The accompanying footnotes are integral to the consolidated financial statements
The accompanying footnotes are integral to the consolidated financial statements
The accompanying footnotes are integral to the consolidated financial statements
The accompanying footnotes are integral to the consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Resources Corporation (ARC or the Company) operates through subsidiaries that were acquired in 2019, 2018, 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), Knott County Coal LLC (KCC), Wyoming County Coal (WCC), Empire Kentucky Land, Inc, Colonial Coal Company, Inc. (Empire) and Perry County Resources LLC (PCR). 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 5, 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 5.
The company was 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. 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.
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. McCoy was 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 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.
WCC was formed in October 2018 for the purpose of acquiring and operating underground and surface coal mine and a coal processing facility. No operations were undergoing at the time of formation or acquisition.
On February 12, 2019, ARC Acquisition Corporation (ARCAC) was formed as a wholly owned subsidiary of ARC. On February 12, 2019, ARCAC merged with Empire Kentucky Land, Inc which is the 100% owner of Colonial Coal Company, Inc. ARC Acquisition Corporation was subsequently renamed Empire Kentucky Land, Inc.
On September 25, 2019, Perry County Resources LLC (PCR) was formed as a wholly owned subsidiary of QEI.
Asset Acquisitions:
On April 21, 2018, McCoy acquired certain assets known as the PointRock Mine (PointRock) in exchange for assuming certain liabilities of the seller. The fair values of the liabilities assumed were $53,771 for prior vendors and $2,624,961 for asset retirement obligation totaling $2,678,732. 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 year ended December 31, 2019 and 2018 amounted to $382,676 and $462,640, respectively. The assets will be measured for impairment when an event occurs that questions the realization of the recorded value. On May 8, 2020, the company sold the assets known as PointRock Mine to an unrelated party. As such, the assets have been written down to $0 as of December 31, 2019 resulting in an impairment loss of $1,687,635.
The assets acquired of PointRock 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 PointRock were as follows at the purchase date:
Assets
|
|
|
|
Mining Rights
|
|
$
|
2,678,732
|
|
Liabilities
|
|
|
|
|
Vendor Payables
|
|
$
|
53,771
|
|
Asset Retirement Obligation
|
|
$
|
2,624,961
|
|
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 year ended December 31, 2019 and 2018 amounted to $12,398 and $4,134, respectively. The assets will be measured for impairment when an event occurs that questions the realization of the recorded value. Due to the desire not to sell thermal coal, the Company idled Wayland during 2019 resulting in an impairment loss of $49,597 as of December 31, 2019.
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
|
|
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, a seller note of $350,000 and a seller note of $250,000. On September 20, 2019 Wyoming County received a Notice of Breach of the asset purchase agreement between WCC and Synergy Coal, LLC due to consideration of $225,000 not being paid, failure to file for permit transfers and pay delinquent transfer fees of $10,500 and other contract breaches, including failure to transfer reclamation surety bonds. Subsequent to the balance sheet date, WCC has paid the delinquent transfer fees and has filed for permit transfer. As of the balance sheet date, the West Virginia permit transfers have not yet been approved, the seller has not been paid cash amounts due, and WCC has not substituted its reclamation surety bonds for the seller’s bond collateral. As of the report date, the Company is in the process of transferring the permits. (Note 8)
Assets
|
|
|
|
Note Receivable
|
|
$
|
234,240
|
|
Land
|
|
$
|
907,196
|
|
Coal Refuse Storage
|
|
$
|
11,993,827
|
|
Processing and Loading Facility
|
|
$
|
9,790,841
|
|
Liabilities
|
|
|
|
|
Notes Payable
|
|
$
|
600,000
|
|
Asset Retirement Obligation
|
|
$
|
234,240
|
|
On February 12, 2019, through a share exchange, ARC merged with Empire Kentucky Land, Inc, its wholly-owned subsidiary Colonial Coal Company, Inc. and purchased assets consisting of surface and mineral ownership and other related agreements of Empire Coal Holdings, LLC in exchange for a cash payment of $500,000 which was carried as a seller note until paid on February 21, 2019, a seller note of $2,000,000 payable in the form of a royalty from production off of the property and 2,000,000 common shares of ARC’s stock valued at $24,400,000. The note is currently in default as a result of non-payment at the earlier of i) completion of the securities offering and ii) August 20, 2019 (Maturity date). The default interest rate is 5%. American Resources Corporation has received a Breach of Promissory Notes from Empire Kentucky Land, Inc. The amount being sought is $2,000,000 as well as additional fees and charges. The acquired assets have an anticipated life of 25 years. Capitalized mining rights will be amortized based on productive activities over the anticipated life of 25 years. Amortization expense for this asset for the year ended December 31, 2019 and 2018 amounted to $931,333 and $0, respectively. The assets will be measured for impairment when an event occurs that questions the realization of the recorded value. On May 8, 2020, the company sold Empire Kentucky Land, Inc. and its wholly-owned subsidiary Colonial Coal Company, Inc back to the seller under a Settlement, Rescission and Mutual Release Agreement. Under the agreement, the shares of Empire and the underlying property is sold to the seller for the consideration of the cancelation of $2,000,000 in seller financing and for 2,000,000 shares of the Company’s common shares. As such, the assets have been written down to $0 as of December 31, 2019 resulting in an impairment loss of $25,968,667.
The stock and assets acquired 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 Empire Coal were as follows at the purchase date:
Assets
|
|
|
|
Acquired Mining Rights
|
|
$
|
25,400,000
|
|
Land
|
|
|
1,500,000
|
|
Liabilities
|
|
|
|
|
Seller Note
|
|
$
|
2,500,000
|
|
On August 16, 2019, ERC acquired certain assets known as the Gold Star Acquisition in exchange for assuming certain liabilities of LC Energy, LLC and the payment of $400,000, of which $177,000 of this amount was considered recovery of previously written off bad debt. The value of the assets received in excess of the liability assumed created a gain on purchase of $394,484. The fair values of the asset retirement obligation liabilities assumed were determined to be $77,831. The liabilities assumed do not require fair value readjustments. The company’s intention with this property is to reclaim the former mining operations and monetize the structure and equipment acquired.
The assets acquired 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 and cash, 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 LC Energy Operations, LLC were as follows at the purchase date:
Assets
|
|
|
|
Cash
|
|
$
|
400,000
|
|
Restricted Cash
|
|
|
250,000
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Reclamation liability
|
|
$
|
77,831
|
|
On September 23, 2019, American Resources Corporation, (“Buyer”) entered into a binding agreement with Bear Branch Coal LLC, a Kentucky limited liability company, Perry County Coal LLC, a Kentucky limited liability company, Ray Coal LLC, a Kentucky limited liability company, and Whitaker Coal LLC, a Kentucky limited liability company (each a “Seller” and collectively, “Sellers”). The agreement was entered into as part of the bankruptcy proceedings of Cambrian Holding Company LLC, (“Cambrian), and is subject to approval by the United States Bankruptcy Court for the Eastern District of Kentucky (the “Bankruptcy Court”) in the chapter 11 bankruptcy cases of the Sellers, Case No. 19-51200(GRS), by entry of an order in form and substance acceptable to Sellers and Buyer (the “Sale Order). Under the agreement of the Sale Order, each Seller will sell, transfer, assign, convey and deliver to American Resources Corporation, effective as of the Closing, all assets, rights, titles, permits, leases, contracts and interests of such Seller free and clear of all liens, claims, interests and encumbrances, to the fullest extent permitted by the Bankruptcy Court. In consideration for the purchased assets, the Buyer will assume certain liabilities. Additionally, the Buyer will assume all liabilities relating to the transferred permits and the associated reclamation and post-mining liabilities of the purchased assets. On September 26, 2019, the Company received notice that a certain lease assumption as part of the PCR acquisition was being disputed by the lessor. As of the report date, the Company is in the process of transferring the permits.
