have been converted to Class A Common shares and no
Series A Preferred shares are outstanding.
Voting Rights
. Holders of Series A
Preferred shares are entitled to three hundred and thirty three and
one-third (333 (1/3)) votes, on an “as-converted”
basis, per each Series A Preferred share held of record on all
matters to be voted upon by the stockholders.
Dividend Rights
. The holders of the
Series A Preferred stock are not entitled to receive
dividends.
Conversion Rights
. The holders of the
Series A Preferred stock are entitled to convert into common
shares, at the holder’s discretion, at a rate of one Series A
Preferred share for three and one-third Common shares. Any
fractional common shares created by the conversion is rounded to
the nearest whole common share.
Liquidation Rights
. Upon our
liquidation, dissolution, distribution of assets or other winding
up, the holders of the Series A Preferred shares shall be entitled
to receive in preference to the holders of the Common Stock a per
share amount equal to $1.65 per share.
Anti-Dilution Protections
. The Series A
Preferred stock shall have full anti-dilution protection until
March 1, 2020, such that, when the sum of the shares of the common
stock plus the Series A Convertible stock that are held by the
Series A Preferred stock holders as of the date of the Articles of
Amendment are summed (the sum of which is defined as the
“Series A Holdings”, and the group defined as the
“Series A Holders”), the Series A Holdings held by the
Series A Holders shall be convertible into, and/or equal to, no
less than Seventy-Two Percent (72.0%) of the fully-diluted common
stock outstanding of the company (inclusive of all outstanding
“in-the-money” options and warrants). Any amount that
is less than Seventy-Two Percent (72.0%) shall be adjusted to
Seventy-Two Percent (72.0%) through the immediate issuance of
additional common stock to the Series A Holders to cure the
deficiency, which shall be issued proportionally to each respective
Series A Holder’s share in the Series A Holdings at the time
of the adjustment. This anti-dilution protection shall include the
effect of any security, note, common stock equivalents, or any
other derivative instruments or liability issued or outstanding
during the anti-dilution period that could potential cause dilution
during the anti-dilution period or in the future.
Other Matters
. The shares of common
stock have no preemptive or conversion rights and are not subject
to further calls or assessment by us. There are no redemption or
sinking fund provisions applicable to the common stock. All
outstanding shares of our common stock, including the common stock
offered in this offering, are fully paid and
non-assessable.
Series C Preferred Stock
Our certificate of
incorporation authorizes our board of directors, subject to any
limitations prescribed by law, without further stockholder
approval, to establish and to issue from time to time our Series C
Preferred stock, par value $0.0001 per share, covering up to an
aggregate of 20,000,000 shares of Series C Preferred stock. The
Series C Preferred stock will cover the number of shares and will
have the powers, preferences, rights, qualifications, limitations
and restrictions determined by the board of directors, which may
include, among others, dividend rights, liquidation preferences,
voting rights, conversion rights, preemptive rights and redemption
rights. Except as provided by law or in a preferred stock
designation, the holders of preferred stock will not be entitled to
vote at or receive notice of any meeting of stockholders. As of the
date of this prospectus, 50,000 shares of Series C Preferred stock
have been issued or are outstanding. See “Security Ownership
of Certain Beneficial Owners and Management” for more detail
on the Series C Preferred stock holders.
Voting Rights
. The holders of Series C
Preferred shares are entitled to vote on an "as-converted" basis of
one share of Series C Preferred Stock voting one vote of common
stock.
Dividend Rights
. The holders of the
Series C Preferred shall accrue a dividend based on an 10.0% annual
percentage rate, compounded annually in arrears, for any Series C
Preferred stock that is outstanding at the end of such prior
year.
Conversion Rights
. The holders of the
Series C Preferred stock are entitled to convert into common
shares, at the holder’s discretion, at a conversion price of
Six Dollars ($6.00) per share of common stock, subject to certain
price adjustments found in the Series C Preferred stock purchase
agreements. Should the company complete an equity offering
(including any offering convertible into equity of the Company) of
greater than Five Million Dollars ($5,000,000) (the
“Underwritten Offering”), then the Series C Preferred
stock shall be automatically and without notice convertible into
Common Stock of the company concurrently with the subsequent
Underwritten Offering at the same per share offering price of the
Underwritten Offering. If the Underwritten Offering occurs within
twelve months of the issuance of the Series C Preferred stock to
the holder, the annual dividend of 10.0% shall become immediately
accrued to the balance of the Series C Preferred stock and
converted into the Underwritten Offering.
Liquidation Rights
. Upon our
liquidation, dissolution, distribution of assets or other winding
up, the holders of Series C Preferred shares shall have a
liquidation preference to the Common shares at an amount equal to
$1.00 per share.
“Blank Check” Preferred Stock
Our certificate of
incorporation authorizes our board of directors, subject to any
limitations prescribed by law, without further stockholder
approval, to establish and to issue from time to time up to an
aggregate of 70,000,000 shares of preferred stock that is
considered “blank check”. The blank check preferred
stock shall be designed by the board of directors at the time of
classification
Outstanding Options or Warrants
Pursuant to our
previously-completed Series B Preferred stock offering, investors
in the Series B Preferred stock received options (also referred to
as “warrants”) to purchase additional common shares at
exercise prices stated within such option. The options have an
expiration date of two or three years post the date of the
investment in the Series B Preferred stock by the
investor.
On October 24,
2018, one of the holders of the options issued pursuant to the
Series B Preferred stock financing exercised 69,445 of his options
through a cashless exercise and received 69,420 Class A Common
shares as a result. Should all the remaining Series B Preferred
stock option holders fully exercise their right to purchase shares,
for cash, the Company will receive $1,700,006 proceeds from such
exercises and will increase the common shares outstanding by
236,112 shares.
On June 27, 2017 we
entered into a settlement agreement with Oscaleta Partners LLC, a
company we engaged on February 20, 2017 to perform consulting
services to AREC, and as part of that settlement, we issued to
Oscaleta Partners LLC the amount of 13,333 restricted shares of the
company’s common stock, and a three-year warrant to purchase
up to 33,333 common shares of stock of the company at an exercise
price of $3.60 per share. Should Oscaleta Partners LLC exercise all
of its shares under the warrant, the company will receive $119,999
cash proceeds.
On May 10, 2017, as
compensation to Bill Bishop for his service on the Board of
Directors of the company, we issued Mr. Bishop a three-year option
to purchase up to 8,334 common shares of our company at an exercise
price of $3.60 per share, subject to certain price adjustments and
other provisions found within the option issued to Mr. Bishop.
Should Mr. Bishop be elected as a board member of the company for
additional term(s), the option contains a cashless exercise
provision that will allow Mr. Bishop to exercise his option without
any cash consideration to the company, as described within the
option. Should Mr. Bishop exercise the option through a cash
payment to the company, the Company will receive up to $30,002 from
Mr. Bishop and he will receive up to 8,334 restricted common shares
of the Company. There are no registration rights associated with
this warrant that require the Company to register the
shares.
On October 4, 2017,
we entered into a financing transaction with Golden Properties
Ltd., a British Columbia company based in Vancouver, Canada
(“Golden Properties”) that involved a series of loans
made by Golden Properties to the Company. As part of that
financing, we issued to Golden Properties the following
warrants:
●
|
Warrant B-4, for
the purchase of 3,417,006 shares of common stock at $0.01 per
share, as adjusted from time to time, expiring on October 2, 2020,
and providing the Company with up to $34,170 in cash proceeds
should all the warrants be exercised;
|
●
|
Warrant C-1, for
the purchase of 400,000 shares of common stock at $3.55 per share,
as adjusted from time to time, expiring on October 2, 2019, and
providing the Company with up to $1,420,000 in cash proceeds should
all the warrants be exercised;
|
●
|
Warrant C-2, for
the purchase of 400,000 shares of common stock at $7.09 per share,
as adjusted from time to time, expiring on October 2, 2019, and
providing the Company with up to $2,836,000 in cash proceeds should
all the warrants be exercised;
|
●
|
Warrant C-3, for
the purchase of 400,000 shares of common stock at $8.58 per share,
as adjusted from time to time, expiring October 2, 2020, and
providing the Company with up to $3,432,000 in cash proceeds should
all the warrants be exercised; and
|
●
|
Warrant C-4, for
the purchase of 400,000 shares of common stock at $11.44 per share,
as adjusted from time to time, expiring October 2, 2020, and
providing the Company with up to $4,576,000 in cash proceeds should
all the warrants be exercised.
|
None of the
warrants resulting from the agreement with Golden Properties have
been exercised as of the date of this prospectus.
On September 12,
2018, pursuant to the Company’s Employee Incentive Stock
Option Plan, we issued a total of 636,830 options to certain
employees. The options have an expiration date of September 10,
2025 and have an exercise price of $1.00 per share. Of the total
options issued, 25,000 vested immediately, with the balance of
611,830 options vesting equally over the course of three years,
subject to restrictions regarding the employee’s continued
employment by the Company.
On September 14,
2018, we entered into a consulting agreement with Redstone
Communications, LLC, an Indiana limited liability company based in
Carmel, Indiana, to provide for public relations with existing
shareholders, broker dealers, and other investment professionals.
As compensation under that agreement, for the first six months we
issued to Redstone Communications a five-year option to purchase up
to 175,000 common shares of our Company at an exercise price of
$1.00 per share and issued to Mr. Marlin Molinaro a five-year
option to purchase up to 75,000 common shares of our Company at an
exercise price of $1.00 per share. Should Redstone Communications,
LLC and Mr. Molinaro exercise the options received under the first
six months of engagement, the Company will receive up to $175,000
and $75,000, respectively. On January 25, 2019, Redstone
Communications and the Company agreed to renew the consulting
agreement, and as a result, we issued 105,000 restricted common
shares to Redstone Communications LLC and 45,000 restricted common
shares to Mr. Marlin Molinaro, and to Redstone Communications
another five-year option to purchase up to 175,000 common shares of
our Company at an exercise price of $1.50 per share and issued to
Mr. Marlin Molinaro another five-year option to purchase up to
75,000 common shares of our Company at an exercise price of $1.50
per share. Should Redstone Communications, LLC and Mr. Molinaro
receive and exercise the options received under the second six
months of engagement, the Company will receive up to $262,500 and
$112,500, respectively.
On November 15,
2018, as compensation to Randal V. Stephenson, Ian Sadler, and
Courtenay O. Taplin for their service on the Board of Directors of
the Company, we issued to each of them a three-year warrant to
purchase up to 15,000 common shares of our company at an exercise
price of $6.00 per share, subject to certain price adjustments and
other provisions found within the respective warrants. Should each
of the three directors exercise the option through a cash payment
to the Company, the Company will receive up to $90,000 from each
director, and each director will receive up to 15,000 restricted
common shares of the Company. There are no registration rights
associated with this warrant that require the Company to register
the shares.
On December 3,
2018, pursuant to a consulting agreement with a non-related entity,
we issued a two-year option to purchase up to 417 common shares of
our company at an exercise price of $6.00 per share. The option can
be exercised via a cashless exercise by the holder at any time
during its term.
Please see
“Underwriting” for a description of warrants to be
issued to the representative of the underwriters.
During the period
the options are outstanding, we will reserve from our authorized
and unissued common stock a sufficient number of shares to provide
for the issuance of shares of common stock underlying the options
upon the exercise of the options. No fractional shares will be
issued upon the exercise of the options. The options are not listed
on any securities exchange. Except as otherwise provided within the
option, the option holders have no rights or privileges as members
of the Company until they exercise their options.
Transfer Agent and Registrar
The transfer agent
and registrar for our common stock is Vstock Transfer, LLC located
at 18 Lafayette Place Woodmere, NY 11598, phone number
212-828-8436.
Listing
Currently we are
trading on the OTC Pink markets under the symbol “AREC”
and have been approved for listing on the NASDAQ Capital Market
under the symbol “AREC”.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table
lists, as of the date of this Prospectus, the number of shares of
our Common Stock and Series A Convertible Preferred Stock that are
beneficially owned by (i) each person or entity known to us to be
the beneficial owner of more than 5% of our common stock; (ii) each
executive officer and director of our company; and (iii) all
executive officers and directors as a group. Information relating
to beneficial ownership of Common Stock and our Convertible
Preferred Stock by our principal shareholders and management is
based upon information furnished by each person using
“beneficial ownership” concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is
deemed to be a beneficial owner of a security if that person has or
shares voting power, which includes the power to vote or direct the
voting of the security, or investment power, which includes the
power to vote or direct the voting of the security. The person is
also deemed to be a beneficial owner of any security of which that
person has a right to acquire beneficial ownership within 60 days
under any contract, option or warrant. Under the Securities and
Exchange Commission rules, more than one person may be deemed to be
a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she
may not have any pecuniary beneficial interest. Except as noted
below, each person has sole voting and investment power. Unless
otherwise specified, the address of each beneficial owner listed in
the tables is c/o American Resources Corporation, 9002 Technology
Lane, Fishers, IN 46038.
Name and
Address
of
Shareholder
|
Number of Shares of
Common
Stock
Beneficially
Owned
(1)
|
Percent of Common
Stock Owned
(2)
|
Golden Properties,
Ltd.
(3)
|
2,122,878
|
9.99
%
|
________________
(1)
|
A person is deemed
to be the beneficial owner of securities that can be acquired by
such a person within 60 days upon exercise of options, warrants or
convertible securities. Each beneficial owner’s percentage
ownership is determined by assuming that options, warrants and
convertible securities that are held by such a person (but not
those held by any other person) and are exercisable within 60 days
from that date have been exercised;
|
|
|
(2)
|
Based on 21,492,281
shares of Common Stock deemed to be outstanding as if one or more
warrants were exercised up to the maximum amount of 9.99%
(or2,122,878 shares) of the issued and outstanding number of shares
at December 31, 2018, including the common shares issuable from the
conversion of the Series A Preferred to common and the conversion
of the Series C Preferred to common. This percentage has been
rounded for convenience;
|
|
|
(3)
|
Golden Properties,
Ltd. is the owner of several Company common stock warrants for the
purchase of shares of our Common Stock, which warrants are
exercisable at such company’s discretion, subject to the
following limitation on amount. The warrant agreements provide that
at no time may Golden Properties, Ltd. or its affiliates exercise
any warrant that would result in their ownership of more than 9.99%
of the issued and outstanding shares of our Common Stock on the
date of exercise. Additionally, as of December 31, 2018 Alexander
Lau, who is a principal of Golden Properties and a beneficial owner
through Golden Properties, is a holder of 5,913 Series A Preferred
shares and 177,400 Class A Common shares. Accordingly, Golden
Properties, Ltd. is presently deemed the beneficial owner of
2,122,878 shares of our Common Stock pursuant to Securities and
Exchange Commission Rule 13d-3, promulgated under the Securities
Exchange Act of 1934. The full number of shares that Golden
Properties' beneficially owns (including all shares underlying all
the warrants owned by Golden Properties and excluding those Series
A Preferred shares owned by Alexander Lau stated above)
is 5,017,006 shares.
|
Name
|
Number of
Shares of
Series A Preferred
Stock Beneficially
Owned (4)
|
Percent of
Series A
Preferred Stock
Owned (5)
|
Common Stock
Beneficially
Owned (6)
|
Percent of Common
Stock Beneficially
Owned (7)
|
|
|
|
|
|
Officers
and Directors
|
|
|
|
|
|
|
|
|
|
Mark C. Jensen,
(
8) Chief Executive Officer,
Director
|
158,045
|
32.80
%
|
5,316,994
|
27.45
%
|
|
|
|
|
|
Thomas M. Sauve,
(9) President, Director
|
136,014
|
28.23
%
|
4,336,010
|
22.99
%
|
|
|
|
|
|
Kirk P. Taylor,
Chief Financial Officer
|
48,612
|
10.09
%
|
1,620,383
|
8.37
%
|
|
|
|
|
|
Tarlis R. Thompson,
Chief Operating Officer
|
4,895
|
1.02
%
|
163,170
|
0.84
%
|
All
Directors and Officers as a Group (4 persons)
|
347,566
|
69.09
%
|
11,552,851
|
59.65
%
|
|
|
|
|
|
5%
Holders
|
|
|
|
|
|
|
|
|
|
Gregory Q.
Jensen
|
48,612
|
10.09
%
|
1,620,383
|
8.37
%
|
|
|
|
|
|
Adam B.