On September 27, 2019, PCR closed and acquired certain assets in exchange for assuming certain liabilities of Perry County Coal, LLC and a cash payment of $1. The preliminary fair values of the asset retirement obligation liabilities assumed were determined to be $2,009,181. Additional assumed liabilities total $3,036,987, of which $1,067,000 of the assumed liabilities are in negotiation as of the report date. The liabilities assumed do not require fair value readjustments.
The assets acquired 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 and a cash payment of $1, 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. Because the transaction closed near the end of the reporting quarter the values assigned are provisional as of December 31, 2019 while the company continues to gather information, including evaluations of mining permits, discovery of assumed unsecured payables and timing and extent of end of mine life cost. The assets acquired and liabilities assumed of Perry County Coal, LLC were as follows at the purchase date:
Assets
|
|
|
|
Coal Inventory
|
|
$
|
659,331
|
|
Mine Development
|
|
|
524,268
|
|
Coal Refuse
|
|
|
179,522
|
|
Land
|
|
|
850,826
|
|
Equipment - Underground
|
|
|
873,161
|
|
Equipment - Surface
|
|
|
4,743
|
|
Processing and Loading Facility
|
|
|
1,954,317
|
|
Liabilities
|
|
|
|
|
Reclamation liability
|
|
$
|
2,009,181
|
|
Accrued liabilities
|
|
|
3,036,987
|
|
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.
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 December 31, 2019 and December 31, 2018 was $47,987 and $58,246, respectively.
A lender of the Company also required a reserve account to be established. The balance as of December 31, 2019 and December 31, 2018 was $0 and $273,783, respectively. The requirement of the reserve ended when the loan agreement terminated during 2019.
The total balance of restricted cash also includes amounts held under the management agreement in the amount of $0 and $79,662, as of December 31, 2019 and 2018, respectively. See note 5 for terms of the management agreement. The restriction ended upon termination of the management agreement during 2019.
During the 2019 the Company established a reclamation bonding collateral fund. The balance of the restricted cash being held totaled $250,000 and $0 as of December 31, 2019 and 2018, 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 year ended December 31, 2019 and December 31, 2018.
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Cash
|
|
$
|
3,324
|
|
|
$
|
2,293,107
|
|
Restricted Cash
|
|
|
265,487
|
|
|
|
411,692
|
|
Total cash and restricted cash presented in the consolidated statement of cash flows
|
|
$
|
268,811
|
|
|
$
|
2,704,799
|
|
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.
During 2019, it was determined that certain long lived assets of Wayland and ERC Mining Indiana were impaired. The assets include mine development, processing and loading facilities used exclusively in the thermal coal market. Because of the ongoing depression of thermal coal prices, it was determined that the net book value of these assets would not be recognized.
During 2020, the Empire property and the Point Rock Permits were sold to unrelated parties. As such, the asset was written down to $0 during 2019.
Total impairment loss recognized during the period ending December 31, 2019 equaled $27,688,030.
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, are capitalized and amortized using the units-of-production method over estimated coal deposits or proven reserves. Costs incurred for development and expansion of existing reserves 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 based on expected reclamation outflows over estimated recoverable coal deposit lives. We are using a discount rates ranging from 6.16% to 7.22%, risk free rates ranging from 1.76% to 2.92% and inflation rate of 2%. Revisions to estimates are a result of changes in the expected spending estimate or the timing of the spending estimate associated with planned reclamation. 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 2019 and 2018, $0 and $0 were incurred for gain loss on settlement on ARO.
The table below reflects the changes to our ARO:
|
|
2019
|
|
|
2018
|
|
Beginning Balance
|
|
$
|
18,528,009
|
|
|
$
|
14,987,135
|
|
Accretion
|
|
|
1,482,349
|
|
|
|
1,366,322
|
|
Reclamation work
|
|
|
-
|
|
|
|
-
|
|
Gain on Reclamation Work
|
|
|
-
|
|
|
|
-
|
|
Dispositions
|
|
|
-
|
|
|
|
(919,158
|
)
|
Wayland Acquisition
|
|
|
-
|
|
|
|
66,129
|
|
PointRock Acquisition
|
|
|
-
|
|
|
|
2,624,961
|
|
Razorblade Mine Development
|
|
|
-
|
|
|
|
168,380
|
|
WCC Acquisition
|
|
|
-
|
|
|
|
234,240
|
|
Gold Star Acquisition
|
|
|
77,831
|
|
|
|
-
|
|
PCR Acquisition
|
|
|
2,009,181
|
|
|
|
-
|
|
Change in ARO Estimate
|
|
|
(2,262,931
|
)
|
|
|
-
|
|
Ending Balance
|
|
$
|
19,839,782
|
|
|
$
|
18,528,009
|
|
Current portion of reclamation liability
|
|
$
|
2,327,169
|
|
|
$
|
2,327,169
|
|
Long-term portion of reclamation liability
|
|
$
|
17,512,613
|
|
|
$
|
16,211,640
|
|
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 adopted and recognizes revenue in accordance with ASC 606 as of January 1, 2018, using the modified retrospective approach. The Company concluded that the adoption did not change the timing at which the Company historically recognized revenue nor did it have a material impact on its consolidated financial statements.
Revenue is recognized when performance obligations under the terms of a contract with our customers are satisfied; for all contracts this occurs when control of the promised goods have been transferred to our customers. For coal shipments to domestic and international customers via rail, control is transferred when the railcar is loaded.
Our revenue is comprised of sales of mined coal and services for processing coal. All of the activity is undertaken in eastern Kentucky.
Revenue from coal processing and loading are recognized when services have been performed according to the contract in place.
Our coal sales generally include 10 to 30-day payment terms following the transfer of control of the goods to the customer. We typically do not include extended payment terms in our contracts with customers. As such, spot sales prices and forward contract pricing has declined.
During late 2019 management anticipated adverse market conditions globally, and in response began to selectively reduce or idle coal production operations and furlough or terminate employees. During Q1 2020, the worldwide COVID-19 outbreak sharply reduced worldwide demand for infrastructure and steel products and their necessary inputs including Metallurgical coal. Company management fully idled the Company’s operations accordingly, and the operations have remained idled through the report date. These recent, global market disruptions and developments are expected to result in lower sales and gross margins for the coal industry and the Company in 2020 and possibly beyond.
Customer Concentration and Disaggregation of Revenue: As of December 31, 2019 and 2018 87.49% and 89% of revenue came from three and four customers, respectively. As of December 31, 2019 and 2018, 99.63% and 99% of outstanding accounts receivable came from two and two customers, respectively.
For the year ended December 31, 2019 and 2018, 62% and 60% of generated from sales to the steel and industrial industry, respectively. For the year ended December 31, 2019 and 2018, 38% and 40% of generated from sales to the utility industry, respectively.
Leases: In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”). ASU 2016-02, along with related amendments issued from 2017 to 2018 (collectively, the “New Leases Standard”), requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach and elected the option to not restate comparative periods in transition and also elected the package of practical expedients for all leases within the standard, which permits the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs.