Jensen
|
48,612
|
10.09
%
|
1,620,383
|
8.37
%
|
|
|
|
|
|
All
Directors, Officers and 5% Holders as a Group (5
persons)
|
444,790
|
89.27
%
|
14,793,617
|
84.57
%
|
|
Effective February
13, 2019, all Series A Preferred stock have been converted into
Class A Common Stock.
|
|
|
(4)
|
A person is deemed
to be the beneficial owner of securities that can be acquired by
such a person within 60 days from December 31, 2018, upon exercise
of options, warrants or convertible securities. Each beneficial
owner’s percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such
a person (but not those held by any other person) and are
exercisable within 60 days from that date have been
exercised;
|
|
|
(5)
|
Based on 481,780
shares of Series A Convertible Preferred Stock outstanding as of
December 31, 2018. These percentages have been rounded for
convenience;
|
|
|
(6)
|
Assuming the Series
A Preferred Stock is converted to Class A Common Stock and
including the Class A Common Stock owned by each respective
person;
|
|
|
(7)
|
Based
on 17,763,469 Class A Common Stock outstanding as of December
31, 2018. These percentages have been rounded for
convenience;
|
|
|
(8)
|
Mr. Jensen
beneficially owns 5,934 shares of our Series A Convertible
Preferred Stock and 178,017 Class A Common Stock through his equity
ownership in T Squared Partners, LP, which shares are included in
the table above;
|
|
|
(9)
|
Mr. Sauve
beneficially owns 3,876 shares of our Series A Convertible
Preferred Stock and 116,294 Class A Common Stock through his equity
ownership in T Squared Partners, LP, which shares are included in
the table above;
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, DIRECTOR
INDEPENDENCE
Transactions
with Related Persons, Promoters and Certain Control
Persons
On June 12, 2015,
the Company executed a consulting agreement with an entity with
common ownership. During 2017 and 2016, the Company incurred fees
totaling $0 and $12,340,615 relating to services rendered under
this agreement. The amount outstanding and payable as of December
31, 2017 and 2016, was $17,840,615 and $17,840,615, respectively.
The amount is due on demand and does not accrue interest. On May
25, 2018, the related party agreed to terminate and extinguish the
entire $17,840,615 payable.
On January 1, 2016,
the Company awarded stock options for 827,862 shares in exchange
for consulting efforts to an entity with common ownership. No stock
options were awarded to related parties during 2017.
During 2015,
equipment purchasing was paid by an affiliate resulting in a note
payable. The balance of the note was $74,000 as of December 31,
2017 and 2016, respectively.
On April 30, 2017,
the Company purchased $250,000 of secured debt that had been owed
to that party, by an operating subsidiary of a related party. As a
result of the transaction, the Company is now the creditor on the
notes. The first note in the amount of $150,000 is dated March 13,
2013, carries an interest rate of 12% and was due on September 13,
2015. The second note in the amount of $100,000 is dated July 17,
2013, carries an interest rate of 12% and was due January 17, 2016.
Both notes are in default and have been fully impaired due to
collectability uncertainty.
During July 2017
and October 2018, an officer of the Company advanced $50,000 and
$13,500, respectively, to the Company. The advance is non-secured,
non-interest bearing and due on demand.
The Company,
through its subsidiaries, leases property and mineral from a
related entity, LRR. During the three month period ended September
30, 2018, the Company incurred royalty expense in the amount of
$64,537 to a related entity formally consolidated as a variable
interest entity. As of September 30, 2018, the company owed the
related entity a total of $512,378 for unpaid royalties and
advances.
Director Independence.
We are not listed
on a national securities exchange; however, we have elected to use
the definition of independence under the Nasdaq listing
requirements in determining the independence of our directors and
nominees for director. In 2018, our Board undertook a review of
director independence, which included a review of each director and
director nominee’s responses to questionnaires inquiring
about any relationships with us. This review was designed to
identify and evaluate any transactions or relationships between a
director, or director nominee or any member of his or her immediate
family and us, or members of our senior management or other members
of our Board, and all relevant facts and circumstances regarding
any such transactions or relationships. Based on its review, our
Board determined that Messrs. Stephenson, Sadler, and Taplin are
independent. Messrs. Jensen and Sauve are not independent under
Nasdaq’s independence standards, its audit committee
independence standards or compensation committee independence
standards.
To the extent
required by the trading market on which our shares are listed, we
will ensure that the overall composition of our Board complies with
the Sarbanes-Oxley Act, and the rules thereunder, and the listing
requirements of the trading market, including the requirement that
one member of the Board qualifies as a “financial
expert.”
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representative, Maxim Group
LLC, located at 405 Lexington Avenue, New York, NY 10174, referred
to herein as Maxim, have severally agreed to purchase from us on a
firm commitment basis the following respective number of shares of
Class A common stock at a public offering price less the
underwriting discounts and commissions set forth on the cover page
of this prospectus:
Underwriter
|
|
Maxim
Group LLC
|
1,000,000
|
Total
|
1,000,000
|
The
underwriting agreement provides that the obligations of the
underwriters to purchase all of the shares being offered to the
public is subject to specific conditions, including the absence of
any material adverse change in our business or in the financial
markets and the receipt of certain legal opinions, certificates and
letters from us, our counsel and the independent auditors. Subject
to the terms of the underwriting agreement, the underwriters will
purchase all of the shares of Class A common stock being offered to
the public, other than those covered by the over-allotment option
described below, if any of these shares are purchased.
Over-Allotment Option
The Company has granted to the underwriters an
option, exercisable not later than 45 days after the effective date
of the registration statement, to purchase up to 150,000
additional shares of Class A common
stock (equivalent to 15% of the total number of shares of Class A
common stock sold in this offering) at the public offering price
less the underwriting discounts and commissions set forth on the
cover of this prospectus. The underwriters may exercise this option
only to cover over-allotments made in connection with the sale of
the shares in this offering. To the extent that the underwriters
exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the
same percentage of these additional shares of Class A common stock
as the number of shares to be purchased by it in the above table
bears to the total number of shares offered by this prospectus. We
will be obligated, pursuant to the option, to sell these additional
shares of Class A common stock to the underwriters to the extent
the option is exercised. If any additional shares are purchased,
the underwriters will offer the additional shares on the same terms
as those on which the other shares are being offered
hereunder.
Discounts, Commissions and Expenses
The underwriting discounts and commissions are
7.0% of the public offering price. The Company has agreed to pay
the underwriters the discounts and commissions set forth below,
assuming either no exercise or full exercise by the underwriters of
the underwriters’ over-allotment option. We have been advised
by Maxim that the underwriters propose to offer the shares of Class
A common stock to the public at the public offering price set forth
on the cover of this prospectus and to dealers at a price that
represents a concession not in excess of $0.16
per share under the public offering price of
$4.00
per share. After the
public offering, the representative of the underwriters may change
the offering price and other selling terms.
The
following table summarizes the underwriting discounts and
commissions and proceeds, before expenses, to us assuming both no
exercise and full exercise by the underwriters of their 15%
over-allotment option:
|
|
|
|
|
|
|
Public offering
price
|
$
4.00
|
$
4,000,000
|
$
4,600,000
|
Underwriting
discounts and commissions (7%)
|
$
0.28
|
$
280,000
|
$
322,000
|
Proceeds, before
expenses, to us
|
$
3.72
|
$
3,720,000
|
$
4,278,000
|
(1)
The
fees do not include the Representative’s Warrants or expense
reimbursement as described below.
In
addition, we have agreed to reimburse Maxim for up to $125,000 of
out-of-pocket expenses it incurs in connection with this offering,
including, but not limited to, filing offering materials with the
Financial Industry Regulatory Authority, or FINRA, background
checks, “road show” expenses, costs of book-building,
prospectus tracking and compliance software and the fees and
disbursements of its counsel. We have paid $5,000 to Maxim as an
advance to be applied towards reasonable out-of-pocket expenses
(the “Advance”). Any portion of the Advance shall be
returned back to us to the extent not actually
incurred.
We
estimate the expenses of this offering payable by us, not including
underwriting discounts and commissions, will be approximately
$205,000.
Representative Warrants
We
have also agreed to issue to Maxim (or its permitted assignees) the
warrants to purchase a number of our shares of Class A common stock
equal to an aggregate of 7% of the total number of shares sold in
this offering (“Representative’s Warrants”). The
Representative’s Warrants will have an exercise price equal
to 110% of the offering price of the shares sold in this offering
and may be exercised on a cashless basis. The
Representative’s Warrants are exercisable commencing 180 days
after the effective date of the registration statement related to
this offering, and will be exercisable for three years after the
effective date. The Representative’s Warrants are not
redeemable by us. The Representative’s Warrants also provide
for unlimited “piggyback” registration rights at our
expense with respect to the underlying shares during the three year
period commencing from the effective date of the registration
statement related to this offering. The Representative’s
Warrants and the shares underlying the Representative’s
Warrants, have been deemed compensation by FINRA and are therefore
subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA.
The underwriters (or permitted assignees under the Rule) may not
sell, transfer, assign, pledge or hypothecate the
Representative’s Warrants or the securities underlying the
Representative’s Warrants, nor will they engage in any
hedging, short sale, derivative, put or call transaction that would
result in the effective economic disposition of the
Representative’s Warrants or the underlying securities for a
period of 12 months from the effective date of this offering,
except to any FINRA member participating in the offering and their
bona fide officers or partners. The Representative’s Warrants
will provide for adjustment in the number and price of such
Representative’s Warrants (and the shares underlying such
Representative’s Warrants) in the event of recapitalization,
merger or other structural transaction to prevent mechanical
dilution or in the event of a future financing undertaken by
us.
Right
of First Refusal
We have agreed to
grant Maxim for the twelve (12) month period following the
effective date of the registration statement, a right of first
refusal to act as lead managing underwriter and book runner or
minimally as a co-lead manager and co-book runner and/or lead
placement agent with at least 80.0% of the economics for any and
all future public or private equity, equity-linked or debt
(excluding commercial bank debt) offerings during such twelve (12)
month period of the Company, or any successor to or any subsidiary
of the Company.
Indemnification
We
have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act and
liabilities arising from breaches of representations and warranties
contained in the underwriting agreement, or to contribute to
payments that the underwriters may be required to make in respect
of those liabilities.
Lock-up Agreements
We
and certain of our directors, executive officers and shareholders
have agreed that, for a period of 180 days after the date of this
prospectus, subject to certain limited exceptions, not to directly
or indirectly, without the prior written consent of the
representative of the underwriters, (1) offer, sell, agree to offer
or sell, solicit offers to purchase, grant any call option or
purchase any put option with respect to, pledge, encumber, assign,
borrow or otherwise dispose of or transfer any shares of Class A
common stock, warrant to purchase such shares or any other security
of the company or any other entity that is convertible into, or
exercisable or exchangeable for, such shares or any other equity
security of the company owned beneficially or otherwise as of the
date of this prospectus, which we refer to as relevant securities,
or otherwise publicly disclose the intention to do so, (2)
establish or increase any “put equivalent position” or
liquidate or decrease any “call equivalent position”
(in each case within the meaning of Section 16 of the Exchange Act)
with respect to any relevant security or otherwise enter into any
swap, derivative or other transaction or arrangement that transfers
to another, in whole or in part, any economic consequence of
ownership of relevant securities, whether or not such transaction
is to be settled by the delivery of relevant securities, other
securities, cash or other consideration, or otherwise publicly
disclose the intention to do so, (3) file or participate in the
filing with the SEC of any registration statement or circulate or
participate in the circulation of any preliminary or final
prospectus or other disclosure document, in each case with respect
to any proposed offering or sale of relevant securities or (4)
exercise any rights to require registration with the SEC of any
proposed offering or sale of relevant securities.
Price Stabilization, Short Positions and Penalty Bids
In
connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act:
|
●
|
Stabilizing
transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified
maximum.
|
|
●
|
Over-allotment
involves sales by the underwriters of shares of Class A common
stock in excess of the number of shares the underwriters are
obligated to purchase, which creates a syndicate short position.
The short position may be either a covered short position or a
naked short position. In a covered short position, the number of
shares over-allotted by the underwriters is not greater than the
number of shares that they may purchase in the over-allotment
option. In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
Maxim may close out any covered short position by either exercising
their over-allotment option and/or purchasing shares in the open
market.
|
|
●
|
Syndicate
covering transactions involve purchases of shares of Class A common
stock in the open market after the distribution has been completed
in order to cover syndicate short positions. In determining the
source of shares to close out the short position, Maxim will
consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which they
may purchase shares through the over-allotment option. If the
underwriters sell more shares than could be covered by the
over-allotment option, a naked short position, the position can
only be closed out by buying shares in the open market. A naked
short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares of Class A common stock in the open market after pricing
that could adversely affect investors who purchase in the
offering.
|
|
●
|
Penalty
bids permit Maxim to reclaim a selling concession from a syndicate
member when the shares originally sold by the syndicate member is
purchased in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
|
These
stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our shares of Class A common stock or preventing or
retarding a decline in the market price of our securities. As a
result, the price of our shares may be higher than the price that
might otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of our shares of Class A
common stock. In addition, neither we nor the underwriters make any
representation that the underwriters will engage in these
transactions or that any transaction, if commenced, will not be
discontinued without notice.
Electronic Distribution
This
prospectus in electronic format may be made available on websites
or through other online services maintained by Maxim or by its
affiliates. Other than this prospectus in electronic format, the
information on Maxim’s website and any information contained
in any other websites maintained by it is not part of this
prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or Maxim
in its capacity as an underwriter, and should not be relied upon by
investors.
Other
Terms
Until twelve (12)
months from the effective date of this registration statement, the
representative shall have an irrevocable right of first refusal to
act as lead managing underwriter and book-runner (or minimally as a
co-lead manager and co-book runner and/or co-lead placement agent
with at least 80% of the economics), at the representative’s
sole discretion, for each and every future public and private
equity and debt offerings (other than commercial bank debt) for the
Company, or any successor to or any subsidiary of the Company,
including all equity linked financings, on terms customary to the
representative. The representative shall have the sole right to
determine whether or not any other broker-dealer shall have the
right to participate in any such offering and the economic terms of
any such participation. The representative will not have more than
one opportunity to waive or terminate the right of first refusal in
consideration of any payment or fee.
Offers Outside the United
States
Other than in the United States, no action has
been taken by us or the underwriters that would permit a public
offering of the securities offered by this prospectus in any
jurisdiction where action for that purpose is required. The
securities offered by this prospectus may not be offered or sold,
directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer
and sale of any such securities be distributed or published in any
jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that
jurisdiction. Persons into whose possession this prospectus comes
are advised to inform themselves about and to observe any
restrictions relating to the offering and the distribution of this
prospectus. This prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any securities offered by this
prospectus in any jurisdiction in which such an offer or a
solicitation is unlawful.
DETERMINATION
OF OFFERING PRICE
Before
this offering, there has been a very limited public trading market
for our shares of Class A Common Stock, and we cannot give any
assurance to you that an active secondary market might develop or
will be sustained after this offering. The price of the shares of
Common Stock we are offering, and the price at which those shares
can be sold in the future to potential buyers, has been determined
solely by us, after consultation with our underwriter and advisors,
and, as such, may be arbitrary in that the price does not
necessarily bear any relationship to our assets, earnings, book
value or other criteria of value, and may not be indicative of the
price that may prevail in the public market, or such share price
may be the result of a private negotiation between us and the buyer
of the shares and may differ substantially from any prior share
price or the market price of our shares. No third-party valuation
or appraisal has ever been prepared for our business. Among the
factors we considered in setting a price were, without one factor
being materially more important than the others):
●
|
our
limited operating history, as well as the other numerous obstacles
we face in operating and expanding our business, as described in
the “Risk Factors” section of this
prospectus;
|
●
|
our
current company capitalization and our internal future expectations
of our operations and financial performance; and
|
●
|
our
cash requirements to run our business over the next 12 to 60
months.
|
●
|
the
information included in this prospectus and otherwise available to
the representative;
|
●
|
the
valuation multiples of publicly traded companies that the
representative believes to be comparable to us;
|
●
|
our
financial information;
|
●
|
our
ability to negotiate the sale price of our shares with potential
buyers of our shares;
|
●
|
our
prospects and our history, and the prospects of the industry in
which we compete;
|
●
|
an
assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
and
|
●
|
the
above factors in relation to market values and various evolution
measures of other companies engaged in activities similar to
ours.
|
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No expert or
counsel named in this prospectus as having prepared or certified
any part of this prospectus or having given an opinion upon the
validity of the securities being registered or upon other legal
matters in connection with the registration or offering of the
common stock was employed on a contingency basis, or had, or is to
receive, in connection with the offering, a substantial interest,
direct or indirect, in the registrant or any of its parents or
subsidiaries. Nor was any such person connected with the registrant
or any of its parents or subsidiaries as a promoter, managing or
principal underwriter, voting trustee, director, officer, or
employee.
Our financial
statements as of December 31, 2017 and 2016, included in this
prospectus have been audited by MaloneBailey, LLP of Houston,
Texas, independent registered public accounting firm, as indicated
in their report with respect thereto, and have been so included in
reliance upon the report of such firm given on their authority as
experts in accounting and auditing. Our audited financial
statements as of December 31, 2017 and 2016, included in this
prospectus have been prepared by the management of the
Company.
The validity of the
securities offered by this prospectus will be passed upon for us by
Law Office of Clifford J. Hunt, P.A. The law firm’s
principal, Clifford J. Hunt, Esquire, is the beneficial owner of
1,721 shares of our common stock. Certain legal matters will be
passed upon for the underwriters by Loeb & Loeb
LLP.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with
the SEC a registration statement on Form S-1 (including the
exhibits, schedules and amendments thereto) under the Securities
Act, with respect to the shares of our common stock offered
hereby.
This prospectus
does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For
further information with respect to the common stock offered
hereby, we refer you to the registration statement and the exhibits
and schedules filed therewith. Statements contained in this
prospectus as to the contents of any contract, agreement or any
other document are summaries of the material terms of such
contract, agreement or other document and are not necessarily
complete. With respect to each of these contracts, agreements or
other documents filed as an exhibit to the registration statement,
reference is made to the exhibits for a more complete description
of the matter involved. A copy of the registration statement, and
the exhibits and schedules thereto, may be inspected without charge
at the public reference facilities maintained by the SEC at 100 F
Street NE, Washington, D.C. 20549. Copies of these materials may be
obtained, upon payment of a duplicating fee, from the Public
Reference Room of the SEC at 100 F Street NE, Washington, D.C.
20549.Please call the SEC at 1-800-SEC-0330 for further information
on the operation of the Public Reference Room. The SEC maintains a
website that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the SEC. The address of the SEC’s website is
www.sec.gov.
As a result of this
offering, we will become subject to full information requirements
of the Exchange Act. We will fulfill our obligations with respect
to such requirements by filing periodic reports and other
information with the SEC. We intend to furnish our stockholders
with annual reports containing financial statements certified by an
independent registered public accounting firm.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our directors and
officers are indemnified as provided by Florida law and our bylaws.
We have agreed to indemnify each of our directors and certain
officers against certain liabilities, including liabilities under
the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the provisions
described above, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by
our director, officer or controlling person in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
We have been
advised that in the opinion of the SEC indemnification for
liabilities arising under the Securities Act is against public
policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities is asserted by one of our directors,
officers, or controlling persons in connection with the securities
being registered, we will, unless in the opinion of our legal
counsel the matter has been settled by controlling precedent,
submit the question of whether such indemnification is against
public policy to a court of appropriate jurisdiction. We will then
be governed by the court’s decision.
Limitation
on Liability
The Florida
Business Corporation Act permits, but does not require,
corporations to indemnify a director, officer or control person of
the corporation for any liability asserted against such person and
liability and expenses incurred by that person in their capacity as
a director, officer, employee or agent, or arising out of their
status as such, if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, unless the articles of
incorporation provide otherwise, whether or not the corporation has
provided for indemnification in its articles of incorporation. Our
articles of incorporation have no separate provision for
indemnification of directors, officers, or control
persons.
Insofar as the
limitation of, or indemnification for, liabilities arising under
the Securities Act of 1933, as amended (the “Securities
Act”), may be permitted to directors, officers, or persons
controlling us pursuant to the foregoing, or otherwise, we have
been advised that, in the opinion of the SEC, such limitation or
indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
INDEX
TO FINANCIAL STATEMENTS
For
the Period Ended September 30, 2018
|
Page
|
|
|
Consolidated
Balance Sheets as of September 30, 2018 (unaudited) and December
31, 2017
|
F-2
|
|
|
Consolidated
Statements of Operations for the three and nine months ended
September 30, 2018 and 2017 (unaudited)
|
F-3
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30,
2018 and 2017 (unaudited)
|
F-4
|
|
|
Notes to Unaudited
Consolidated Financial Statements for the nine months ended
September 30, 2018
|
F-5
|
December
31, 2017 and 2016 and for the Years Ended December 31, 2017 and
2016
|
Page
|
|
|
Report of
Independent Registered Public Accounting Firm
|
F-13
|
|
|
Consolidated
Balance Sheets at December 31, 2017 and 2016
|
F-14
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2017 and
2016
|
F-15
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) for
the years ended December 31, 2017 and 2016
|
F-16
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2017 and
2016
|
F-17
|
|
|
Notes to
Consolidated Financial Statements
|
F-18
|
AMERICAN
RESOURCES CORPORATION
CONSOLIDATED
BALANCE SHEETS
UNAUDITED
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
57,739
|
|
|
$
|
186,722
|
|
Accounts Receivable
|
|
|
2,801,040
|
|
|
|
1,870,562
|
|
Inventory
|
|
|
426,725
|
|
|
|
615,096
|
|
Prepaid fees
|
|
|
147,826
|
|
|
|
-
|
|
Accounts Receivable - Other
|
|
|
102,994
|
|
|
|
30,021
|
|
Total Current Assets
|
|
|
3,536,324
|
|
|
|
2,702,401
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Cash - restricted
|
|
|
286,043
|
|
|
|
198,943
|
|
Processing and rail facility
|
|
|
2,802,855
|
|
|
|
2,914,422
|
|
Underground equipment
|
|
|
9,346,692
|
|
|
|
8,887,045
|
|
Surface equipment
|
|
|
4,532,724
|
|
|
|
3,957,603
|
|
Mining rights (net of amortization of $181,385
and $0)
|
|
|
2,036,567
|
|
|
|
-
|
|
Less Accumulated Depreciation
|
|
|
(6,600,108
|
)
|
|
|
(4,820,569
|
)
|
Land
|
|
|
-
|
|
|
|
178,683
|
|
Accounts Receivable - Other
|
|
|
-
|
|
|
|
127,718
|
|
Note Receivable
|
|
|
4,117,139
|
|
|
|
4,117,139
|
|
Total Other Assets
|
|
|
16,521,912
|
|
|
|
15,560,984
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
20,058,236
|
|
|
$
|
18,263,385
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,813,924
|
|
|
$
|
5,360,537
|
|
Accrued management fee
|
|
|
-
|
|
|
|
17,840,615
|
|
Accrued interest
|
|
|
624,209
|
|
|
|
336,570
|
|
Accrued dividend on Series B
|
|
|
104,157
|
|
|
|
-
|
|
Funds held for others
|
|
|
63,767
|
|
|
|
82,828
|
|
Due to affiliate
|
|
|
636,378
|
|
|
|
124,000
|
|
Current portion of long term-debt (net of
issuance costs and debt discount of $387,442 and
$35,000)
|
|
|
14,625,099
|
|
|
|
9,645,154
|
|
Current portion of reclamation
liability
|
|
|
2,275,848
|
|
|
|
2,033,862
|
|
Total Current Liabilities
|
|
|
25,143,382
|
|
|
|
35,423,566
|
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
|
|
|
|
|
|
Long-term portion of note payable (net of
issuance costs of $420,293 and $440,333)
|
|
|
5,072,493
|
|
|
|
5,081,688
|
|
Reclamation liability
|
|
|
20,289,527
|
|
|
|
17,851,195
|
|
Total Other Liabilities
|
|
|
25,362,020
|
|
|
|
22,932,883
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
50,505,402
|
|
|
|
58,356,449
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
AREC - Class A Common stock: $.0001 par value;
230,000,000 shares authorized, 1,192,044 and 892,044 shares issued
and outstanding for the period end
|
|
|
118
|
|
|
|
89
|
|
AREC - Series A Preferred stock: $.0001 par
value; 5,000,000 shares authorized, 4,817,792 shares issued and
outstanding
|
|
|
482
|
|
|
|
482
|
|
AREC - Series B Preferred stock: $.001 par
value; 20,000,000 shares authorized, 850,000 shares issued and
outstanding
|
|
|
850
|
|
|
|
850
|
|
AREC- Series C Preferred stock: $.0001 par
value; 20,000,000 shares authorized, 0 shares issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
19,816,567
|
|
|
|
1,527,254
|
|
Accumulated deficit
|
|
|
(50,265,183
|
)
|
|
|
(42,019,595
|
)
|
Total American Resources Corporation's
Shareholders' Deficit
|
|
|
(30,447,166
|
)
|
|
|
(40,490,920
|
)
|
Non controlling interest
|
|
|
-
|
|
|
|
397,856
|
|
Total Stockholders' Deficit
|
|
|
(30,447,166
|
)
|
|
|
(40,093,064
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
|
$
|
20,058,236
|
|
|
$
|
18,263,385
|
|
The accompanying footnotes are integral to the unaudited
consolidated financial statements
AMERICAN
RESOURCES CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
UNAUDITED
For the Three and
Nine Months Ended September 30, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal Sales
|
$
8,890,322
|
$
4,192,244
|
$
23,219,222
|
$
13,770,183
|
Processing Services Income
|
147,946
|
159,724
|
167,462
|
1,563,864
|
|
|
|
|
|
Total Revenue
|
9,038,268
|
4,351,968
|
23,386,684
|
15,334,047
|
|
|
|
|
|
|
|
|
|
|
Cost of Coal Sales and Processing
|
(6,690,698
)
|
(2,797,140
)
|
(16,783,801
)
|
(12,307,399
)
|
Accretion Expense
|
(539,771
)
|
(339,288
)
|
(1,435,295
)
|
(1,181,055
)
|
Loss on settlement
|
-
|
(30,055
)
|
-
|
(281,907
)
|
Depreciation
|
(649,983
)
|
(697,214
)
|
(1,779,539
)
|
(1,856,442
)
|
Amortization of mining rights
|
(181,385
)
|
-
|
(181,385
)
|
-
|
General and Administrative
|
(1,142,522
)
|
(26,940
)
|
(2,175,794
)
|
(189,604
)
|
Professional Fees
|
(784,922
)
|
(144,712
)
|
(1,222,937
)
|
(565,995
)
|
Production Taxes and Royalties
|
(1,041,667
)
|
(865,950
)
|
(2,769,584
)
|
(3,464,611
)
|
Development Costs
|
(2,188,833
)
|
(1,035,286
)
|
(5,908,207
)
|
(4,172,759
)
|
|
|
|
|
|
Total Expenses from Operations
|
(13,219,781
)
|
(5,936,585
)
|
(32,256,542
)
|
(24,019,772
)
|
|
|
|
|
|
Net Loss from Operations
|
(4,181,513
)
|
(1,584,617
)
|
(8,869,858
)
|
(8,685,725
)
|
|
|
|
|
|
Other Income
|
875,942
|
67,844
|
1,295,065
|
309,418
|
Gain on cancelation of debt
|
-
|
-
|
315,000
|
-
|
Receipt of previously impaired
receivable
|
-
|
117,657
|
92,573
|
241,574
|
Interest Income
|
-
|
-
|
41,171
|
-
|
Interest expense
|
(305,655
)
|
(342,683
)
|
(864,104
)
|
(567,970
)
|
|
|
|
|
|
Net Loss
|
(3,611,226
)
|
(1,741,799
)
|
(7,990,153
)
|
(8,702,703
)
|
|
|
|
|
|
Less: Series B dividend requirement
|
(17,000
)
|
-
|
(104,157
)
|
-
|
|
|
|
|
|
Less: Net income attributable to Non Controlling
Interest
|
-
|
(67,844
)
|
(151,278
)
|
(309,418
)
|
|
|
|
|
|
Net loss attributable to American Resources
Corporation Shareholders
|
$
(3,628,226
)
|
$
(1,809,643
)
|
$
(8,245,588
)
|
$
(9,012,121
)
|
|
|
|
|
|
Net loss per share - basic and
diluted
|
$
(2.49
)
|
$
(2.03
)
|
$
(8.76
)
|
$
(11.87
)
|
|
|
|
|
|
Weighted average shares outstanding
|
1,038,783
|
891,180
|
941,495
|
759,397
|
The accompanying
footnotes are integral to the unaudited consolidated financial
statements
AMERICAN
RESOURCES CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
UNAUDITED
For the 9 Months
Ended September 30, 2018 and
For the 9 Months
Ended September 30, 2017
|
|
|
Cash Flows from
Operating activities:
|
|
|
Net loss
|
$
(7,990,153
)
|
$
(8,702,703
)
|
Adjustments to
reconcile net income (loss) to net cash
|
|
|
Depreciation
|
1,779,539
|
1,856,442
|
Amortization of mining rights
|
181,385
|
-
|
Accretion expense
|
1,435,295
|
1,181,055
|
Cancelation of debt
|
(315,000
)
|
-
|
Loss on reclamation settlements
|
-
|
281,907
|
Assumption of note payable in reverse
merger
|
-
|
50,000
|
Gain on disposition
|
(807,591
)
|
-
|
Recovery of previously impaired
receipts
|
(92,573
)
|
(241,574
)
|
Amortization of debt discount
|
420,134
|
284,406
|
Warrant expense
|
234,067
|
-
|
Option expense
|
13,410
|
-
|
Stock compensation expense
|
201,250
|
10,000
|
Change in current
assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(930,478
)
|
2,123,881
|
Inventory
|
188,371
|
-
|
Prepaid expenses and other assets
|
(147,826
)
|
-
|
Accounts payable
|
973,057
|
2,824,351
|
Funds held for others
|
(19,061
)
|
-
|
Due to affiliates
|
512,378
|
-
|
Accrued interest
|
287,639
|
90,000
|
Reclamation liability settlements
|
-
|
(709,132
)
|
Cash used in operating activities
|
(4,076,157
)
|
(951,367
)
|
|
|
|
Cash Flows from
Investing activities:
|
|
|
|
|
|
Advances made in connection with management
agreement
|
(99,582
)
|
(75,000
)
|
Advance repayment in connection with management
agreement
|
222,304
|
469,645
|
Cash paid for PPE, net
|
(127,957
)
|
(176,597
)
|
Cash (used in) provided by investing
activities
|
(5,235
)
|
218,048
|
|
|
|
Cash Flows from
Financing activities:
|
|
|
|
|
|
Principal payments on long term
debt
|
(2,064,902
)
|
(318,576
)
|
Proceeds from long term debt
|
5,316,977
|
1,670,000
|
Proceeds from related party
|
-
|
50,000
|
Net proceeds from (payments to) factoring
agreement
|
787,434
|
(1,521,577
)
|
Proceeds from sale of Series B Preferred
Stock
|
-
|
600,000
|
Cash provided by financing
activities
|
4,039,509
|
479,847
|
|
|
|
Decrease in cash and restricted
cash
|
(41,883
)
|
(253,472
)
|
|
|
|
Cash and restricted cash, beginning of
period
|
385,665
|
784,525
|
|
|
|
Cash and restricted
cash, end of period
|
$
343,782
|
$
531,053
|
|
|
|
Supplemental Information
|
|
|
Non-cash investing and financing
activities
|
|
|
Assumption of net assets and liabilities for
asset acquisitions
|
$
2,217,952
|
$
-
|
Equipment for notes payable
|
$
906,660
|
$
1,222,500
|
Purchase of related party note receivable in
exchange for Series B Equity
|
$
-
|
$
250,000
|
Preferred Series B dividends
|
$
104,157
|
$
-
|
Conversion of note payable to common
stock
|
$
-
|
$
50,000
|
Beneficial conversion feature on note
payable
|
$
-
|
$
50,000
|
Forgiveness of accrued management
fee
|
$
17,840,615
|
$
-
|
Relative fair value debt discount on warrant
issue
|
$
-
|
$
300,000
|
|
|
|
Cash paid for interest
|
$
156,331
|
$
193,564
|
Cash paid for income taxes
|
$
-
|
$
-
|
The accompanying
footnotes are integral to the unaudited consolidated financial
statements
AMERICAN
RESOURCES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(UNAUDITED)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
American Resources Corporation (ARC or the
Company) operates through subsidiaries that were acquired in 2016
and 2015 for the purpose of acquiring, rehabilitating and operating
various natural resource assets including coal, oil and natural
gas.
Basis of Presentation and
Consolidation:
The consolidated financial statements include
the accounts for the nine months ended September 30, 2018 and 2017
of the Company and its wholly owned subsidiaries Quest Energy Inc
(QEI), Deane Mining, LLC (Deane), Quest Processing LLC (Quest
Processing), ERC Mining Indiana Corp (ERC), McCoy Elkhorn Coal LLC
(McCoy) and Knott County Coal LLC (KCC). All significant
intercompany accounts and transactions have been
eliminated.
As of July 1, 2018, the accounts of Land
Resources & Royalties, LLC have been deconsolidated from the
financial statements based upon the ongoing review of its status as
a variable interest entity.