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.
Beneficial Conversion Features of Convertible Securities: Conversion options that are not bifurcated as a derivative pursuant to ASC 815 and not accounted for as a separate equity component under the cash conversion guidance are evaluated to determine whether they are beneficial to the investor at inception (a beneficial conversion feature) or may become beneficial in the future due to potential adjustments. The beneficial conversion feature guidance in ASC 470-20 applies to convertible stock as well as convertible debt which are outside the scope of ASC 815. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date. In addition, our preferred stock issues contain conversion terms that may change upon the occurrence of a future event, such as antidilution adjustment provisions. The beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as a dividend over either the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the dividend must be recognized at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.
The Company has a loan, convertible into common shares at $5.25 per share, with a beneficial conversion feature added through a loan modification on February 4, 2019. At the time of the modification the loan had a maturity date of three months, and the conversions may occur any time from the time of the modification.
Loan Issuance Costs and Discounts are amortized using the effective interest method. Amortization expense amounted to $7,725,076 and $670,601 as of December 31, 2019 and 2018, respectively. Amortization expense for the next five years is expected to be approximately $19,000, 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, 2019 and 2018 amounted to $0 and $0, respectively. Allowance for other accounts receivables as of December 31, 2019 and 2018 amounted to $0 and $0, respectively.
Trade and loan receivables are carried at amortized cost, net of allowance for losses. Amortized cost approximated book value as of December 31, 2019 and 2018.
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 2018-07 which was adopted on July 1 2018 and ASC 505 for periods before July 1, 2018 and did not have an impact to the financial statements.
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, 2019 and 2018, the Company had 10,698,879 and 5,545,227 outstanding stock warrants, respectively. For the years ended December 31, 2019 and 2018, the Company had 1,056,830 and 681,830 outstanding stock options, respectively. For the years ended December 31, 2019 and 2018, the Company had 0 and 481,780 shares of Series A Preferred Stock, respectively, that has the ability to convert at any time into 0 and 1,605,934 shares of common stock, respectively. For the years ended December 31, 2019 and 2018, the Company had 0 and 0 shares of Series B Preferred Stock, respectively, that has the ability to convert at any time into 0 and 0 shares of common stock, respectively. For the years ended December 31, 2019 and 2018, the Company had 1,056,830 and 681,830 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.
NOTE 2 - PROPERTY AND EQUIPMENT
At December 31, 2019 and 2018, property and equipment were comprised of the following:
|
|
2019
|
|
|
2018
|
|
Processing and rail facility
|
|
$
|
12,723,163
|
|
|
$
|
11,630,171
|
|
Underground equipment
|
|
|
8,294,188
|
|
|
|
8,717,229
|
|
Surface equipment
|
|
|
3,224,896
|
|
|
|
3,101,518
|
|
Mine development
|
|
|
669,860
|
|
|
|
14,907,068
|
|
Coal refuse storage
|
|
|
12,171,271
|
|
|
|
-
|
|
Land
|
|
|
1,748,169
|
|
|
|
907,193
|
|
Less: Accumulated depreciation
|
|
|
(11,162,662
|
)
|
|
|
(6,691,259
|
)
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment, Net
|
|
$
|
27,668,855
|
|
|
$
|
32,571,920
|
|
Depreciation expense amounted to $4,588,136 and $2,461,557 for the years of December 31, 2019 and 2018, respectively. Amortization of mining rights amounted to $1,657,673 and $478,801 for the years of December 31, 2019 and 2018, respectively.
The estimated useful lives are as follows:
Processing and Rail Facilities
|
7-20 years
|
Surface Equipment
|
7 years
|
Underground Equipment
|
5 years
|
Mine Development
|
5-10 years
|
Coal Refuse Storage
|
10 years
|
NOTE 3 - NOTES PAYABLE
During the year ended December 31, 2019 and 2018, principal payments on long term debt totaled $2,059,484 and $2,309,571, respectively. During the year ended December 31, 2019 and 2018, new debt issuances totaled $8,660,527 and $8,431,965, respectively. During the year ended December 31, 2019 and 2018, net (payments) and proceeds from our factoring agreements totaled $1,489,508 and $(495,576), respectively.
During the year ended December 31, 2019 and 2018, discounts on debt issued amounted to $210,581 and $709,500, respectively related to the Sales financing arrangement discussed below and the note payable discussed further in note 3. During 2019 and 2018, $362,151 and $670,601 was amortized into expense with $417,183 and $88,685 remaining as unamortized discount., respectively.
Short-term and Long-term debt consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
-
|
|
|
$
|
4,627
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
28,861
|
|
|
|
35,683
|
|
|
|
|
|
|
|
|
|
|
On September 8, 2017, Quest entered into an equipment purchase agreement with an unaffiliated entity, Inc. to purchase certain underground mining equipment for $600,000. The note carries 0% interest and is due April 1, 2019. The agreement provided for $80,000 paid upon execution, $30,000 monthly payments until the balance is paid in full. The note is secured by the equipment purchased. The note is currently in default.
|
|
|
220,000
|
|
|
|
280,000
|
|
|
|
|
|
|
|
|
|
|
On October 19, 2017, Quest entered into an equipment financing agreement with an unaffiliated entity, Inc. 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%. The note is secured by the equipment purchased.
|
|
|
4,136
|
|
|
|
66,324
|
|
|
|
|
|
|
|
|
|
|
On October 20, 2017, Quest entered into an equipment financing agreement with an unaffiliated entity, Inc. 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%. The note is secured by the equipment purchased.
|
|
|
5,166
|
|
|
|
31,105
|
|
|
|
|
|
|
|
|
|
|
On December 7, 2017, Quest entered into an equipment financing agreement with an unaffiliated entity, to purchase certain surface equipment for $56,900. The agreement calls for an interest rate of 8.522%, monthly payments until maturity of January 7, 2021. The note is secured by the equipment purchased.
|
|
|
34,594
|
|
|
|
39,838
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
169,749
|
|
|
|
235,983
|
|
|
|
|
|
|
|
|
|
|
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. The note is secured by the equipment purchased by the note and a personal guarantee of an officer.
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Business Loan - ARC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 4, 2017, ARC entered into a consolidated loan agreement with an unaffiliated entity. $7,764,980 has been advanced under the note. 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, 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 This note was not paid and was modified into a convertible note (Convertible Note) December 31, 2018. And $35,000 included as interest expense and $0 included as a note discount as of December 31, 2019. The note is secured by all assets of the Company.
|
|
|
-
|
|
|
|
6,819,632
|
|
|
|
|
|
|
|
|
|
|
Empire – Secured Seller Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 20, 2019, as part of the merger with Empire Kentucky Land, Inc, the Company executed a seller financing note in the amount of $2,000,000 with the maturity date of August 20, 2019. The note was in technical default and carries a default interest rate of 5% until settled on May 8, 2020. (see note 10)
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Sales Financing Arrangement ARC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company received $500,000 in cash with $700,000 worth of coal held as collateral. The agreement has a maturity of sixty days (July 30, 2019) and does not have a stated interest rate, however, the interest expense, “additional consideration” is stated to be $50,000 over the two-month term. The company also issued 25,000 shares as consideration for the inventory line of credit. This note is currently in default. The inventory line of credit is secured by the underlying inventory
|
|
$
|
450,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
ARC Corporate Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 9, 2019, the Company entered into a $500,000 promissory note with a non-related entity. The note bears interest at 11% and is due by September 15, 2019. On August 6, 2019, $250,000 was drawn on the promissory note. On August 9, 2019, $250,000 was drawn on the promissory note. On August 16, 2019, an additional $300,000 was drawn on the promissory note. The note included 300,000 common shares resulting in a relative fair value calculation discount of $210,581 which is amortized over the term of the note. This note is currently in default. The note is secured by specific equipment. Additional funds totaling $1,000,000 was advanced in December 31, 2019.