On August 23, 2018, KCC disposed of certain
non-operating assets totaling $111,567 and the corresponding asset
retirement obligation totaling $919,158 which resulted in a gain of
$807,591.
The accompanying Consolidated Financial
Statements are unaudited and have been prepared in accordance with
accounting principles generally accepted in the United States
(“U.S. GAAP”)
Interim Financial
Information
Certain information and footnote disclosures
normally included in annual financial statements prepared in
accordance with U.S. GAAP have been omitted. In the opinion of
management, these interim unaudited Consolidated Financial
Statements reflect all normal and recurring adjustments necessary
for a fair presentation of the results for the periods presented.
Results of operations for the three and nine months ended September
30, 2018 are not necessarily indicative of the results to be
expected for the year ending December 31, 2018 or any other period.
These financial statements should be read in conjunction with the
Company’s 2017 audited financial statements and notes thereto
which were filed on Form 10K on April 23, 2018.
Going Concern:
The Company has
suffered recurring losses from operations and currently has a
working capital deficit. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern.
We plan to generate profits by expanding current coal operations as
well as developing new coal operations. However, we will need to
raise the funds required to do so through sale of our securities or
through loans from third parties. We do not have any commitments or
arrangements from any person to provide us with any additional
capital. If additional financing is not available when needed, we
may need to cease operations. We may not be successful in raising
the capital needed to expand or develop operations. Management
believes that actions presently being taken to obtain additional
funding provide the opportunity for the Company to continue as a
going concern. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern; no
adjustments to the financial statements have been made to account
for this uncertainty.
Convertible Preferred
Securities:
We account for hybrid contracts that
feature conversion options in accordance with generally accepted
accounting principles in the United States. ASC 815,
Derivatives and Hedging Activities
(“ASC 815”) requires companies to bifurcate conversion
options from their host instruments and account for them as free
standing derivative financial instruments according to certain
criteria. The criteria includes circumstances in which (a) the
economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid
instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under
otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a
separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative
instrument.
We also follow ASC 480-10,
Distinguishing Liabilities from Equity
(“ASC 480-10”) in its evaluation of the accounting for
a hybrid instrument. A financial instrument that embodies an
unconditional obligation, or a financial instrument other than an
outstanding share that embodies a conditional obligation, that the
issuer must or may settle by issuing a variable number of its
equity shares shall be classified as a liability (or an asset in
some circumstances) if, at inception, the monetary value of the
obligation is based solely or predominantly on any one of the
following: (a) a fixed monetary amount known at inception; (b)
variations in something other than the fair value of the
issuer’s equity shares; or (c) variations inversely related
to changes in the fair value of the issuer’s equity shares.
Hybrid instruments meeting these criteria are not further evaluated
for any embedded derivatives and are carried as a liability at fair
value at each balance sheet date with remeasurements reported as a
component of other income/expense in the accompanying Consolidated
Statements of Operations.
Cash
is maintained in bank
deposit accounts which, at times, may exceed federally insured
limits. To date, there have been no losses in such
accounts.
Restricted cash:
As part of the
Kentucky New Markets Development Program an asset management fee
reserve was set up in the amount of $116,115. The funds are held to
pay annual asset management fees to an unrelated party through
2021. The balance as of September 30, 2018 and December 31, 2017
was $73,730 and $116,115, respectively. A lender of the Company
also required a reserve account to be established. The balance as
of September 30, 2018 and December 31, 2017 was $148,546 and $0,
respectively. The total balance of restricted cash also includes
amounts held under the management agreement in the amount of
$63,767 and $82,828, respectively. See note 5 for terms of the
management agreement.
The balance as of September 30, 2018 and
December 31, 2017 was $286,043 and $198,943,
respectively.
The following table sets forth a reconciliation
of cash, cash equivalents, and restricted cash reported in the
consolidated balance sheet that agrees to the total of those
amounts as presented in the consolidated statement of cash flows
for the nine months ended September 30, 2018 and September 30,
2017.
|
|
|
Cash
|
$
57,739
|
$
342,041
|
Restricted Cash
|
286,043
|
189,012
|
Total cash and restricted cash presented in the
consolidated statement of cash flows
|
$
343,782
|
$
531,053
|
Asset Acquisitions:
On April 21, 2018, McCoy acquired certain assets
known as the Point Rock Mine (Point Rock) in exchange for assuming
certain liabilities of the seller. The fair values of the
liabilities assumed were $53,771 for prior vendors and $2,098,052
for asset retirement obligation totaling $2,151,823. The
liabilities assumed do not require fair value readjustments. In
addition, McCoy entered into a surface and mineral sub-lease in the
amount of up to $4,000,000 to be paid only upon coal extraction at
$2 per extracted ton of coal. McCoy will also pay a portion of the
sales price as a royalty with an annual minimum payment of $60,000
starting in January 2019. The acquired assets have an anticipated
life of 5 years. Capitalized mining rights will be amortized based
on productive activities over the anticipated life of 5 years.
Amortization expense for the 3 months ended September 30, 2018 and
2017 amounted to $179,318 and $0, respectively. The assets will be
measured for impairment when an event occurs that questions the
realization of the recorded value.
The assets acquired of Point Rock do not
represent a business as defined in FASB AS 805-10-20 due to their
classification as a single asset. Accordingly, the assets acquired
are initially recognized at the consideration paid, which was the
liabilities assumed, including direct acquisition costs, of which
there were none. The cost is allocated to the group of assets
acquired based on their relative fair value. The assets acquired
and liabilities assumed of Point Rock were as follows at the
purchase date:
Assets
|
|
Mining Rights
|
$
2,151,823
|
Liabilities
|
|
Vendor Payables
|
$
53,771
|
Asset Retirement Obligation
|
$
2,098,052
|
On May 10, 2018, KCC acquired certain assets
known as the Wayland Surface Mine (Wayland) in exchange for
assuming certain liabilities of the seller. The fair values of the
liabilities assumed were $66,129 for asset retirement obligation.
The liabilities assumed do not require fair value readjustments. In
addition, KCC entered into a royalty agreement with the seller to
be paid only upon coal extraction in the amount of $1.50 per
extracted ton of coal. The acquired assets have an anticipated life
of 7 years. Capitalized mining rights will be amortized based on
productive activities over the anticipated life of 7 years.
Amortization expense for the 3 months ended September 30, 2018 and
2017 amounted to $2,067 and $0, respectively. The assets will be
measured for impairment when an event occurs that questions the
realization of the recorded value.
The assets acquired of Wayland do not represent
a business as defined in FASB AS 805-10-20 due to their
classification as a single asset. Accordingly, the assets acquired
are initially recognized at the consideration paid, which was the
liabilities assumed, including direct acquisition costs, of which
there were none. The cost is allocated to the group of assets
acquired based on their relative fair value. The assets acquired
and liabilities assumed of Wayland were as follows at the purchase
date:
Assets
|
|
Mining Rights
|
$
66,129
|
Liabilities
|
|
Asset Retirement Obligation
|
$
66,129
|
Asset Retirement Obligations (ARO) –
Reclamation:
At the time they are incurred, legal
obligations associated with the retirement of long-lived assets are
reflected at their estimated fair value, with a corresponding
charge to mine development. Obligations are typically incurred when
we commence development of underground and surface mines, and
include reclamation of support facilities, refuse areas and slurry
ponds or through acquisitions.
Obligations are reflected at the present value
of their future cash flows. We reflect accretion of the obligations
for the period from the date they incurred through the date they
are extinguished. The asset retirement obligation assets are
amortized using the units-of-production method over estimated
recoverable (proved and probable) reserves. We are using a discount
rate of 10%. Federal and State laws require that mines be reclaimed
in accordance with specific standards and approved reclamation
plans, as outlined in mining permits. Activities include
reclamation of pit and support acreage at surface mines, sealing
portals at underground mines, and reclamation of refuse areas and
slurry ponds.
We assess our ARO at least annually and reflect
revisions for permit changes, change in our estimated reclamation
costs and changes in the estimated timing of such costs. During the
periods ending September 30, 2018 and 2017, $0 and $281,907 were
incurred for loss on settlement on ARO, respectively.
The table below reflects the changes to our
ARO:
Balance at December 31, 2017
|
$
19,885,057
|
Accretion – nine months September 30,
2018
|
1,435,295
|
Reclamation work – nine months September
30, 2018
|
(0
)
|
Asset disposition
|
(919,158
)
|
Point Rock Acquisition
|
2,098,052
|
Wayland Acquisition
|
66,129
|
Balance at September 30, 2018
|
$
22,565,375
|
Allowance For Doubtful Accounts:
The Company recognizes an allowance for losses on trade and other
accounts receivable in an amount equal to the estimated probable
losses net of recoveries. The allowance is based on an analysis of
historical bad debt experience, current receivables aging and
expected future write-offs, as well as an assessment of specific
identifiable amounts considered at risk or
uncollectible.
Allowance for trade receivables as of September
30, 2018 and December 31, 2017 amounted to $0, for both periods.
Allowance for other accounts receivables as of September 30, 2018
and December 31, 2017 amounted to $0 and $92,573,
respectively.
Trade and loan receivables are carried at
amortized cost, net of allowance for losses. Amortized cost
approximated book value as of September 30, 2018 and December 31,
2017.
Reclassifications:
Reclassifications of prior periods have been made to conform with
current year presentation.
New Accounting
Pronouncements:
|
-
|
ASU 2016-01,
Recognition and Measurement of Financial
Assets and Financial Liabilities
, effective for years
beginning after December 15, 2017. ASU 2016-01 was adopted on
January 1, 2018 and the standard did not have a material effect on
the consolidated financial statements or related
disclosures
|
|
-
|
ASU 2016-02,
Leases
, effective for years beginning
after December 15, 2019. We expect to adopt ASU 2016-02 beginning
January 1, 2019 and are in the process of assessing the impact that
this new guidance is expected to have on our consolidated financial
statements and related disclosures.
|
|
-
|
ASU 2017-09,
Compensation – Stock
Compensation,
effective beginning after December 31, 2017.
ASU 2017-09 was adopted on January 1, 2018 and the standard did not
have a material effect on the consolidated financial statements or
related disclosures
|
|
-
|
ASU 2017-11,
Earnings Per Share,
effective beginning
after December 15, 2018. We expect to adopt ASU 2017-11 beginning
January 1, 2019 and are in the process of assessing the impact that
this new guidance is expected to have on our consolidated financial
statements and related disclosures.
|
|
-
|
ASU 2018-05,
Income Taxes,
effective beginning after
December 15, 2017, was adopted on January 1, 2018 with no effect on
our consolidated financial statements and related
disclosures.
|
|
-
|
ASU 2018-07,
Compensation-Stock Compensation (Topic
718),
effective beginning after December 15, 2018 was
adopted on July 1, 2018 and the standard did not have a material
effect on the consolidated financial statements or related
disclosures.
|
Management has elected to early adopt ASU
2017-01,
Business Combinations
(Topic 805): Clarifying the Definition of a Business
effective at inception.
ASU 2016-18,
Statement of Cash Flows: Restricted Cash
(Topic 230).
Topic 230 addressed how restricted cash was
presented in the statement of cash flows. We adopted Topic 230 as
of January 1, 2018 resulting in modifications as to the manner in
which restricted cash transactions are presented in the statement
of cash flows.
ASU 2014-09,
Revenue from Contracts with Customers (Topic
606).
Topic 606 supersedes the revenue recognition
requirements in Topic 605 and requires entities to recognize
revenues when control of the promised goods or services is
transferred to customers at an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or services. The Company’s primary
source of revenue is from the sale of coal through both short-term
and long-term contracts with utilities, industrial customers and
steel producers whereby revenue is currently recognized when risk
of loss has passed to the customer. During the fourth quarter of
2017, the Company finalized its assessment related to the new
standard by analyzing certain contracts representative of the
majority of the Company’s coal sales and determined that the
timing of revenue recognition related to the Company’s coal
sales will remain consistent between the new standard and the
previous standard. The Company also reviewed other sources of
revenue, and concluded the current basis of accounting for these
items is in accordance with the new standard. The Company adopted
ASU 2014-09 effective January 1, 2018 using the modified
retrospective method, and there was no cumulative adjustment to
retained earnings.
NOTE 2 - PROPERTY AND
EQUIPMENT
At September 30, 2018 and December 31, 2017,
property and equipment were comprised of the
following:
|
|
|
Processing and rail facility
|
$
2,802,855
|
$
2,914,422
|
Underground equipment
|
9,346,692
|
8,887,045
|
Surface equipment
|
4,532,724
|
3,957,603
|
Mining rights (Less: accumulated amortization of
$181,385)
|
2,036,567
|
-
|
Land
|
-
|
178,683
|
Less: Accumulated depreciation
|
(6,600,108
)
|
(4,820,569
)
|
|
|
|
Total Property and Equipment, Net
|
$
12,118,730
|
$
11,117,184
|
Depreciation expense amounted to $649,983 and
$697,214 for the three month periods September 30, 2018 and
September 30, 2017, respectively. Depreciation expense amounted to
$1,779,539 and $1,856,442 for the nine month periods September 30,
2018 and September 30, 2017, respectively.
The estimated useful lives are as
follows:
Processing and Rail Facilities
|
20 years
|
|
Surface Equipment
|
7 years
|
|
Underground Equipment
|
5 years
|
|
Mining Rights
|
5 years
|
|
NOTE 3 - NOTES
PAYABLE
The net increase in debt includes the
following:
Total debt balance as of December 31,
2017
|
$
14,726,842
|
|
|
During the nine-month period ended September 30,
2018, $2,450 ,000 was drawn from the ARC business loan which
carries annual interest at 7%, is due within two months of
advancement and is secure by all company assets. On June 4, 2018,
$30,000 and September 28, 2018, $75,000 of this note was
repaid.
|
2,450,000
|
|
|
On January 25, 2018, QEI entered into an
equipment loan agreement with an unrelated party in the amount of
$346,660. The agreement calls for monthly payments of $11,360 until
maturity date of December 24, 2020 and carries an interest rate of
9%. The loan is secured by the underlying surface equipment
purchased by the loan. Loan proceeds were used directly to purchase
equipment.
|
346,660
|
|
|
On March 28, 2018, QEI entered into an equipment
loan agreement with an unrelated party in the amount of $135,000.
The agreement called for payments of $75,000 and $60,000 are due on
April 6, 2018 and April 13, 2018, respectively, at which date the
note was repaid in full. Loan proceeds were used directly to
purchase equipment.
|
135,000
|
|
|
On May 9, 2018, QEI entered into a loan
agreement with an unrelated party in the amount of $1,000,000 with
a maturity date of September 24, 2018 with monthly payments of
$250,000 due beginning June 15, 2018. The note is secured by the
assets and equity of the company and carries an interest rate of
0%. Proceeds of the note were split between receipt of
$575,000 cash and $425,000 payment for new equipment. No payments
have been made on the note which is in default.
|
1,000,000
|
|
|
During May 2018, the company entered into a
financing arrangement with two unrelated parties. The notes totaled
$2,859,500, carried an original issue discount of $752,535,
interest rate of 33% and have a maturity date of January 2019 and
are secured by future receivables as well as personal guarantees of
two officers of the company.
|
2,963,958
|
|
|
During the nine-month period ended September 30,
2018 net additions to the factoring agreement totaled
$787,435.
|
787,435
|
|
|
Total increases to debt
|
7,683,053
|
|
|
Less cash payments
|
(2,064,902
)
|
|
|
In May 2018, an unrelated party forgave $315,000
of the $540,000 equipment loan agreement dated September 30,
2016.
|
(315,000
)
|
|
|
Issuance discount
|
(752,535
)
|
|
|
Amortization of issuance cost and loan
discounts
|
420,134
|
|
|
Ending debt balance at September 30,
2018
|
$
19,697,592
|
|
|
Less current portion:
|
$
14,625,099
|
|
|
Total long term debt at September 30,
2018
|
$
5,072,493
|
NOTE 4 - RELATED PARTY
TRANSACTIONS
On June 12, 2015, the Company executed a
consulting agreement with an entity with common ownership. No fees
or repayments have occurred during the nine-month period September
30, 2018 and 2017, respectively.
The amount outstanding and payable as of
September 30, 2018 and December 31, 2017, was $0 and $17,840,615,
respectively. The amount was due on demand and did not accrue
interest. The amounts under the agreement were cancelled and
forgiven on May 31, 2018. The forgiveness was accounted for as an
increase in additional paid in capital.
On April 30, 2017, the Company purchased
$250,000 of secured debt that had been owed to a third party, by an
operating subsidiary of a related party. As a result of the
transaction, the Company is now the creditor on the notes. The
first note in the amount of $150,000 is dated March 13, 2013,
carries an interest rate of 12% and was due on September 13, 2015.
The second note in the amount of $100,000 is dated July 17, 2013,
carries an interest rate of 12% and was due January 17, 2016. Both
notes are in default and have been fully impaired due to
collectability uncertainty.
During the three month period ended September
30, 2018, the Company incurred royalty expense in the amount of
$64,537 to a related entity formally consolidated as a variable
interest entity. As of September 30, 2018 the company owed the
related entity a total of $512,378 for unpaid royalties and
advances.
NOTE 5 –
MANAGEMENT AGREEMENT
On April 13, 2015, ERC entered into a mining and
management agreement with an unrelated entity, to operate a coal
mining and processing facility in Jasonville, Indiana. Under the
management agreement, net funds advanced for the nine-month period
ended September 30, 2018 and 2017 are $99,582 and $75,000,
respectively and the amounts repaid totaled $127,957 and $394,645,
respectively. During the nine-month period ended September 30, 2018
and 2017, fees paid under the agreement amounted $313,114 and $0,
respectively which has been recorded in other income.
NOTE 6 – EQUITY
TRANSACTIONS
On July 18, 2018, we issued 150,000 common
shares valued at $165,000 to Sylva International LLC for an
agreement to provide digital marketing services to the Company. The
agreement was subsequently terminated by the Company for breach of
contract. The Company fully recognized $165,000 of stock based
compensation for the nine months September 30, 2018.
On September 12, 2018, pursuant to the
Company’s Employee Incentive Stock Option Plan, we issued a
total of 636,830 options to certain employees. The options have an
expiration date of September 10, 2025 and have an exercise price of
$1.00 per share. Of the total options issued, 25,000 vested
immediately, with the balance of 611,830 options vesting equally
over the course of three years, subject to restrictions regarding
the employee’s continued employment by the Company. The fair
value of the options is $482,751. The Company recognized $13,410 as
option expense for the nine months September 30, 2018. The
unamortized expense at September 30, 2018 is $469,342.
On September 14,
2018, we issued 105,000 common shares valued at $152,250 and
175,000 warrants to Redstone Communications LLC and 45,000 common
shares valued at $65,250 and 75,000 warrants to Mr. Marlin
Molinaro as compensation for the first six months of an agreement
to provide for public relations with existing shareholders, broker
dealers, and other investment professionals for the Company. The
warrants fair value was determined to be $234,067. The warrants
granted are non-refundable and vest immediately and have an
expiration date of September 14, 2023. Stock based compensation of
$36,205 for the common shares issued and $234,067 for the warrant
granted was expensed during the nine months September 30, 2018. As
of September 30, 2018, the unamortized expense for the common
shares issued is $181,250.
The Company has
Series A Preferred stock outstanding, which has the following key
provisions: par value of $0.0001, voting rights of 33(1/3) votes of
Class A Common stock for each Series A Preferred stock, conversion
to Class A Common stock at a rate 3(1/3) Class A Common stock,
liquidation rights at $1.65 per share, and anti-dilution protection
through March 21, 2020 for conversion into Class A Common Stock at
no less than 72.0% of the fully-diluted Class A Common stock
outstanding. The Company evaluated the embedded conversion option
under ASC 815. The conversion option was deemed clearly and closely
related to its equity host instrument and as such was not
bifurcated.
Total preferred dividend requirement for the
nine-month period ending September 30, 2018 and 2017 amounted to
$104,157 and $0, respectively.
Total stock, warrant and option compensation
expense for the nine-month period ending September 30, 2018 and
2017 amounted to $448,727 and $0, respectively.
The price of the above stock, warrants and
options were determined using the closing stock price at the date
of the grant and the Black-Sholes Option Pricing
Model.
|
|
9/30/2018
|
|
Expected Dividend Yield
|
|
0%
|
|
Expected volatility
|
|
120%
|
|
Risk-free rate
|
|
1.4%
|
|
Expected life of warrants
|
|
3-7 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2017
|
5,364,230
|
$
2.638
|
2.835
|
$
138,069
|
Exercisable - December 31, 2017
|
5,364,230
|
$
2.638
|
2.835
|
$
138,069
|
Granted
|
886,830
|
$
1.000
|
6.388
|
$
5,386,975
|
Forfeited or Expired
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
$
-
|
-
|
-
|
Outstanding - September 30, 2018
|
6,251,060
|
$
2.432
|
2.474
|
$
31,556,641
|
Exercisable - September 30, 2018
|
5,639,230
|
$
2.590
|
1.982
|
$
27,836,687
|
NOTE 7 -
CONTINGENCIES
In the course of normal operations, the Company
is involved in various claims and litigation that management
intends to defend. The range of loss, if any, from potential claims
cannot be reasonably estimated. However, management believes the
ultimate resolution of matters will not have a material adverse
impact on the Company’s business or financial
position.
Should the Company
decide to renew the consulting agreement with Redstone
Communication, LLC, as compensation for the following six months of
engagement, we will issue to Redstone Communications another
five-year option to purchase up to 175,000 common shares of our
Company at an exercise price of $1.50 per share, another 105,000
common shares, and a cash payment of $10,000 per month for the
second six-month term (with the first two months payable in advance
upon renewal of the second term). Furthermore, we will issue to Mr.
Marlin Molinaro another five-year option to purchase up to 75,000
common shares of our Company at an exercise price of $1.50 per
share and another 45,000 common shares. Should Redstone
Communications, LLC and Mr. Molinaro receive and exercise the
options received under the second six months of engagement, the
Company will receive up to $262,500 and $112,500,
respectively.
NOTE 8 - SUBSEQUENT
EVENTS
During October 2018, an officer of the company
advanced an additional $13,500. The advance is non-interest
bearing, non-secured and due on demand.
On October 25, 2018, Wyoming County Coal LLC was
formed as a wholly owned subsidiary of Quest Energy
Inc.
On November 7, 2018, Wyoming County Coal LLC,
acquired 5 permits, coal processing and loading facilities, surface
ownership, mineral ownership, and coal refuse storage facilities
from unrelated entities. Consideration for the acquired assets was
the assumption of reclamation bonds totaling $234,240, 1,727,273
shares of common stock of the company
priced at $12.79
per share of common stock
, a seller note of $350,000 and a
seller note of $250,000. Management is still gathering the
information needed to complete the allocation of the purchase price
to the assets acquired and liabilities assumed.
On October 24, 2018, options totaling 69,420
common shares of the company were exercised by a non-affiliated
shareholder. The exercise was a cashless exercise.
On November 5, 2018, 4,336,012 Series A
preferred shares were converted into 14,453,373 common shares of
the company in a cashless conversion under the terms of the
agreement.
On November 7, 2018, 964,290 Series B preferred
shares were converted into 267,859 common shares of the company in
a cashless conversion.
On November 7, 2018, $36,000 worth of trade
payables were settled with 6,000 common shares of the
company.
On November 8,
2018, the Company's Board of Directors elected to amend its
Articles of Incorporation, canceled its Series B Preferred Stock,
designated 20,000,000 shares of a newly created Series C Preferred
Stock, and amended its Series A Preferred stock for the following
key provisions: voting rights of 333(1/3) votes of Class A Common
stock for each Series A Preferred stock, and anti-dilution
protection through March 1, 2020 at no less than 72.0% of the
fully-diluted Class A Common stock. The newly created Series C
Preferred Stock carries the following key provisions: automated
conversion to Class A Common Stock upon the completion of a
underwritten equity offering totaling $5,000,000 or more and a paid
in kind annual dividend with a 10% annual percentage
rate.
On November 13, 2018, $300,000 was advanced
under the ARC business loan which carries annual interest at 7%, is
due within two months of advancement and is secure by all company
assets.
On November 14,
$225,000 of debt to an unrelated entity, was converted into 37,500
shares of Class A Common stock.
On November 15,
three independent directors were appointed.
As compensation for their services, each of the
directors were issued a three-year warrant to purchase up to 15,000
common shares of our company at an exercise price of $6.00 per
share, subject to certain price adjustments and other provisions
found within the respective warrants. Should each of the three
directors exercise the option through a cash payment to the
Company, the Company will receive up to $90,000 from each director,
and each director will receive up to 15,000 restricted common
shares of the Company. There are no registration rights associated
with this warrant that require the Company to register the
shares.
On November 27,
2018, 50,000 shares of Series C preferred shares were sold at $1.00
per share resulting in proceeds of $50,000 for the
Company.
On December 3,
2018, 10,000 shares of Class A Common stock and an option to
purchase 417 shares of the company were issued to an unrelated firm
for consulting services. The option has a strike price of $6.00 per
share, has a two-year term, and can be exercised via a cashless
exercise by the holder at any time during its term. The agreement
also carries the commitment that a cash fee of $10,000 will be
payable under the agreement at the time the company closes a
financing of greater than $1.0 million. An additional 15,000 shares
will be issued on June 1, 2019 if the agreement is still in
effect.
On December 24,
2018, the ARC business loan was amended to reflect the proper state
of incorporation for the Company.
On December 31,
2018, the Company entered into a loan agreement with an unrelated
party. The loan is for an amount up to $6,500,000 of which
$3,000,000 was advanced on December 31, 2018 and $2,000,000 was
advanced on February 1, 2019. The promissory agreement
carries interest at 5% annual interest rate and payments of
principal and interest shall be repaid at a per-ton rate of coal
sold to the lender. The outstanding amount of the note has a
maturity of April 1, 2020. The note is secured by the assets
of the Company.
On January 16,
2019, an affiliate of the Company converted its remaining 29,051
shares of Series A Preferred into 96,837 Class A Common
shares
On January 17,
2019, a non-affiliated shareholder partially exercised 300,000
shares of a warrant they held in the Company. The exercise was
cashless, and the shareholder received 299,697 shares of common
stock as a result of the conversion.
On January 25,
2019, the Company extended its consulting agreement with Redstone
Communications, LLC for an additional six-month term, and as a
result, we issued 105,000 restricted common shares to Redstone
Communications LLC and 45,000 restricted common shares to Mr.
Marlin Molinaro, another five-year option to purchase up to 175,000
common shares of our Company at an exercise price of $1.50 per
share and issued to Mr. Marlin Molinaro another five-year option to
purchase up to 75,000 common shares of our Company at an exercise
price of $1.50 per share as compensation for the second six months
of an agreement. Should Redstone Communications, LLC and Mr.
Molinaro receive and exercise the options received under the second
six months of engagement, the Company will receive up to $262,500
and $112,500, respectively. These common shares have not been
physically issued.
On January 27,
2019, the Company issued 1,000 shares of Class A Common Stock to an
unrelated party for the consideration of $5,000 cash to the
Company.
On January 28,
2019, the Company issued a total of 400 shares of Class A Common
Stock to two unrelated parties for the total consideration of
$2,000 cash to the Company.
On January 30,
2019, the Company entered into an Investor Relations Agreement with
American Capital Ventures, Inc. (“American Capital”)
whereby American Capital will provide, among other services,
assistance to the Company in planning, reviewing and creating
corporate communications, press releases, and presentations and
consulting and liaison services to the Company relating to the
conception and implementation of its corporate and business
development plan. The term of the agreement is six months and
American Capital was immediately issued 9,000 shares of Class A
Common stock as compensation under the agreement.
On February 1,
2019, the Company issued a total of 1,000 shares of Class A Common
Stock to two unrelated parties for the total consideration of
$5,000 cash to the Company.
On February 4,
2019, the ARC business loan was amended to allow conversion of
outstanding amounts to Class A Common shares at a price per share
of $5,25.
On
February 12, 2019, McCoy signed a contract with an unrelated
party for the acquisition of stock and membership interests of
entities with non-operating assets consisting of surface and
mineral ownership and other related agreements. The transaction is
expected to close simultaneous with this offering. Consideration is
expected to be in the form of 2,000,000 Class A common shares,
priced at $12.79 per share of common stock, as well as $500,000
cash and a promissory note totaling $2,000,000 with a maturity of
less than 1 year. The note is secured by a land contract on the
acquired property.
On February 6,
2019, a non-affiliated shareholder partially exercised 300,000
shares of a warrant they held in the Company. The exercise was
cashless, and the shareholder received 299,730 shares of common
stock as a result of the conversion.
On February 4
through February 8, 2019, the Company issued a total of 17,800
shares of Class A Common Stock to sixteen unrelated parties for the
total consideration of $89,000 cash to the Company.
On February 10,
2019, $3,000 worth of trade payables were settled with 500 common
shares of the company.
On February 14,
2019, 452,729 Series A preferred shares were converted into
1,509,097 common shares of the company in a cashless conversion
under the terms of the agreement. This resulted in no more Series A
Preferred stock being outstanding.
Report
of Independent Registered Public Accounting Firm
To the shareholders
and board of directors of
American Resources
Corporation
Opinion on the Financial Statements
We have audited the
accompanying consolidated balance sheets of American Resources
Corporation and its subsidiaries (collectively, the
“Company”) as of December 31, 2017 and 2016, and the
related consolidated statements of operations, changes in
stockholders’ deficit, and cash flows for the years then
ended, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the
results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Going Concern
Matter
The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Basis for Opinion
These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our
audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of
our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal
control over financial reporting. Accordingly, we express no such
opinion.