|
|
|
1,800,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
PCR Acquisition Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 27, 2019, the Company entered into a promissory note with a non-related entity for an amount up to $1,850,000 in conjunction with the PCR asset acquisition but separate from the assumed liabilities. $250,000 was drawn on this note as of September 30, 2019. The note bears interest at 4% and is due in full on September 27, 2020. The note was subsequently amended on October 18, 2019 the increase the full amount of the borrowing to $2,010,547. The note is unsecured. The initial draw was to be used for closing costs and the remaining tranches are to be used for payroll and payroll related expenses. The note carries restrictive covenants outlined in the note agreement. The note is currently in default.
|
|
|
2,010,547
|
|
|
|
-
|
|
Customer Loan Agreement - ARC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $3,500,000 was advanced During 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 all assets of the Company. Loan issuance costs totaled $41,000 as of December 31, 2018. The note is currently in default.
|
|
$
|
6,035,988
|
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
Sales Financing Arrangement ARC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 0% 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. As of December 31, 2019 and 2018, unamortized original issue discount totaled $0 and $88,685 and unamortized loan issuance costs totaled $0 and $4,611, respectively. On April 1, 2020, $375,690.37 of this note was converted into a senior convertible note. (See Note 10) The remaining portion of the note is in default.
|
|
|
804,618
|
|
|
|
1,613,049
|
|
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 July 31, 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 6. Therefore, the title of the assets are not held with ERC and there is a corresponding receivable due for the payment of this note.
|
|
|
14,399
|
|
|
|
23,352
|
|
|
|
|
|
|
|
|
|
|
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 July 31, 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 6. Therefore, the title of the assets are not held with ERC and there is a corresponding receivable due for the payment of this note.
|
|
|
73,527
|
|
|
|
89,419
|
|
|
|
|
|
|
|
|
|
|
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 6. Therefore, the title of the assets are not held with ERC and there is a corresponding receivable due for the payment of this note.
|
|
|
2,022
|
|
|
|
29,554
|
|
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. The note carried 0% interest. $315,000 of this note was forgiven during May 2018, which was recorded as gain on cancelation of debt. The remaining balance of $225,000 was converted to equity. See note 8. The note was secured by the equipment purchased with the note.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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 which carries 0% interest. Full payment was due September 12, 2017, and the note is in default. The note is secured by the equipment purchased with the note.
|
|
|
81,000
|
|
|
|
87,500
|
|
|
|
|
|
|
|
|
|
|
On June 12, 2017, Quest entered into an equipment purchase Agreement, which carried interest at 0% with an unaffiliated entity, Inc. to purchase certain underground mining equipment for $22,500. Full payment was due September 12, 2017, and the note is in default. The note is secured by the equipment purchased with the note.
|
|
|
22,500
|
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
|
On September 25, 2017, Quest entered into an equipment purchase Agreement, which carries 0% interest 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. The note matures on September 25, 2019, and the note is in default. The note is secured by the equipment purchased with the note.
|
|
|
262,041
|
|
|
|
308,000
|
|
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 and is unsecured. 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
|
|
|
|
|
|
|
|
|
|
|
Seller Note – Wyoming County
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In conjunction with the asset acquisition, $600,000 promissory note payable to an unrelated company. See note 1. $350,000 is due on demand and the remaining $250,000 will be paid with monthly payments based on $1 per ton of coal to originate from the assets acquired, commencing November 1, 2019. $375,000 was paid in 2019. The note is due on May 7, 2019, is unsecured and carries interest at 0%. The note was in default and subsequently cured by conversion into modified debt agreement April 1, 2020.
|
|
|
225,000
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable Factoring Agreement
Factoring Arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2019
|
|
|
-
|
|
|
|
1,087,413
|
|
|
|
|
|
|
|
|
|
|
On December 19, 2019, the Company entered into a factoring arrange with an unrelated party. The arrangement is separated into two components. The first component is a promissory note in the amount of $1,189,223 with interest equaling 1.61% and a due date of December 31, 2020. The principal will be repaid out of future sales and the note is secured by certain fixed assets of PCR. The second component is advance of customer invoices totaling 2,200,486. The advances bear interest at 7% plus a $1 per ton fee and were re-paid in January 2020, from customer receipts. The note is in default.
|
|
|
3,389,709
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
A customer of the Company advanced $550,000 for inventory. The advance is unsecured and bears no interest and will be recouped by future sales to the customer. The note is due on demand and currently not repaid.
|
|
|
550,000
|
|
|
|
-
|
|
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 5.
|
|
|
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 5.
|
|
|
1,026,047
|
|
|
|
1,026,047
|
|
|
|
|
|
|
|
|
|
|
Less: Debt Discounts and Loan Issuance Costs
|
|
|
(417,183
|
)
|
|
|
(428,699
|
)
|
|
|
|
|
|
|
|
|
|
Total note payables, net of discount
|
|
|
25,909,860
|
|
|
|
22,088,011
|
|
Less: Current maturities
|
|
|
20,494,589
|
|
|
|
14,169,139
|
|
|
|
|
|
|
|
|
|
|
Total Long-term note payables, net of discount
|
|
$
|
5,415,271
|
|
|
$
|
7,918,872
|
|
Convertible notes payable consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
ARC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 4, 2017, ARC entered into a consolidated loan agreement with an unaffiliated entity. $7,770,000 has been advanced under the note. The agreement calls for interest of 7% and with all outstanding amounts due on demand. The Company analyzed the conversion options in the convertible loan payables for derivative accounting consideration under ASC 815, Derivative and Hedging, and determines that the transactions do not qualify for derivative treatment. The note is secured by all assets of Quest and subsidiaries. In conjunction with the loan, 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 had a conversion feature added during February 2019 resulting in a non cash expense of $7,362,925 The note is secured by all assets of the Company.
|
|
$
|
7,419,612
|
|
|
$
|
-
|
|
Affiliate notes consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
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. During October 2018, the same officer advanced $13,500 to American Resources. The advances are unsecured, non interest bearing and due on demand.
|
|
|
53,639
|
|
|
|
63,500
|
|
|
|
|
|
|
|
|
|
|
During December 2018, an officer of the Company advanced $5,000 to Quest. The advance is unsecured, non interest bearing and due on demand.
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Total affiliate note payables
|
|
|
132,639
|
|
|
|
142,500
|
|
Total interest expense was $2,908,579 in 2019 and $1,288,990 in 2018.