Our audits included
performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ MaloneBailey,
LLP
www.malonebailey.com
We have served as
the Company’s auditor since 2017
Houston,
Texas
April 20,
2018
AMERICAN RESOURCES CORPORATION
CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
Cash
|
$
186,722
|
$
784,525
|
Accounts
Receivable
|
1,870,562
|
2,753,199
|
Inventory
|
615,096
|
-
|
Intercompany
|
-
|
-
|
Accounts Receivable
- Other
|
30,021
|
199,701
|
Total Current
Assets
|
2,702,401
|
3,737,425
|
|
|
|
OTHER
ASSETS
|
|
|
Cash -
restricted
|
198,943
|
141,102
|
Processing and rail
facility
|
2,914,422
|
2,914,422
|
Underground
equipment
|
8,887,045
|
7,500,512
|
Surface
equipment
|
3,957,603
|
3,751,054
|
Less Accumulated
Depreciation
|
(4,820,569
)
|
(2,262,855
)
|
Land
|
178,683
|
178,683
|
Accounts Receivable
- Other
|
127,718
|
196,347
|
Note
Receivable
|
4,117,139
|
4,117,139
|
Total Other
Assets
|
15,560,984
|
16,536,404
|
|
|
|
TOTAL
ASSETS
|
$
18,263,385
|
$
20,273,829
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable
|
$
5,360,537
|
$
2,196,060
|
Accrued management
fee
|
17,840,615
|
17,840,615
|
Accrued
interest
|
336,570
|
122,945
|
Funds held for
others
|
82,828
|
24,987
|
Due to
affiliate
|
124,000
|
74,000
|
Current portion of
long term-debt (net of unamortized discount of $35,000 and
$0)
|
9,645,154
|
4,431,006
|
Current portion of
reclamation liability
|
2,033,862
|
519,489
|
Total Current
Liabilities
|
35,423,566
|
25,209,102
|
|
|
|
OTHER
LIABILITIES
|
|
|
Long-term portion
of note payable (net of issuance costs $440,333 and
$451,389)
|
5,081,688
|
4,964,941
|
Reclamation
liability
|
17,851,195
|
17,607,384
|
Total Other
Liabilities
|
22,932,883
|
22,572,325
|
|
|
|
Total
Liabilities
|
58,356,449
|
47,781,427
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
AREC - Class A
Common stock: $.0001 par value; 230,000,000 shares authorized,
892,044 and 0 shares issued and outstanding for the period
end
|
89
|
-
|
AREC - Series A
Preferred stock: $.0001 par value; 4,817,792 shares authorized,
4,817,792 shares issued and outstanding
|
482
|
482
|
AREC - Series B
Preferred stock: $.001 par value; 20,000,000 shares authorized,
850,000 shares issued and outstanding
|
850
|
-
|
Additional paid-in
capital
|
1,527,254
|
88,193
|
Accumulated
deficit
|
(42,019,595
)
|
(27,651,030
)
|
Total American
Resources Corporation Shareholders' Equity
|
(40,490,920
)
|
(27,562,355
)
|
Non controlling
interest
|
397,856
|
54,757
|
Total Stockholders'
Deficit
|
(40,093,064
)
|
(27,507,598
)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
18,263,385
|
$
20,273,829
|
The
accompanying footnotes are integral to the consolidated financial
statements
AMERICAN
RESOURCES CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
Coal
Sales
|
$
19,231,249
|
$
5,345,145
|
Processing Services
Income
|
1,589,749
|
2,256,049
|
|
|
|
Total
Revenue
|
20,820,998
|
7,601,194
|
|
|
|
Cost of Coal Sales
and Processing
|
(16,344,567
)
|
(8,961,653
)
|
Accretion
Expense
|
(1,791,051
)
|
(1,664,774
)
|
Loss on reclamation
settlement
|
-
|
(71,245
)
|
Depreciation
|
(2,557,714
)
|
(2,262,855
)
|
General and
Administrative
|
(1,378,111
)
|
(237,601
)
|
Professional
Fees
|
(694,366
)
|
(391,659
)
|
Consulting Fees -
Related Party
|
-
|
(12,340,615
)
|
Production Taxes
and Royalties
|
(4,974,013
)
|
(1,250,365
)
|
Impairment Loss
from notes receivable from related party
|
(250,000
)
|
(510,902
)
|
Development
Costs
|
(6,850,062
)
|
(1,760,594
)
|
|
|
|
Total Expenses from
Operations
|
(34,839,884
)
|
(29,452,263
)
|
|
|
|
Net Loss from
Operations
|
(14,018,886
)
|
(21,851,069
)
|
|
|
|
Other
Income
|
343,100
|
54,757
|
Amortization of
debt discount and debt issuance costs
|
(477,056
)
|
(9,406
)
|
Interest
Income
|
298,721
|
-
|
Receipt of
previously impaired receivables
|
387,427
|
-
|
|
|
|
Interest
|
(558,772
)
|
(283,564
)
|
|
|
|
Net
Loss
|
(14,025,466
)
|
(22,089,282
)
|
|
|
|
Less: Preferred
dividend requirement
|
(53,157
)
|
-
|
|
|
|
Less: Net income
attributable to Non Controlling Interest
|
(343,099
)
|
(54,757
)
|
|
|
|
Net loss
attributable to American Resources Corporation
Shareholders
|
$
(14,421,722
)
|
$
(22,144,039
)
|
|
|
|
Net loss per share
- basic and diluted
|
$
(18.20
)
|
$
-
|
|
|
|
Weighted average
shares outstanding
|
792,391
|
-
|
The
accompanying footnotes are integral to the consolidated financial
statements
AMERICAN
RESOURCES CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January
1, 2016
|
-
|
$
-
|
2,550,430
|
$
-
|
-
|
$
-
|
$
-
|
$
(5,506,991
)
|
$
-
|
$
(5,506,991
)
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
2,267,362
|
482
|
-
|
-
|
88,193
|
-
|
-
|
88,675
|
|
|
|
|
|
|
|
|
|
|
|
New issuances
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(22,144,039
)
|
54,757
|
(22,089,282
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2016
|
-
|
$
-
|
4,817,792
|
$
482
|
-
|
$
-
|
$
88,193
|
$
(27,651,030
)
|
$
54,757
|
$
(27,507,598
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January
1, 2017
|
-
|
$
-
|
4,817,792
|
$
482
|
-
|
$
-
|
88,193
|
(27,651,030
)
|
54,757
|
(27,507,598
)
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
845,377
|
85
|
-
|
-
|
-
|
-
|
(85
)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Preferred Series B
Stock
|
-
|
-
|
-
|
-
|
850,000
|
850
|
849,150
|
-
|
-
|
850,000
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
Debt
|
33,334
|
3
|
-
|
-
|
-
|
-
|
49,997
|
-
|
-
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion
feature
|
-
|
-
|
-
|
-
|
-
|
-
|
50,000
|
-
|
-
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to
consultant
|
13,333
|
1
|
-
|
|
|
|
9,999
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
40,000
|
-
|
-
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
Relative fair value debt
discount
|
|
|
|
|
|
|
|
|
|
|
on warrants
issued
|
-
|
-
|
-
|
-
|
-
|
-
|
440,000
|
-
|
-
|
440,000
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(14,358,565
)
|
343,099
|
(14,025,466
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2017
|
892,044
|
$
89
|
4,817,792
|
$
482
|
850,000
|
$
850
|
1,527,254
|
(42,019,595
)
|
397,856
|
(40,093,064
)
|
The
accompanying footnotes are integral to the consolidated financial
statements
AMERICAN
RESOURCES CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
Cash
Flows from Operating activities:
|
|
|
Net
loss
|
$
(14,025,466
)
|
$
(22,089,282
)
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
Depreciation
|
2,557,714
|
2,262,855
|
Accretion
expense
|
1,791,051
|
1,664,774
|
Loss on reclamation
settlements
|
-
|
71,245
|
Assumption of note
payable in reverse merger
|
50,000
|
-
|
Amortization of
debt discount and debt issuance costs
|
477,056
|
9,406
|
Impairment
(recovery) of advances receivable
|
(387,427
)
|
510,902
|
Impairment of
related party note receivable
|
250,000
|
-
|
Stock compensation
expense
|
50,000
|
88,675
|
Change
in current assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
882,637
|
(2,753,199
)
|
Prepaid expenses
and other assets
|
-
|
920
|
Inventory
|
(615,096
)
|
-
|
Restricted cash
used to pay interest expense
|
14,981
|
13,984
|
Accounts
payable
|
3,096,351
|
2,196,060
|
Accrued
expenses
|
-
|
12,340,615
|
Accrued
interest
|
213,625
|
122,945
|
Reclamation
liability settlements
|
-
|
(256,892
)
|
Cash used in
operating activities
|
(5,644,574
)
|
(5,816,992
)
|
|
|
|
Cash
Flows from Investing activities:
|
|
|
|
|
|
Note
receivable
|
-
|
(4,117,139
)
|
Increase in
restricted cash
|
(57,841
)
|
(116,115
)
|
Restricted cash
used to pay down debt
|
65,604
|
54,421
|
Advances made in
connection with management agreement
|
(77,800
)
|
(1,845,902
)
|
Advance repayment
in connection with management agreement
|
625,227
|
1,175,000
|
Cash paid for PPE,
net
|
(173,432
)
|
(34,200
)
|
Cash received from
acquisitions, net of $0 and $100 cash paid
|
-
|
5,315,700
|
Cash provided by
investing activities
|
381,758
|
431,765
|
|
|
|
Cash
Flows from Financing activities:
|
|
|
|
|
|
Principal payments
on long term debt
|
(392,002
)
|
(303,706
)
|
Proceeds from long
term debt (net of issuance costs $0 and $460,795)
|
4,440,000
|
4,857,391
|
Proceeds from
related party
|
50,000
|
-
|
Net (payments)
proceeds from factoring agreement
|
(32,985
)
|
1,616,067
|
Proceeds from
private placements
|
600,000
|
-
|
Cash provided by
financing activities
|
4,665,013
|
6,169,752
|
|
|
|
Increase(decrease)
in cash
|
(597,803
)
|
784,525
|
|
|
|
Cash, beginning of
year
|
784,525
|
-
|
|
|
|
Cash,
end of year
|
$
186,722
|
$
784,525
|
|
|
|
Supplemental
Information
|
|
|
|
|
|
Assumption of net
assets and liabilities for asset acquisitions
|
$
-
|
$
2,745,582
|
Equipment for notes
payable
|
$
1,419,650
|
$
904,425
|
Purchase of related
party note receivable in exchange for Series B Equity
|
$
250,000
|
$
-
|
Affiliate note for
equipment
|
$
-
|
$
63,000
|
Conversion of note
payable to common stock
|
$
50,000
|
$
-
|
Beneficial
conversion feature on note payable
|
$
50,000
|
$
-
|
Relative fair value
debt discount on warrant issue
|
$
440,000
|
$
-
|
|
|
|
Cash paid for
interest
|
$
345,147
|
$
160,619
|
The accompanying
footnotes are integral to the consolidated financial
statements
AMERICAN
RESOURCES CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2017 and 2016
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
American
Resources Corporation (ARC or the Company) operates through
subsidiaries that were acquired in 2016 and 2015 for the purpose of
acquiring, rehabilitating and operating various natural resource
assets including coal, oil and natural gas.
Basis of Presentation and Consolidation:
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Quest Energy Inc (QEI),
Deane Mining, LLC (Deane), Quest Processing LLC (Quest Processing),
ERC Mining Indiana Corp (ERC), McCoy Elkhorn Coal LLC (McCoy) and
Knott County Coal LLC (KCC). All significant intercompany accounts
and transactions have been eliminated.
On
January 5, 2017, QEI entered into a share exchange agreement with
NGFC Equities, Inc (NGFC). Under the agreement, the shareholders of
QEI exchanged 100% of its common stock to NGFC for 4,817,792 newly
created Series A Preferred shares that is convertible into
approximately 95% of outstanding common stock of NGFC. The previous
NGFC shareholders retained 845,377 common shares as part of the
agreement. The conditions to the agreement were fully satisfied on
February 7, 2017, at which time the Company took full control of
NGFC. NGFC has been renamed to American Resources Corporation
(ARC). The transaction was accounted for as a recapitalization. QEI
was the accounting acquirer and ARC will continue the business
operations of QEI, therefore, the historical financial statements
presented are those of QEI and its subsidiaries. The equity and
share information reflect the results of the recapitalization. On
May 15, 2017 ARC initiated a one-for-thirty reverse stock split.
The financial statements have been retrospectively restated to give
effect to this split.
Entities
for which ownership is less than 100% a determination is made
whether there is a requirement to apply the variable interest
entity (VIE) model to the entity. Where the company holds current
or potential rights that give it the power to direct the activities
of a VIE that most significantly impact the VIE’s economic
performance, combined with a variable interest that gives the
Company the right to receive potentially significant benefits or
the obligation to absorb potentially significant losses, the
Company would be deemed to have a controlling
interest.
The
Company is the primary beneficiary of ERC Mining, LLC, which
qualifies as a variable interest entity. Accordingly, the assets,
liabilities, revenue and expenses of ERC Mining, LLC have been
included in the accompanying consolidated financial statements. The
Company has no ownership in ERC Mining, LLC. Determination of the
Company as the primary beneficiary is based on the power
through its management functions to direct the activities that most
significantly impact the economic performance of ERC Mining,
LLC. On March 18, 2016, the company lent ERC Mining, LLC $4,117,139
to facilitate the transaction described in Note 6, which represent
amounts that could be significant to ERC. No further support has
been provided. The Company has ongoing involvement in the
management of ERC Mining, LLC to ensure their fulfillment of the
transaction described in Note 6.
The
Company is the primary beneficiary of Land Resources &
Royalties LLC (LRR) which qualifies as a variable interest entity.
Accordingly, the assets, liabilities, revenue and expenses of Land
Resources & Royalties have been included in the accompanying
consolidated financial statements. The Company has no ownership in
LRR. Determination of the Company as the primary beneficiary is
based on the power through its management functions to direct
the activities that most significantly impact the economic
performance of LRR. On October 24, 2016, the company issued
LRR a note in the amount of $178,683 to facilitate the transaction
described in Note 5, which represent amounts that could be
significant to LRR. No further support has been provided. The
Company has ongoing involvement in the management of LRR to ensure
their fulfillment of the transaction described in Note
5.
Deane
was formed in November 2007 for the purpose of operating
underground coal mines and coal processing facilities. Deane was
acquired on December 31, 2015 and as such no operations are
presented prior to the acquisition date.
Quest
Processing was formed in November 2014 for the purpose of operating
coal processing facilities and had no operations before March 8,
2016.
ERC
was formed in April 2015 for the purpose managing an underground
coal mine and coal processing facility. Operations commenced in
June 2015.
McCoy
was formed in February 2016 for the purpose of operating
underground coal mines and coal processing facilities. The assets
of McCoy were acquired on February 17, 2016 and as such no
operations are presented prior to the acquisition
date.
KCC
was formed in September 2004 for the purpose of operating
underground coal mines and coal processing facilities. KCC was
acquired on April 14, 2016 and as such no operations are presented
prior to the acquisition date.
On
February 17, 2016, McCoy Elkhorn Coal LLC (McCoy) acquired certain
assets in exchange for $100 and for assuming certain liabilities of
Fortress Resources, LLC. The fair values of the asset retirement
obligation liabilities assumed were determined to be $3,561,848
respectively. The liabilities assumed do not require fair value
readjustments.
The
assets acquired of McCoy do not represent a business as defined in
FASB AS 805-10-20. McCoy does not have an integrated set of
activities and assets that that is capable of being conducted and
managed for the purpose of providing a return or other economic
benefit to their investors, members or participants. Accordingly,
the assets acquired are initially recognized at the consideration
paid, which was the liabilities assumed, including direct
acquisition costs, of which there were none. The cost is allocated
to the group of assets acquired based on their relative fair value.
The assets acquired and liabilities assumed of McCoy were as
follows at the purchase date:
Assets
|
|
Cash
|
$
2,935,800
|
Underground Mining
Equipment
|
531,249
|
Surface Mining
Equipment
|
36,218
|
Coal Preparation
and Loading Facilities
|
58,681
|
Liabilities
|
|
Asset Retirement
Obligation
|
$
3,561,848
|
On
April 14, 2016, the Company acquired 100% of the membership
interests of ICG Knott County, LLC, subsequently renamed Knott
County Coal LLC. The fair values of the asset retirement obligation
liabilities assumed were determined to be $4,499,434 respectively.
The liabilities assumed do not require fair value
readjustments.
The
assets acquired of ICG Knott County do not represent a business as
defined in FASB AS 805-10-20. IGC Knott County does not have an
integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return or
other economic benefit to their investors, members or participants.
Accordingly, the assets acquired and liabilities assumed are
initially recognized at the consideration paid, including direct
acquisition costs. The cost is allocated to the group of assets
acquired and liabilities assumed based on their relative fair
value. The assets and liabilities assumed of ICG Knott County were
as follows on the purchase date:
Assets
|
|
Cash
|
$
2,380,000
|
Underground Mining
Equipment
|
1,533,937
|
Surface Mining
Equipment
|
206,578
|
Land
|
178,683
|
Coal Preparation
and Loading Facilities
|
200,236
|
Liabilities
|
|
Asset Retirement
Obligation
|
$
4,499,434
|
As
a result of the KCC and McCoy acquisitions during 2016, $8,061,282
of ARO was assumed for net cash of $5,315,700 and property,
equipment and land of $2,745,582.
Going
Concern:
The Company has
suffered recurring losses from operations and currently a working
capital deficit. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. We plan to
generate profits by expanding current coal operations as well as
developing new coal operations. However, we will need to raise the
funds required to do so through sale of our securities or through
loans from third parties. We do not have any commitments or
arrangements from any person to provide us with any additional
capital. If additional financing is not available when needed, we
may need to cease operations. We may not be successful in raising
the capital needed to expand or develop operations. Management
believes that actions presently being taken to obtain additional
funding provide the opportunity for the Company to continue as a
going concern. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern; no
adjustments to the financial statements have been made to account
for this uncertainty.
Estimates:
Management
uses estimates and assumptions in preparing financial statements in
accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect
the reported amounts of assets, liabilities, revenues, expenses and
the disclosure of contingent assets and liabilities. Actual results
could vary from those estimates.
Convertible
Preferred Securities:
We
account for hybrid contracts that feature conversion options in
accordance with generally accepted accounting principles in the
United States. ASC 815,
Derivatives and Hedging
Activities
(“ASC
815”) requires companies to bifurcate conversion options from
their host instruments and account for them as free standing
derivative financial instruments according to certain criteria. The
criteria includes circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are
not clearly and closely related to the economic characteristics and
risks of the host contract, (b) the hybrid instrument that
embodies both the embedded derivative instrument and the host
contract is not re-measured at fair value under otherwise
applicable generally accepted accounting principles with changes in
fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative
instrument would be considered a derivative
instrument.
We also follow ASC
480-10,
Distinguishing
Liabilities from Equity
(“ASC 480-10”) in its evaluation
of the accounting for a hybrid instrument. A financial instrument
that embodies an unconditional obligation, or a financial
instrument other than an outstanding share that embodies a
conditional obligation, that the issuer must or may settle by
issuing a variable number of its equity shares shall be classified
as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or
predominantly on any one of the following: (a) a fixed monetary
amount known at inception; (b) variations in something other than
the fair value of the issuer’s equity shares; or (c)
variations inversely related to changes in the fair value of the
issuer’s equity shares. Hybrid instruments meeting these
criteria are not further evaluated for any embedded derivatives,
and are carried as a liability at fair value at each balance sheet
date with remeasurements reported in interest expense in the
accompanying Consolidated Statements of
Operations.
Related
Party Policies:
In accordance
with FASB ASC 850 related parties are defined as either an
executive, director or nominee, greater than 10% beneficial owner,
or an immediate family member of any of the proceeding.
Transactions with related parties are reviewed and approved by the
directors of the Company, as per internal
policies.
Advance
Royalties:
Coal leases that
require minimum annual or advance payments and are recoverable from
future production are generally deferred and charged to expense as
the coal is subsequently produced.
Cash
is maintained in bank deposit accounts
which, at times, may exceed federally insured limits. To date,
there have been no losses in such accounts.
As
of December 31, 2017 and 2016 total cash, including restricted
cash, amounted to $385,665 and $925,627, respectively. Restricted
cash as of December 31, 2017 and 2016 amounted to $198,943 and
$141,102, respectively.
Restrictions
to cash include funds held for the benefit other parties in the
amount of $82,828 and $24,987 as of December 31, 2017 and 2016,
respectively. The use of these funds are in conjunction with the
management of the property owned by this party and the duration of
the restrictions matches the duration of the management agreement.
(See Note 7)
As
part of the Kentucky New Markets Development Program (See Note 3)
an asset management fee reserve was set up in the amount of
$116,115. The funds are held to pay annual asset management fees to
an unrelated party through 2021. (See Note 6)
Concentration:
As of December 31, 2017 and 2016 63%
and 78% of revenue and 99% and 97% of outstanding accounts
receivable came from three and two customers,
respectively.
Coal
Property and Equipment
are
recorded at cost. For equipment, depreciation is calculated using
the straight-line method over the estimated useful lives of the
assets, generally ranging from three to seven years. Amortization
of the equipment under capital lease is included with depreciation
expense.
Property
and equipment and amortizable intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability is measured by comparison of the carrying amount to
the future net undiscounted cash flows expected to be generated by
the related assets. If these assets are determined to be impaired,
the impairment to be recognized is measured by the amount by which
the carrying amount exceeds the fair market value of the
assets.
Costs
related to maintenance and repairs which do not prolong the
asset’s useful life are expensed as incurred.
Mine
Development:
Costs of
developing new coal mines, including asset retirement obligation
assets, or significantly expanding the capacity of existing mines,
are capitalized and amortized using the units-of-production method
over estimated coal deposits. Costs not incurred for development of
existing coal deposits are expensed as
incurred.
Asset
Retirement Obligations (ARO) – Reclamation:
At the time they are incurred, legal
obligations associated with the retirement of long-lived assets are
reflected at their estimated fair value, with a corresponding
charge to mine development. Obligations are typically incurred when
we commence development of underground and surface mines, and
include reclamation of support facilities, refuse areas and slurry
ponds or through acquisitions.
Obligations
are reflected at the present value of their future cash flows. We
reflect accretion of the obligations for the period from the date
they incurred through the date they are extinguished. The asset
retirement obligation assets are amortized using the
units-of-production method over estimated coal deposits. We are
using a discount rate of 10%, risk free rate of .23% and inflation
rate of 1.5%. Federal and State laws require that mines be
reclaimed in accordance with specific standards and approved
reclamation plans, as outlined in mining permits. Activities
include reclamation of pit and support acreage at surface mines,
sealing portals at underground mines, and reclamation of refuse
areas and slurry ponds.
We
assess our ARO at least annually and reflect revisions for permit
changes, change in our estimated reclamation costs and changes in
the estimated timing of such costs. During 2017 and 2016, $0 and
$71,245 were incurred for loss on settlement on ARO.
The
table below reflects the changes to our ARO:
|
|
|
Beginning
Balance
|
$
18,126,873
|
$
8,586,464
|
Accretion
|
1,791,051
|
1,664,774
|
Reclamation
work
|
(32,867
)
|
(185,647
)
|
McCoy
Acquisition
|
-
|
3,561,848
|
KCC
Acquisition
|
-
|
4,499,434
|
Ending
balance
|
$
19,885,057
|
$
18,126,873
|
Current portion of
reclamation liability
|
$
2,033,862
|
$
519,489
|
Long-term portion
of reclamation liability
|
$
17,851,195
|
$
17,607,384
|
Income
Taxes
include U.S. federal and
state income taxes currently payable and deferred income taxes.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are
measured using the 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 period of enactment. Deferred income tax expense represents the
change during the year in the deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax asset will not be
realized.
The
Company filed an initial tax return in 2015. Management believes
that the Company’s income tax filing positions will be
sustained on audit and does not anticipate any adjustments that
will result in a material change. Therefore, no reserve for
uncertain income tax positions has been recorded. The
Company’s policy for recording interest and penalties, if
any, associated with income tax examinations will be to record such
items as a component of income taxes.
Revenue
Recognition:
The Company
recognizes revenue in accordance with ASC 605 when the terms of the
contract have been satisfied; generally, this occurs when delivery
has been rendered, the fee is fixed or determinable, and
collectability is reasonably assured. Revenue is measured as the
amount of consideration we expect to receive in exchange for
transferring goods or providing services.
Our
revenue is comprised of sales of mined coal and services for
processing coal. All of the activity is undertaken in eastern
Kentucky.
We
recognize revenue from coal sales at the time risk of loss passes
to the customer at contracted amounts and amounts are deemed
collectible. Revenue from coal processing and loading are
recognized when services have been performed according to the
contract in place.
Leases:
Leases are reviewed by management
based on the provisions of ASC 840 and examined to see if they are
required to be categorized as an operating lease, a capital lease
or a financing transaction.
The
Company leases certain equipment and other assets under
noncancelable operating leases, typically with initial terms of 3
to 7 years. Minimum rent on operating leases is expensed on a
straight-line basis over the term of the lease. In addition to
minimum rental payments, certain leases require additional payments
based on sales volume, as well as reimbursement of real estate
taxes, which are expensed when incurred. Capital leases are
recorded at the present value of the future minimum lease payments
at the inception of the lease. The gross amount of assets recorded
under capital lease amounted to $333,875, all of which is
classified as surface equipment.
Loan
Issuance Costs and Discounts
are amortized using the effective interest method.
Amortization expense amounted to $477,056 and $9,406 as of December
31, 2017 and 2016, respectively. Amortization expense for the next
five years is expected to be $11,520, annually.
Allowance
For Doubtful Accounts:
The
Company recognizes an allowance for losses on trade and other
accounts receivable in an amount equal to the estimated probable
losses net of recoveries. The allowance is based on an analysis of
historical bad debt experience, current receivables aging and
expected future write-offs, as well as an assessment of specific
identifiable amounts considered at risk or
uncollectible.
Allowance
for trade receivables as of December 31, 2017 and 2016 amounted to
$0 and $0, respectively. Allowance for other accounts receivables
as of December 31, 2017 and 2016 amounted to $92,573 and $640,000,
respectively.
Trade
and loan receivables are carried at amortized cost, net of
allowance for losses. Amortized cost approximated book value as of
December 31, 2017 and 2016.
Inventory:
Inventory consisting of mined coal is
stated at the lower of cost (first in, first out method) or net
realizable value.
Stock-based
Compensation:
Stock-based
compensation is measured at the grant date based on the fair value
of the award and is recognized as expense over the applicable
vesting period of the stock award (generally 0 to 5 years) using
the straight-line method. Stock compensation to employees is
accounted for under ASC 718 and stock compensation to non-employees
is accounted for under ASC 505.
Earnings
Per Share:
The Company’s
basic earnings per share (EPS) amounts have been computed based on
the average number of shares of common stock outstanding for the
period and include the effect of any participating securities as
appropriate. Diluted EPS includes the effect of the Company’s
outstanding stock options, restricted stock awards, restricted
stock units and performance-based stock awards if the inclusion of
these items is dilutive.
For
the years ended December 31, 2017 and 2016, the Company had
5,364,230 and 0 outstanding stock warrants, respectively. For the
years ended December 31, 2017 and 2016, the Company did not have
any restrictive stock awards, restricted stock units, or
performance-based awards.
Reclassifications:
Reclassifications have been made to
conform with current year presentation.
New
Accounting Pronouncements:
Management has determined that the impact of the
following recent FASB pronouncements will not have a material
impact on the financial statements.
|
·
|
Accounting
Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
,
effective for years beginning after December 15, 2017
|
|
·
|
ASU 2015-11,
Simplifying the Measurement of
Inventory
, effective for years beginning after December 15,
2016. Adoption of ASU 2015-11 did not have a material effect on the
consolidated financial statements.
|
|
·
|
ASU 2015-17,
Balance Sheet Classification of
Deferred Taxes
, effective for years beginning after December
15, 2016. Adoption of ASU 2015-17 did not have a material effect on
the consolidated financial statements or related
disclosures.
|
|
·
|
ASU 2016-01,
Recognition and Measurement of
Financial Assets and Financial Liabilities
, effective for
years beginning after December 15, 2017
|
|
·
|
ASU 2016-02,
Leases
, effective for years
beginning after December 15, 2019. We expect to adopt ASU 2016-02
beginning January 1, 2019 and are in the process of assessing the
impact that this new guidance is expected to have on our
consolidated financial statements and related
disclosures.
|
|
·
|
ASU 2016-18,
Statement of Cash Flows:
Restricted Cash,
effective beginning after December 15,
2017
|
|
·
|
ASU 2017-01,
Business Combinations,
effective beginning after December 15, 2017
|
|
·
|
AUS 2017-09,
Compensation – Stock
Compensation,
effective beginning after December 31,
2017
|
|
·
|
ASU 2017-11,
Earnings Per Share,
effective beginning after December 15, 2018
|
|
·
|
ASU 2018-05,
Income Taxes,
effective
beginning after December 15, 2017. We expect to adopt ASU 2018-05
beginning January 1, 2018 and are in the process of assessing the
impact that this new guidance is expected to have on our
consolidated financial statements and related
disclosures.
|
Management has elected to early adopt ASU
2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
effective at inception. See above in Note
1.
ASU 2014-09,
Revenue from Contracts with
Customers (Topic 606).
Topic
606 supersedes the revenue recognition requirements in Topic 605
and requires entities to recognize revenues when control of the
promised goods or services is transferred to customers at an amount
that reflects the consideration to which the entity expects to be
entitled to in exchange for those goods or services. We adopted
Topic 606 as of January 1, 2018 using the modified retrospective
method of adoption. Implementation of Topic 606 caused no change in
previously recognized revenue.
NOTE 2 – PROPERTY AND EQUIPMENT
At
December 31, 2017 and 2016, property and equipment were comprised
of the following:
|
|
|
Processing and rail
facility
|
$
2,914,422
|
$
2,914,422
|
Underground
equipment
|
8,887,045
|
7,500,512
|
Surface
equipment
|
3,957,603
|
3,751,054
|
Land
|
178,683
|
178,683
|
Less: Accumulated
depreciation
|
(4,820,569
)
|
(2,262,855
)
|
|
|
|
Total Property and
Equipment, Net
|
$
11,117,184
|
$
12,081,816
|
Depreciation
expense amounted to $2,557,714 and $2,262,855 for the years of
December 31, 2017 and 2016, respectively.
The
estimated useful lives are as follows:
Processing and Rail
Facilities
|
|
20
years
|
Surface
Equipment
|
|
7
years
|
Underground
Equipment
|
|
5
years
|
NOTE 3 – NOTES PAYABLE
During
the year ended December 31, 2017 and 2016, principal payments on
long term debt totaled $392,002 and $303,706, respectively. During
the year ended December 31, 2017 and 2016, new debt issuances
totaled $5,909,650 and $5,824,816, respectively, primarily from
$4,490,000 of working capital loans and $1,419,650 of equipment
loans in 2017 and $4,688,152 from the Kentucky New Markets
Development program and $967,425 in equipment loans in 2016. (See
Note 5). During the year ended December 31, 2017 and 2016, net
proceeds from our factoring agreement totaled $32,985 and
$1,616,067, respectively.
During
the year ended December 31, 2017 and 2016, discounts on debt issued
amounted to $490,000 and $-, respectively related to the ARC
business loan discussed below and the note payable discussed in
note 9. During 2017 and 2016, $455,000 and $- was amortized into
expense with $35,000 and $- remaining as unamortized
discount.
Long-term
debt consisted of the following at December 31, 2017 and
2016:
|
|
|
|
|
|
Equipment Loans -
QEI
|
|
|
|
|
|
Note payable to an
unrelated company in monthly installments of $2,064, with interest
at 8.75%, through maturity in March 2019, when the note is due in
full. The note is secured by equipment and a personal guarantee by
an officer of the Company.
|
$
30,962
|
$
50,235
|
|
|
|
Note payable to an
unrelated company in monthly installments of $1,468, With interest
at 6.95%, through maturity in March 2021, when the note is due in
full. The note is secured by equipment and a personal guarantee by
an officer of the Company
|
57,290
|
64,175
|
|
|
|
On September 8,
2017, Quest entered into an equipment purchase agreement with an
unaffiliated entity, to purchase certain underground mining
equipment for $600,000. The agreement provided for $80,000 paid
upon execution, $30,000 monthly payments until the balance is paid
in full.
|
460,000
|
-
|
|
|
|
On October 19,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$90,400. The agreement calls for monthly payments until maturity of
October 19, 2019 and interest of 9.95%.
|
88,297
|
-
|
|
|
|
On October 20,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$50,250. The agreement calls for monthly payments until maturity of
October 20, 2019 and interest of 10.60%.
|
51,320
|
-
|
|
|
|
On December 4,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$56,900. The agreement calls for monthly payments until maturity of
January 7, 2021.
|
56,900
|
-
|
|
|
|
Business Loan -
ARC
|
|
|
|
|
|
On October 4, 2017,
ARC entered into a consolidated loan agreement with an unaffiliated
entity. $5,444,632 has been advanced under the note. $1,300,000 of
the note was advanced after December 31, 2017. The agreement calls
for interest of 7% and with all outstanding amounts due on demand.
The note is secured by all assets of Quest and subsidiaries. In
conjunction with the loan, a warrants for up to 5,017,006 common
shares were issued at an exercise price ranging from $.01 to $11.44
per share and with an expiration date of October 2, 2020. The loan
consolidation was treated as a loan modification for accounting
purposes giving rise to a discount of $140,000. The discount was
amortized over the life of the loan with $105,000 included as
interest expense and $35,000 included as a note discount as of
December 31, 2017.
|
4,444,632
|
175,000
|
|
|
|
Equipment Loans
– ERC
|
|
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $771 with
an interest rate of 5.25% with a balloon payment at maturity of
June 30, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
27,288
|
35,644
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $3,304 with
an interest rate of 5.25% with a balloon payment at maturity of
June 30, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
128,254
|
161,738
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $2,031 with
an interest rate of 5.25% with a balloon payment at maturity of
August 13, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
36,890
|
60,541
|
Equipment Loans -
McCoy
|
|
|
|
|
|
Equipment note
payable to an unrelated company, with monthly payments of $150,000
in September 2016, October 2016, November 2016 and a final payment
of $315,000 due in December 2016. No extensions have been entered
into subsequent to December 31, 2017 resulting in the note being in
default.
|
540,000
|
540,000
|
|
|
|
On May 2, 2017,
Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $250,000. Full payment was due September 12,
2017.
|
135,000
|
-
|
|
|
|
On June 12, 2017,
Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $22,500. Full payment was due September 12,
2017.
|
22,500
|
-
|
|
|
|
On September 25,
2017, Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $350,000. The agreement provided for $20,000 monthly
payments until the balance is paid in full.
|
330,000
|
-
|
|
|
|
Business Loans -
McCoy
|
|
|
|
|
|
Business loan
agreement with Crestmark Bank in the amount of $200,000, with
monthly payments of 23,000, with an interest rate of 12%, through
maturity in January 1, 2018. The note is secured by a corporate
guaranty by the Company and a personal guaranty.
|
66,667
|
-
|
|
|
|
Seller Note -
Deane
|
|
|
|
|
|
Deane Mining -
promissory note payable to an unrelated company, with monthly
interest payments of $10,000, at an interest rate of 6%, beginning
June 30, 2016. The note is due December 31, 2017. No payments have
been made on the note and no extensions have been entered into
subsequent to December 31, 2017, resulting in the note being in
default.
|
2,000,000
|
2,000,000
|
|
|
|
Accounts Receivable
Factoring Agreement
|
|
|
|
|
|
McCoy, Deane and
Knott County secured accounts receivable note payable to a bank.
The agreement calls for interest of .30% for each 10 days of
outstanding balances. The advance is secured by the accounts
receivable, corporate guaranty by the Company and personal
guarantees by two officers of the Company. The agreement ends in
October 2018
|
1,582,989
|
1,616,167
|
|
|
|
Kentucky New
Markets Development Program
|
|
|
|
|
|
Quest Processing -
loan payable to Community Venture Investment XV, LLC, with interest
only payments due quarterly until March 2023, at which time
quarterly principal and interest payments are due. The note bears
interest at 3.698554% and is due March 7, 2046. The loan is secured
by all equipment and accounts of Quest Processing. See
Note
|
4,117,139
|
4,117,139
|
|
|
|
Quest Processing -
loan payable to Community Venture Investment XV, LLC, with interest
only payments due quarterly until March 2023, at which time
quarterly principal and interest payments are due. The note bears
interest at 3.698554% and is due March 7, 2046. The loan is secured
by all equipment and accounts of Quest Processing. See
Note
|
1,026,047
|
1,026,047
|
|
|
|
Less: Debt
Discounts and Loan Issuance Costs
|
(475,333
)
|
(451,389
)
|
|
|
|
Affiliate
Notes
|
|
|
|
|
|
Notes payable to
affiliate, due on demand with no interest and is uncollateralized.