Future minimum principal payments, interest payments and payments on capital leases are as follows:
Payable In
|
|
Loan Principal
|
|
|
Lease
Principal
|
|
|
Total Loan and Lease Principal
|
|
|
Lease Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
27,846,843
|
|
|
|
89,948
|
|
|
|
27,936,791
|
|
|
|
4,722
|
|
2021
|
|
|
709,791
|
|
|
|
-
|
|
|
|
709,791
|
|
|
|
-
|
|
2022
|
|
|
134,535
|
|
|
|
-
|
|
|
|
134,535
|
|
|
|
-
|
|
2023
|
|
|
139,581
|
|
|
|
-
|
|
|
|
139,581
|
|
|
|
-
|
|
2024
|
|
|
144,815
|
|
|
|
|
|
|
|
144,815
|
|
|
|
|
|
Thereafter
|
|
|
4,703,733
|
|
|
|
-
|
|
|
|
4,703,733
|
|
|
|
-
|
|
NOTE 4 - RELATED PARTY TRANSACTIONS
On June 12, 2015, the Company executed a consulting agreement with an entity with common ownership. During prior years, the Company incurred fees totaling $17,840,615 relating to services rendered under this agreement. The amount outstanding and payable as of December 31, 2019 and 2018, was $0 and $0, respectively. The amount is due on demand and does 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.
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, 2019 and 2018, respectively.
During 2016, the Company entered into a coal sales commission agreement with a company for which a member services as a Company Independent Director. The company is to get 2% of the net sales price on all coal sold through pre-approved customers. Commissions earned during 2019 and 2018 amounted to $29,677 and $0, respectively. As of December 31, 2019 and 2018, the balance owed on the agreement amounted to $110,828 and $81,151, 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 3)
During July 2017, an officer of the Company advanced $50,000 to Quest. The advance is unsecured, non interest bearing and due on demand. During October 2018, the same officer advanced $13,500 under the same terms. (see Note 3). The balance as of December 31, 2019 and 2018 amounted to $53,639 and $63,500, respectively. Subsequent to year end this note was converted into a senior secured convertible note. (see Note 10)
During December 2018, an officer of the Company advanced $5,000 to American Resources. The advance is unsecured, non interest bearing and due on demand. (see Note 3) The balance as of December 31, 2019 and 2018 amounted to $5,000 and $5,000, respectively. Subsequent to year end this note was converted into a senior secured convertible note. (see Note 10)
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. As of January 28, 2017, the note was paid in full. From October 24, 2016. this transaction was eliminated upon consolidation as a variable interest entity. 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. As of December 31, 2019, and 2018, amounts owed to LRR totaled $718,156 and $474,654, respectively.
On February 13, 2020, the Company entered into a Contract Services Agreement with Land Betterment Corp, an entity controlled by certain members of the Company’s management who are also directors and shareholders. The contract terms state that service costs are passed through to the Company with a 10% mark-up and a 50% share of cost savings. The agreement covers services across all of the Company’s properties.
NOTE 5 – 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, 2019 and 2018 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, 2019 and 2018, respectively, for which there are to be used in conjunction with the transaction described above. Assets totaling $3,490,087 and $3,654,772 and liabilities totaling $4,117,139 and $4,117,139, respectively, are eliminated upon consolidation as of December 31, 2019 and 2018. 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 6 – 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. Fees earned totaled $340,915 and $440,000 for 2019 and 2018, respectively. The agreement called for equipment payments to be made by the entity.
During 2019, ERC had advances of $48,611 and repayments of $197,419 of amounts previously advanced. During 2018, ERC had advances of $48,611 and repayments of $197,419 of amounts previously advanced. The advances are unsecured, non-interest bearing and due upon demand.
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 $79,662 as of December 31, 2018. The arrangement was terminated on September 20, 2019.
NOTE 7 - 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 $5,996,494 and $2,227,849 at December 31, 2019 and 2018, respectively, which was fully reserved. Deferred tax assets consist of net operating loss carryforwards in the amount of $13,746,391 and $7,749,897 at December 31, 2019 and 2018, respectively, which was fully reserved. The net operating loss carryforwards for years 2015, 2016, 2017, 2018 and 2019 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.
On March 25, 2020, the CARES Act was established with implications of corporate tax treatment. The CARES Act provides that NOLs arising in a tax year beginning after December 31, 2018 and before January 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for the tax years beginning in 2019 and 2020.
The Company’s effective income tax rate is lower than what would be expected if the U.S. federal statutory rate (21%) 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, 2019.
NOTE 8 – EQUITY TRANSACTIONS
As of December 31, 2019, the following describes the various types of the Company’s securities:
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, 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 100,000 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. Additionally, the holders of preferred stock will entitled to vote at or receive notice of any meeting of stockholders. As of the date of this filing, 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 stockholders.
Voting Rights. The holders of Series A Preferred Stock shall be entitled to vote on an “as-converted” basis for any matters that require voting of the Class A Common Stock..
Dividend Rights. The holders of the Series A Preferred stock are entitled to receive its proportional distribution or accrual of the cash dividend as if the Series A Preferred Stock were converted to Class A Common Stock (plus any Class A Common Stock equivalents that may be entitled to receive a dividend).
Conversion Rights. The holders of the Series A Preferred stock are entitled to convert into common shares, at the holder’s discretion, Into Forty Percent (40.0%) of the outstanding amount of Class A Common Stock plus common stock equivalents that are existing at the time of the conversion, at any time and from time to time. No additional consideration is required for the conversion.
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 $1.00 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.
As of February 14, 2019, all Series A Preferred stock has been converted into Common shares of the company.
Series B 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 B Preferred stock, par value $0.001 per share, covering up to an aggregate of 20,000,000 shares of Series B Preferred stock. The Series B 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 filing, no shares of Series B Preferred stock are outstanding. See “Security Ownership of Certain Beneficial Owners and Management” for more detail on the Series B Preferred stock holders.
Voting Rights. The holders of Series B Preferred shares have no voting rights.
Dividend Rights. The holders of the Series B Preferred shall accrue a dividend based on an 8.0% annual percentage rate, compounded quarterly in arrears, for any Series B Preferred stock that is outstanding at the end of such prior quarter.
Conversion Rights. The holders of the Series B Preferred stock are entitled to convert into common shares, at the holder’s discretion, at a conversion price of Three Dollars and Sixty Cents ($3.60) per share of common stock, subject to certain price adjustments found in the Series B Preferred stock purchase agreements.
Liquidation Rights. Upon our liquidation, dissolution, distribution of assets or other winding up, the holders of Series B Preferred shares shall have a liquidation preference to the Series A Preferred and Common shares at an amount equal to the holders’ investment in the Series B Preferred stock.
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 filing, no shares of Series C Preferred stock 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.
As of February 21, 2019, all Series C Preferred stock has been converted into Common shares of the company.
A 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.
A new 2018 Stock Option Plan (2018 Plan) was approved by the Board on July 1, 2018. The Company may grant up to 4,000,000 shares of common stock under the 2018 Plan. The 2018 Plan is administered by the Board of Directors, which has substantial discretion to determine persons, amounts, time, price, vesting schedules, exercise terms, and restrictions of the grants, if any. On September 12, 2018, the Board issued a total of 636,830 options to four employees of the Company under the 2018 Plan. 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 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 (earning 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 for an option for the investor to put the Series B Preferred investment to the Company at a 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.