Equipment purchasing was paid by an affiliate resulting in the note
payable.
|
$
74,000
|
$
74,000
|
|
|
|
During July 2017,
an officer of the Company advanced $50,000 to Quest. The advance is
unsecured, non interest bearing and due on demand.
|
$
50,000
|
$
-
|
|
|
|
|
14,850,842
|
9,469,947
|
Less: Current
maturities
|
9,769,154
|
4,505,006
|
|
|
|
Total Long-term
Debt
|
$
5,081,688
|
$
4,964,941
|
Total
interest expense was $558,772 in 2017 and $283,564 in
2016.
Future
minimum principal payments, interest payments and payments on
capital leases are as follows:
Payable
In
|
|
|
Total Loan and
Lease Principal
|
|
|
|
|
|
|
2018
|
9,704,444
|
64,710
|
9,769,154
|
8,560
|
2019
|
312,707
|
125,798
|
438,505
|
3,722
|
2020
|
37,283
|
-
|
37,283
|
-
|
2021
|
10,491
|
-
|
10,491
|
-
|
2022
|
-
|
-
|
-
|
-
|
Thereafter
|
4,595,409
|
|
4,595,409
|
|
NOTE 4 – RELATED PARTY TRANSACTIONS
On
June 12, 2015, the Company executed a consulting agreement with an
entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615, respectively, relating
to services rendered under this agreement. The amount outstanding
and payable as of December 31, 2017 and 2016, was $17,840,615 and
$17,840,615, respectively. The amount is due on demand and does not
accrue interest.
On
January 1, 2016, the Company awarded stock options for 857,464
shares that were cashlessly exercised into 290,513 shares of Series
A preferred stock or consulting efforts to an entity with common
ownership. No stock options were awarded to related parties during
2017.
During
2015, equipment purchasing was paid by an affiliate resulting in a
note payable. The balance of the note was $74,000 as of December
31, 2017 and 2016, respectively.
On
April 30, 2017, the Company purchased $250,000 of secured debt that
had been owed to that party, by an operating subsidiary of a
related party. As a result of the transaction, the Company is now
the creditor on the notes. The first note in the amount of $150,000
is dated March 13, 2013, carries an interest rate of 12% and was
due on September 13, 2015. The second note in the amount of
$100,000 is dated July 17, 2013, carries an interest rate of 12%
and was due January 17, 2016. Both notes are in default and have
been fully impaired due to collectability uncertainty. (see Note
9)
During
July 2017, an officer of the Company advanced $50,000 to Quest. The
advance is unsecured, non interest bearing and due on demand. (see
Note 3)
On
June 12, 2015, the Company executed a consulting agreement with an
entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615, respectively, relating
to services rendered under this agreement. The amount outstanding
and payable as of December 31, 2017 and 2016, was $17,840,615 and
$17,840,615, respectively. The amount is due on demand and does not
accrue interest.
NOTE 5 – VARIABLE INTEREST ENTITY
On
October 24, 2016, the Company sold certain mineral and land
interests to a subsidiary of an entity, LRR, owned by members of
the Company’s management. LRR leases various parcels of land
to QEI and engages in other activities creating miscellaneous
income. The consideration for the transaction was a note in the
amount of $178,683. The note bears no interest and is due in 2026.
The balance as of December 31, 2016 was $130,145. As of January 28,
2017, the note was paid in full. This transaction was eliminated
upon consolidation as a variable interest entity.
The Company’s management also manages the
operations of LRR. LRR has assets totaling $475,401 and liabilities
totaling $77,443 as of December 31, 2017 for which there were no
restrictions.
The
Company’s risk associated with LRR is greater than its
ownership percentage and its involvement does not affect the
Company’s business beyond the relationship described
above.
NOTE 6 – KENTUCKY NEW MARKETS DEVELOPMENT
PROGRAM
On
March 18, 2016, Quest Processing entered into two loans under the
Kentucky New Markets Development Program for a total of $5,143,186.
Quest Processing paid $460,795 of debt issuance costs resulting in
net proceeds of $4,682,391. See note 3. The Company retains the
right to call $5,143,186 of the loans in March 2023. State of
Kentucky income tax credits were generated for the lender which the
Company has guaranteed over their statutory life of seven years in
the event the credits are recaptured or reduced. At the time of the
transaction, the income tax credits were valued at $2,005,843. The
Company has not established a liability in connection with the
guarantee because it believes the likelihood of recapture or
reduction is remote.
On
March 18, 2016, ERC Mining LLC, an entity consolidated as a VIE,
lent $4,117,139 to an unaffiliated entity, as part of the Kentucky
New Markets Development Program loans. The note bears interest at
4% and is due March 7, 2046. The balance as of December 31, 2017
and 2016 was $4,117,139 and $4,117,139, respectively. Payments of
interest only are due quarterly until March 18, 2023 at which time
quarterly principal and interest are due. The note is
collateralized by the equity interests of the
borrower.
The
Company’s management also manages the operations of ERC
Mining LLC. ERC Mining LLC has assets totaling $4,415,860 and
liabilities totaling $4,117,139 as of December 31, 2017 for which
there are to be used in conjunction with the transaction described
above. Assets totaling $3,818,418 and liabilities totaling
$4,117,139, respectively, are eliminated upon consolidation. The
Company’s risk associated with ERC Mining LLC is greater than
its ownership percentage and its involvement does not affect the
Company’s business beyond the relationship described
above.
NOTE 7 – MANAGEMENT AGREEMENT
On
April 13, 2015, ERC entered into a mining and management agreement
with an unrelated entity, to operate a coal mining and processing
facility in Jasonville, Indiana. The agreement called for a monthly
base fee of $20,000 in addition to certain per ton fees based on
performance to be paid to ERC. During 2017 and 2016 no fee had been
paid and due to the uncertainty of collection, no fee has been
recorded. Fees earned totaled $240,000 and $240,000 for 2017 and
2016, respectively, which have been fully reserved. The agreement
called for equipment payments to be made by the entity. As of
December 31, 2017, and 2016 amounts owed from the entity to ERC for
equipment payments amounted to $192,432 and $258,096,
respectively.
During
2017, ERC had advances of $77,800 and repayments of $625,227 of
amounts previously advanced. During 2016, ERC had advances of
$1,975,000 which is unsecured, non-interest bearing and due upon
demand and repayments of previously advanced amounts of $1,175,000.
Of the amounts received in 2017, $387,427 was the collection of a
previously impaired amount.
As
part of the agreement, ERC retained the administrative rights to
the underlying mining permit and reclamation liability. The entity
has the right within the agreement to take the mining permits and
reclamation liability at any time. In addition, all operational
activity that takes place on the facility is the responsibility of
the entity. ERC acts as a fiduciary and as such has recorded cash
held for the entity’s benefit as both an asset and an
offsetting liability amounting to $82,828 and $24,987 respectively
as of December 31, 2017 and 2016.
NOTE 8 – INCOME TAXES
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The primary temporary differences that give rise to the
deferred tax assets and liabilities are as follows: accrued
expenses.
Deferred
tax assets consisted of $4,152,800 at December 31, 2017, which was
fully reserved. Deferred tax assets consist of net operating loss
carryforwards in the amount of $4,152,800 at December 31, 2017,
which was fully reserved. The net operating loss carryforwards for
years 2015, 2016 and 2017 begin to expire in 2035. The application
of net operating loss carryforwards are subject to certain
limitations as provided for in the tax code. The Tax Cuts and Jobs
Act was signed into law on December 22, 2017 and reduced the
corporate income tax rate from 34% to 21%. The Company’s
deferred tax assets, liabilities, and valuation allowance have been
adjusted to reflect the impact of the new tax
law.
The
Company’s effective income tax rate is lower than what would
be expected if the U.S. federal statutory rate (34%) were applied
to income before income taxes primarily due to certain expenses
being deductible for tax purposes but not for financial reporting
purposes. The Company files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. All years are open to
examination as of December 31, 2017.
NOTE 9 – EQUITY TRANSACTIONS
A
new 2016 Stock Incentive Plan (2016 Plan) was approved by the Board
during January 2016. The Company may grant up to 6,363,225 shares
of Series A Preferred stock under the 2016 Plan. The 2016 Plan is
administered by the Board of Directors, which has substantial
discretion to determine persons, amounts, time, price, exercise
terms, and restrictions of the grants, if any. The options issued
under the 2016 Plan vest upon issuance.
During
2016, the Company issued options amounting to 6,363,225 shares
(which includes shares disclosed above) under an adopted stock
option plan that were cashlessly exercised into 2,267,362 shares of
Series A preferred stock resulting in an expense of
$88,675.
On
May 10, 2017, the Company issued warrants amounting to 8,334 common
shares to a board member. The options expire May 9, 2020 and have
an exercise price of $3.60. An expense in the amount of $40,000 was
recognized for this issuance.
The
Company had a note payable in the amount of $50,000 which was
assumed as part of the share exchange agreement and accounted for
as an expense in the recapitalization transaction. On February 22,
2017, the Company modified the note to add a conversion option with
a price of $1.50. The conversion option was beneficial, therefore,
the Company recognized $50,000 as a discount to the assumed note
payable. The note was immediately converted, resulting in the
issuance of 33,334 shares and the full amortization of the
discount.
The Company has
Series A Preferred stock outstanding, which has the following key
provisions: par value of $0.0001, voting rights of 33(1/3) votes of
Class A Common stock for each Series A Preferred stock, conversion
to Class A Common stock at a rate 3(1/3) Class A Common stock,
liquidation rights at $1.65 per share, and anti-dilution protection
through March 21, 2020 for conversion into Class A Common Stock at
no less than 72.0% of the fully-diluted Class A Common stock
outstanding. The Company evaluated the embedded conversion option
under ASC 815. The conversion option was deemed clearly and closely
related to its equity host instrument and as such was not
bifurcated.
On
March 7, 2017, ARC closed a private placement whereby it issued an
aggregate of 500,000 shares of ARC’s Series B Preferred Stock
at a purchase price of $1.00 per Series B Preferred share and
warrants to purchase an aggregate of 208,334 shares of the
ARC’s common stock (subject to certain adjustments), for
proceeds to ARC of $500,000 (the “March 2017 Private
Placement”). After deducting for fees and expenses, the
aggregate net proceeds from the sale of the preferred series B
shares and the warrants in the March 2017 Private Placement were
approximately $500,000. The ‘A’ warrants totaling
138,889 shares expire March 6, 2020 and hold an exercise price of
$7.60 per share. The ‘A-1’ warrants totaling 69,445
shares expire March 6, 2020 and hold an exercise price of $.003 per
share.
On
April 2, 2017, American Resources Corporation closed a private
placement whereby it issued an aggregate of 100,000 shares of the
ARC’s Series B Preferred Stock at a purchase price of $1.00
per Series B Preferred share, and warrants to purchase an aggregate
of 27,778 shares of the ARC’s common stock (subject to
certain adjustments), for proceeds to ARC of $100,000 (the
“April 2017 Private Placement”). After deducting for
fees and expenses, the aggregate net proceeds from the sale of the
Series B Preferred Stock and the warrants in the April 2017 Private
Placement were approximately $100,000. The ‘A’ warrants
totaling 27,778 shares expire April 2, 2019 and hold an exercise
price of $7.20 per share.
On
April 30, 2017, American Resources Corporation closed on a private
placement agreement whereby it issued an aggregate of 250,000
shares of the ARC’s Series B Preferred Stock and A warrants
amounting to 69,445 to an unrelated party for the purchase of
$250,000 of secured debt that had been owed to that party, by an
operating subsidiary of a related party. As a result of the
transaction, the Company is now the creditor on the notes. The
first note in the amount of $150,000 is dated March 13, 2013,
carries an interest rate of 12% and was due on September 13, 2015.
The second note in the amount of $100,000 is dated July 17, 2013,
carries an interest rate of 12% and was due January 17, 2016. Both
notes are in default and were impaired. The A warrants totaling
69,445 shares expire April 29, 2019 and hold an exercise price of
$7.20 per share.
The
Series B Preferred Stock converts into common stock of the Company
at the holder’s discretion at a conversion price of $3.60 per
common share (one share of Series B Preferred converts to common at
a ratio of 0.27778). Furthermore, the Series B Preferred share
purchase agreement provides for certain adjustments to the
conversion value of the Series B Preferred to common shares of the
Company that are based on the EBITDA (earnings before interest,
taxes, depreciation, and amortization) for the Company for the 12
months ended March 31, 2018 of $6,000,000. Those adjustments
provide for a decrease in the conversion value based on the
proportional miss of the Company’s EBITDA, up to a maximum of
30.0% decrease in the conversion value of the Series B Preferred to
common shares.
The
Series B Preferred share purchase agreement provides, for a period
of nine months post execution of the purchase agreement, an option
for the investor to put the Series B Preferred investment to the
Company at a 12% premium to the Series B Preferred purchase price
should the Company achieve certain hurdles, such as a secondary
offering and an up-listing to a national stock exchange. Such put
option expires after 20 days from notification of the Company to
the Series B Preferred investor of the fulfillment of such
qualifications.
Total
preferred dividend requirement for 2017 and 2016 amounted to
$53,157 and $0, respectively.
Total
stock-based compensation expense incurred for awards to employees
during 2017 and 2016 was $0 and $88,675, respectively. Fair value
was determined using the total enterprise value
approach.
On
July 5, 2017, the Company issued 13,333 common shares and warrants
to purchase 33,333 shares to an unrelated consulting company. The
warrants had an exercise price of $3.60 with a three-year term. The
total compensation expense related to this warrant was $10,000
which was determined using the closing stock price at the date of
the grant and the Black-Sholes Option Pricing Model.
In
conjunction with the ARC business loan, warrants of 5,996,609
common shares were issued and 979,603 were subsequently canceled at
an exercise price ranging from $.01 to $11.44 per share and with an
expiration date of October 2, 2020.
|
|
Expected Dividend
Yield
|
0
%
|
Expected
volatility
|
13.73
%
|
Risk-free
rate
|
1.62
%
|
Expected life of
warrants
|
|
|
|
|
Weighted
Average Contractual Life in Years
|
Aggregate
Intrinsic Value
|
Outstanding
– December 31, 2015
|
-
|
-
|
-
|
-
|
Exercisable -
December 31, 2015
|
-
|
-
|
-
|
-
|
Granted
|
-
|
-
|
-
|
-
|
Forfeited or
Expired
|
-
|
-
|
-
|
-
|
Outstanding -
December 31, 2016
|
-
|
-
|
-
|
-
|
Exercisable -
December 31, 2016
|
-
|
-
|
-
|
-
|
Granted
|
6,343,833
|
$
2.317
|
2.706
|
$
174,253
|
Forfeited or
Expired
|
979,603
|
$
0.560
|
1.997
|
$
36,184
|
Exercised
|
-
|
-
|
-
|
-
|
Outstanding -
December 31, 2017
|
5,364,230
|
$
2.638
|
2.835
|
$
138,069
|
Exercisable -
December 31, 2017
|
5,364,230
|
$
2.638
|
2.835
|
$
138,069
|
NOTE 10 – CONTINGENCIES
In
the course of normal operations, the Company is involved in various
claims and litigation that management intends to defend. The range
of loss, if any, from potential claims cannot be reasonably
estimated. However, management believes the ultimate resolution of
matters will not have a material adverse impact on the
Company’s business or financial position.
The
company leases various office space some from an entity which we
consolidate as a variable interest entity. (see note 5). The future
annual rent is $6,000 through 2021. Rent expense for 2017 and 2016
amounted to $26,000 each year, respectively.
NOTE 11 – SUBSEQUENT EVENTS
On
January 25, 2018, Quest entered into an equipment financing
agreement with an unaffiliated entity, to purchase certain surface
equipment for $346,660. The agreement calls for monthly payments
until maturity of December 25, 2020.
During
2018, the company drew an additional $1,300,000 on the ARC business
loan. (see note 3)
On
March 29, 2018, Quest entered into an equipment financing agreement
with an affiliated entity, to purchase certain surface mining
equipment for $135,000. Payments of $75,000 and $60,000 are due on
April 6, 2018 and April 13, 2018, respectively.
1,000,000 Shares
Class A Common Stock
Prospectus
Book-Running Manager
MAXIM GROUP, LLC
February
15, 2019