On June 12, 2019, we entered into an agreement with Golden Properties Ltd., a British Columbia company based in Vancouver, Canada (“Golden Properties”) to amend warrants “C-1”, “C-2” “C-3”, and “C-4” that were originally part of a October 4, 2017 agreement with Golden Properties that involved a series of loans made by Golden Properties to the Company. As a result, the following warrants are issued to Golden Properties:
|
·
|
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 4, 2020, and providing the Company with up to $34,170 in cash proceeds should all the warrants be exercised. There was no change to Warrant B-4 as part of the June 12, 2019 amendment;
|
|
|
|
|
·
|
Warrant C-1, for the purchase of 750,000 shares of common stock at $3.55 per share, as adjusted from time to time, expiring on October 4, 2020, and providing the Company with up to $2,662,500 in cash proceeds should all the warrants be exercised;
|
|
|
|
|
·
|
Warrant C-2, for the purchase of 750,000 shares of common stock at $4.25per share, as adjusted from time to time, expiring on October 4, 2020, 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 750,000 shares of common stock at $4.50 per share, as adjusted from time to time, expiring April 4, 2022, and providing the Company with up to $3,375,000 in cash proceeds should all the warrants be exercised; and
|
|
|
|
|
·
|
Warrant C-4, for the purchase of 750,000 shares of common stock at $5.00 per share, as adjusted from time to time, expiring April 4, 2022, and providing the Company with up to $3,750,000 in cash proceeds should all the warrants be exercised.
|
As of the date of this annual report, 600,000 shares of Warrant B-4 have been exercised cashlessly and as a result the shareholder received 599,427 shares of common stock as a result of the exercise
Total stock based compensation expense incurred for awards to employees and directors during 2019 and 2018 was $377,255 and $63,127, respectively. Fair value was determined using the Black-Sholes Option Pricing Model.
The preferred dividend requirement for 2019 and 2018 amounted to $- and $114,850, respectively.
On July 18, 2018, the Company 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.
On September 14, 2018, the Company issued 105,000 common shares valued at $152,250 and 175,000 warrants valued at $163,847 to Redstone Communications LLC 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. These warrants vest immediately, have an exercise price of $1 and a 5 year term
On September 14, 2018, the Company issued 45,000 common shares valued at $65,250 and 75,000 warrants valued at $70,220 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. These warrants vest immediately, have an exercise price of $1 and a 5 year term.
On October 24, 2018, warrants 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.
On November 7, 2018, the Company issued 1,727,276 shares, valued at $22,091,860, as part of the consideration for the acquisition of five permits, coal processing and loading facilities, surface ownership, mineral ownership, and coal refuse storage facilities from unrelated entities by the Company’s wholly-owned subsidiary, Wyoming County Coal LLC.
On November 7, 2018, 964,290 of Series B preferred shares and $0 of accrued dividends 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, resulting in a loss of $40,740.
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 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 common shares. The newly created Series C Preferred Stock carries the following key provisions: automated conversion to common shares 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 14, 2018, $225,000 of debt to an unrelated entity, was converted into 37,500 shares of common stock, resulting in a loss of $206,250.
On November 15, 2018, 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 the Company at an exercise price of $6.00 per share, subject to certain price adjustments and other provisions found within the respective warrants. The warrants have a 3 year term, vest ratably over their term and will result in a current expense of $9,488 and a future expense of $113,850 totaling $341,550.
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.
Under an agreement dated November 1, the Company, on December 3, 2018, issued 10,000 shares of Class A Common stock and a warrant to purchase 417 shares, valued at $2,527, of the company were issued to an unrelated firm for consulting services. The warrant 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 January 16, 2019, an affiliate of the Company converted its remaining 29,051 shares of Series A Preferred into 96,837 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 299,713 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 warrant 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 warrant 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. If the warrants which are received under the second six months of engagement are exercised, the Company will receive up to $262,500 and $112,500, respectively. The common shares were valued at $10.50 on January 25, 2019 and resulted in an expense of $1,575,000 which was recorded in full on January 25, 2019. The corresponding expense of the issued warrants was recorded in full in the amount of $2,385,000.
On January 27, 2019, the Company issued 1,000 shares of common shares 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 common shares 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 common shares as compensation under the agreement. The common shares were valued at $10.80 on January 30, 2019 and resulted in an expense of $97,200 which was recorded in full on January 30, 2019.
On January 31, 2019, the Company issued a total of 3,917 shares of common shares, priced at $6 per share, to an unrelated party for the settlement of trade payables in the total amount of $23,502. If at the time of potential sale of the shares, the listed price per share is below $6, the Company is required to purchase the shares back at $6 per share which results in a contingent liability of $23,502. The common shares were valued at $11.00 on January 31, 2019 and resulted in a loss on settlement of $19,585.
On February 1, 2019, the Company issued a total of 1,000 shares of common shares to two unrelated parties for the total consideration of $5,000 cash to the Company.
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 299,714 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 common shares 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. The common shares were valued at $12.15 on February 10, 2019 and resulted in a loss on settlement of $3,075.
On February 12, 2019, the Company executed a contract with an unrelated party for the acquisition of stock and assets of entities with non-operating assets consisting of surface and mineral ownership and other related agreements. Consideration is in the form of 2,000,000 common shares, priced at the closing market price of $12.20 per share of common share, 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 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 as of this date.
On February 20, 2019, the Company issued 1,000,000 shares of Class A Common Stock at a price of $4 per share in conjunction with its effective S-1/A Registration Statement. Net proceeds to the Company amounted to $3,695,000. As part of the underwriter agreement, 70,000 warrants to purchase Class A Common Stock were issued to the underwriter. These warrants expire on February 15, 2021 and carry an exercise price of $4.40 per share. The warrants had a value of $123,000 was recorded as an increase and decrease in additional paid in capital. Offering costs totaled $447,000, which has been recorded as a reduction of equity.
On February 21, 2019, 50,000 Series C Preferred shares were converted into 13,750 shares of Class A Common Stock in a cashless conversion under the terms of the agreement. This resulted in no more Series C Preferred stock being outstanding as of this date.
On March 7, 2019, the Company issued an additional 150,000 shares of Class A Common Stock at a price of $4 per share as the over-allotment from the effective S-1/A Registration Statement. The net proceeds to the company amounted to $558,000. As part of the underwriter agreement, 10,500 warrants to purchase Class A Common Stock were issued to the underwriter. These warrants expire on February 15, 2021 and carry an exercise price of $4.40 per share. The warrants had a value of $23,100 was recorded as an increase and decrease in additional paid in capital.
On May 7, 2019, the Company issued 200,000 shares of common stock as part of a settlement to an unrelated entity for the use of certain mining equipment. The stock price at the time of issuance was $3.88 resulting in a settlement gain of $6,000.
On May 30, 2019, the Company issued 25,000 shares to an unrelated entity in conjunction with a short-term borrowing facility issued by the entity. The stock price at the time of issuance was $3.49 resulting in a stock interest expense of $87,250.
On June 5, 2019, the Company issued options to certain employees in the amount of 175,000 under an adopted stock option plan. The issuance of employee options resulted in an expense totaling $4,910. The total expense will be $353,500 which will be amortized over the three-year vesting period.
On June 6, 2019, the Company and a former employee reached a settlement agreement where 107,000 shares of common stock were canceled and returned to the company. These shares were forfeited and returned to the company for no consideration and are accounted for as authorized and not issued.
On June 7, 2019, the Company issued 25,000 shares of common stock at $4 per share to an unrelated entity under an equity purchase agreement. The Company received $100,000 cash consideration for the investment. The stock price at the time of issuance was $2.10. If the Company, during the period in which the purchased shares are held by the original entity, issues or sells any shares of common stock for a price less than $4.00, the Company shall issue to the purchaser an additional number of shares of common stock, so as to provide the purchaser the benefit of the reduced price per share.
On June 7, 2019, the Company issued 30,000 shares of common stock for consulting services to an unrelated party. The stock price at the time of issuance was $2.10 resulting in an expense totaling $63,000. The consulting agreement is for six months and the shares for services were deemed to have been earned upon execution of the consulting agreement on May 30, 2019. In addition to the shares issued, 75,000 warrants with three-year exercise period and $4.00 strike price were issued upon execution of the consulting agreement resulting in a expense of $139,500.
On June 12, 2019, the Company restructured a series of warrants; C-1, C-2, C-3 and C-4, held by an unrelated party as part of the ARC business loan which resulted in an increase in the number of warrants issued from 1.6 million shares across four warrants to 3.0 million shares across four warrants; an increase in the term of the warrants from the date of the amendment from a weighted average of 297 days to 753 days, and a decrease in the weighted average exercise price from $7.665 per share to $4.325 per share. Fair value was determined using the Black-Scholes Option Pricing Model. The incremental value as a result of the modification is a one-time warrant expense totaling $2,545,360 as of June 30, 2019.
On June 13, 2019, the Company issued 28,000 shares of common stock under a consulting agreement to an unrelated party. The stock price at the time of issuance was $2.53 resulting in a stock-based compensation of $70,840. The term of the consulting agreement is 6 months with monthly payments equal to $5,000 payable in months three through six of the agreement.
On July 1, 2019, the Company issued 200,000 common stock options under the Incentive Stock Option Agreement. The options vest equally over an 8 year term and have an exercise price of $3.52 per share. Utilizing a Black-Scholes Option Pricing model, the value of these options at issuance was determined to be $540,000, which is being amortized over the vesting term.
On August 16, 2019, the Company issued 300,000 shares of Class A Common Stock in conjunction with a $800,000 loan from an unrelated party. Based on a relative fair value calculation, the stock issuance created a debt discount totaling $210,581 which was fully amortized during the three month period ending September 30, 2019.
On August 27, 2019, the Company issued 3,600,000 shares of Class A Common Stock at a price of $1.04 per share. In conjunction with the common stock issuance, the Company issued warrants to purchase up to 3,600,000 shares of common stock at $.01 for each warrant in conjunction with its effective S-3/A Registration Statement. Net proceeds to the Company amounted to $3,409,600. The warrants to purchase common stock carry an exercise price of $1.20 and a 5-year term. Offering costs totaled $370,400, which has been recorded as a reduction of equity.
On September 30, 2019, the Company issued warrants to purchase up to 445,400 shares of common stock at $.01 for each warrant in conjunction with its effective S-3/A Registration Statement. Net proceeds to the Company amounted to $4,098. The warrants to purchase common stock carry an exercise price of $1.20 and a 5-year term. Offering costs totaled $356, which has been recorded as a reduction of equity.
On October 11, 2019, the Company issued 70,238 shares of Class A Common Stock pursuant to prior stock purchase agreement dated May 30, 2019. The share price at issuance was $0.67.
On October 23, 2019, the Company issued 23,077 shares of Class A Common Stock pursuant to an agreement for public relations. The share price at issuance was $0.70.
On October 31, 2019, the Company issued 50,000 shares of Class A Common Stock pursuant to an agreement for investor relations. The share price at issuance was $0.74.
The company uses the black Scholes option pricing model to value its warrants and options. The significant inputs are as follows
|
|
2019
|
|
|
2018
|
|
Expected Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
87.99-109
|
%
|
|
|
87.97-109
|
%
|
Risk-free rate
|
|
|
1.40-1.62
|
%
|
|
|
1.03-2.73
|
%
|
Expected life of warrants
|
|
|
1-7.75 years
|
|
|
|
2-5 years
|
|
Company Warrants:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life in Years
|
|
|
Value
|
|
Exercisable (Vested) - December 31, 2017
|
|
|
5,364,230
|
|
|
$
|
2.638
|
|
|
|
2.835
|
|
|
$
|
138,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
250,417
|
|
|
$
|
1.008
|
|
|
|
4.699
|
|
|
$
|
2,251,668
|
|
Forfeited or Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
69,420
|
|
|
$
|
0.003
|
|
|
|
1.367
|
|
|
$
|
194,513
|
|
Outstanding - December 31, 2018
|
|
|
5,545,227
|
|
|
$
|
2.745
|
|
|
|
1.704
|
|
|
$
|
42,063,228
|
|
Exercisable (Vested) - December 31, 2018
|
|
|
5,545,227
|
|
|
$
|
2.745
|
|
|
|
1.704
|
|
|
$
|
42,063,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,450,900
|
|
|
$
|
2.531
|
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited or Expired
|
|
|
1,697,223
|
|
|
|
7.638
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
600,000
|
|
|
$
|
0.010
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding - December 31, 2019
|
|
|
10,698,904
|
|
|
$
|
1.856
|
|
|
|
2.310
|
|
|
$
|
1,746,544
|
|
Exercisable (Vested) - December 31, 2019
|
|
|
10,689,904
|
|
|
$
|
1.856
|
|
|
|
2.310
|
|
|
$
|
1,746,544
|
|
Company Options:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life in Years
|
|
|
Value
|
|
Exercisable (Vested) - December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
681,830
|
|
|
$
|
1.330
|
|
|
|
6.447
|
|
|
$
|
405,000
|
|
Forfeited or Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2018
|
|
|
681,830
|
|
|
$
|
1.413
|
|
|
|
6.447
|
|
|
$
|
405,000
|
|
Exercisable (Vested) - December 31, 2018
|
|
|
70,000
|
|
|
$
|
4.214
|
|
|
|
4.247
|
|
|
$
|
405,000
|
|
Outstanding - December 31, 2018
|
|
|
681,830
|
|
|
$
|
1.413
|
|
|
|
6.447
|
|
|
$
|
405,000
|
|
Exercisable (Vested) - December 31, 2018
|
|
|
70,000
|
|
|
$
|
4.214
|
|
|
|
4.247
|
|
|
$
|
405,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
375,000
|
|
|
$
|
3.105
|
|
|
|
6.999
|
|
|
$
|
-
|
|
Forfeited or Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding - December 31, 2019
|
|
|
1,056,830
|
|
|
$
|
1.960
|
|
|
|
5.998
|
|
|
$
|
-
|
|
Exercisable (Vested) - December 31, 2019
|
|
|
273,943
|
|
|
$
|
1.821
|
|
|
|
5.072
|
|
|
$
|
-
|
|
NOTE 9 – CONTINGENCIES AND COMMITMENTS
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.
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. These claims include amounts assessed by the Kentucky Energy Cabinet totaling $1,368,390, the Company has accrued $2,157,106 as a payable to the Commonwealth of Kentucky including amounts owed to the Kentucky Energy Cabinet. Claims assessed by the Mine Health Safety Administration totaling $905,433 of which the Company has accrued $570,876 as a payable. During 2019, McCoy and Deane, received notice of intent to place liens for amounts owed on federal excise taxes. The amounts associated with the notices are included in the company’s trade payables.
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, a seller note of $350,000 and a seller note of $250,000. On September 20, 2019 Wyoming County received a Notice of Breach of the asset purchase agreement between WCC and Synergy Coal, LLC due to consideration of $225,000 not being paid, failure to file for permit transfers and pay delinquent transfer fees of $10,500 and other contract breaches, including failure to transfer reclamation surety bonds. WCC has paid the delinquent transfer fees and has filed for permit transfer. As a result of these steps, the seller notified us on May 17, 2020 that all breaches were cured. As of the balance sheet date and report date, the West Virginia permit transfers have not yet been approved, the seller has not been paid cash amounts due, and WCC has not substituted its reclamation surety bonds for the seller’s bond collateral.
The Empire acquisition loan in conjunction with the Empire Kentucky Land merger totaling $2,500,000 is due with $500,000 upfront and $2,000,000 due through a $1 per ton royalty off the coal sold from the acquired property and is secured by the underlying property. As of the balance sheet date the agreement was in default and the company received a breach of contract notice in September 2019. On May 8, 2020, the Company entered into a Settlement, Rescission and Mutual Release Agreement with the parties of the Empire acquisition. The agreement provides for the property of Empire to transfer back to the former parties for the return of 2,000,000 common shares of the Company and extinguishment $2,000,000 seller financing note. Additionally, permits and bonding liability associated with the Point Rock Mine were also transferred back to the original permit holders for the consideration of them assuming the reclamation liability. The default was cured on May 8, 2020 through the Settlement, Recission and Mutual Release Agreement.
On August 21, 2018, Deane and an unrelated vendor entered into a settlement agreement for past payables. Pursuant to the settlement agreement, Deane will pay the full outstanding unpaid balance in accordance with the agreed to schedule, with the full amount being due on January 3, 2019. As of the balance sheet date, Deane was in default of this agreement. The amounts were settled and converted into senior convertible notes in 2020. (See Note 10)
On April 3, 2019 KCC partially settled a case relating to a reclamation issue while the property was under former ownership. The settled amount is $100,000 which will be paid out of a prior insurance policy. The remaining portion of the case was settled during for amount of $280,000. The outstanding amount has not been paid as of the report date and is included in trade payables.
On September 26,2019, the Company received notice that a certain lease assumption as part of the PCR acquisition was being disputed by the lessor (see note 1).
During January 2020, the Company and Sylva International LLC agreed to the termination of a digital marketing consulting services agreement that the Company had entered upon mutually acceptable terms.
The company leases various office space some from an entity which was consolidated as a variable interest entity until June 30, 2018 (see note 4). The rental lease for the Company’s former principal office space expired in December 31, 2018 and continued on a month-to-month basis until February 15, 2019. The future annual rent is $6,000 through 2021. Rent expense for the year ended December 31, 2019 and 2018 amounted to $32,000 and $32,000 each period, respectively.
NOTE 10 - SUBSEQUENT EVENTS
Empire Coal and Point Rock Settlement
On May 8, 2020, the Company entered into a Settlement, Rescission and Mutual Release Agreement with the parties of the Empire acquisition. The agreement provides for the property of Empire to transfer back to the former parties for the return of 2,000,000 common shares of the Company and extinguishment $2,000,000 seller financing note. Additionally, permits and bonding liability associated with the Point Rock Mine were also transferred back to the original permit holders for the consideration of them assuming the reclamation liability.
Common Stock Transactions
On May 8, 2020, 2,000,000 common shares of the company were returned as part of the Empire Coal and Point Rock Settlement. See above.
On April 1, 2020, 600,000 common shares of the company were issued as part of the settlement with ENCECo, Inc. See below.
On May 26, 2020, 20,000 common shares of the company were issued as part of an investor relations contract. The contract, dated March 1, 2020 has a three month term, with $7,500 in cash due monthly and the issuance of 20,000 shares that fully vest over the three month term.
Warrant Modification
On February 3 2020, we entered into a warrant adjustment agreement with Golden Properties Ltd., a British Columbia company based in Vancouver, Canada (“Golden Properties”) to amend warrants “C-1”, “C-2” “C-3”, and “C-4” that were originally part of a October 4, 2017 agreement with Golden Properties that involved a series of loans made by Golden Properties to the Company. As a result, the following warrants modified for Golden Properties:
|
·
|
Warrant C-1, for the purchase of 750,000 shares of common stock at $1.05 per share, as adjusted from time to time, expiring on January 31, 2023, and providing the Company with up to $787,500 in cash proceeds should all the warrants be exercised;
|
|
|
|
|
·
|
Warrant C-2, for the purchase of 750,000 shares of common stock at $1.05 per share, as adjusted from time to time, expiring on January 31, 2023, and providing the Company with up to $787,500 in cash proceeds should all the warrants be exercised;
|
|
|
|
|
·
|
Warrant C-3, for the purchase of 750,000 shares of common stock at $1.05 per share, as adjusted from time to time, expiring January 31, 2023, and providing the Company with up to $787,500 in cash proceeds should all the warrants be exercised; and
|
|
|
|
|
·
|
Warrant C-4, for the purchase of 750,000 shares of common stock at $1.05 per share, as adjusted from time to time, expiring January 31, 2023, and providing the Company with up to $787,500 in cash proceeds should all the warrants be exercised.
|
Senior Convertible Notes
On February 3, 2020, the Company formalized the issuance of senior convertible notes. The notes have a minimum offering amount of $12,500,000 and maximum of $25,000,000 and minimum investment of $500,000. The notes carry a 24-month term, 12.5% interest 10% warrant coverage and a conversion price of $1.05. The warrants have an exercise price of $1.50. As of the report date, $13,251,846 of notes have been issued for the settlement of prior debt and $222,500 has been issued for cash and 1,347,434 warrants have been issued in conjunction with the issuance of the notes.
The following notes and liabilities were converted or settled into the senior convertible notes:
|
-
|
ARC Business Loan for the principal amount of $9,494,073.
|
|
|
|
|
-
|
Libertas Funding LLC for the principal amount of $375,690.
|
|
|
|
|
-
|
Wyoming County Seller Note for the principal amount of $225,000
|
|
|
|
|
-
|
Trade payable to Dominion Carbon Sales, LLC for the principal amount of $200,000
|
|
|
|
|
-
|
Trade payable to Calvin R. Tackett for the principal amount of $110,000
|
|
|
|
|
-
|
Interest and usage fees for the ENCECo, Inc. for the principal amount of $900,000
|
|
|
|
|
-
|
Coking Coal Financing, LLC for the principal amount of $1,888,444
|
|
|
|
|
-
|
Note with officers for the principal amount of $58,639.
|
Promissory Note
On April 21, 2020, the Company entered into a promissory note with Merchants Bank of Indiana for the amount of $2,649,800. The note accrues interest at 1% and is due April 1, 2022. Commencing October 21, 2020, payments of principal and interest are due on a repayment schedule of eighteen months. The promissory note was issued pursuant to the CARES Act and SBA’s Paycheck Protection Program.
Contract Services Agreement
On February 13, 2020, the Company entered into a Contract Services Agreement with Land Betterment Corporation, an entity controlled by certain members of the Company’s management who are also directors and shareholders. The contract terms state that service costs are passed through to the Company with a 10% mark-up and a 50% share of cost savings. The services agreement covers all of the Company’s properties.
COVID-19
Beginning late of 2019 management anticipated adverse market conditions globally, and in response began to selectively reduce or idle coal production operations and furlough or terminate employees. During Q1 2020, the worldwide COVID-19 outbreak sharply reduced worldwide demand for infrastructure and steel products and their necessary inputs including Metallurgical coal. Company management fully idled the Company’s operations accordingly, and the operations have remained idled through the report date. These recent, global market disruptions and developments are expected to result in lower sales and gross margins for the coal industry and the Company in 2020 and possibly beyond.