UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the quarterly period ended June 30, 2022 |
| OR | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:001-34743
| “COAL KEEPS YOUR LIGHTS ON” |
| “COAL KEEPS YOUR LIGHTS ON” |
| HALLADOR ENERGY COMPANY (www.halladorenergy.com) | ||
| Colorado (State of incorporation) |
| 84-1014610 (IRS Employer Identification No.) |
|
|
|
|
| 1183 East Canvasback Drive, Terre Haute, Indiana (Address of principal executive offices) |
| 47802 (Zip Code) |
Registrant’s telephone number, including area code: 812.299.2800
| Securities registered pursuant to Section 12(b) of the Act: | ||||
| Title of each class |
| Trading Symbol |
| Name of each exchange on which registered |
| Common Shares, $.01 par value |
| HNRG |
| Nasdaq |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ |
| Accelerated filer ☐ |
| Non-accelerated filer ☑ |
| Smaller reporting company ☑ |
|
|
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of August 12, 2022, we had 32,982,605 shares of common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Hallador Energy Company
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 8,882 | $ | 2,546 | ||||
| Restricted cash | 3,491 | 3,283 | ||||||
| Accounts receivable | 17,155 | 13,584 | ||||||
| Inventory | 13,806 | 7,699 | ||||||
| Parts and supplies | 12,247 | 10,015 | ||||||
| Prepaid expenses | 999 | 2,112 | ||||||
| Total current assets | 56,580 | 39,239 | ||||||
| Property, plant and equipment: | ||||||||
| Land and mineral rights | 115,771 | 115,837 | ||||||
| Buildings and equipment | 355,053 | 342,782 | ||||||
| Mine development | 123,274 | 112,575 | ||||||
| Total property, plant and equipment | 594,098 | 571,194 | ||||||
| Less - accumulated depreciation, depletion and amortization | (286,960 | ) | (268,370 | ) | ||||
| Total property, plant and equipment, net | 307,138 | 302,824 | ||||||
| Investment in Sunrise Energy | 3,883 | 3,545 | ||||||
| Other assets | 8,134 | 8,372 | ||||||
| Total Assets | $ | 375,735 | $ | 353,980 | ||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of bank debt, net | $ | 13,222 | $ | 23,098 | ||||
| Accounts payable and accrued liabilities | 47,973 | 41,528 | ||||||
| Total current liabilities | 61,195 | 64,626 | ||||||
| Long-term liabilities: | ||||||||
| Bank debt, net | 113,607 | 84,667 | ||||||
| Deferred income taxes | 3,094 | 2,850 | ||||||
| Asset retirement obligations | 13,437 | 14,025 | ||||||
| Other | 1,579 | 1,577 | ||||||
| Total long-term liabilities | 131,717 | 103,119 | ||||||
| Total liabilities | 192,912 | 167,745 | ||||||
| Redeemable noncontrolling interests | 4,000 | 4,000 | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $ par value, shares authorized; issued and outstanding | — | — | ||||||
| Common stock, $ par value, shares authorized; and issued and outstanding, respectively | 330 | 308 | ||||||
| Additional paid-in capital | 114,212 | 104,126 | ||||||
| Retained earnings | 64,281 | 77,801 | ||||||
| Total stockholders’ equity | 178,823 | 182,235 | ||||||
| Total liabilities, redeemable noncontrolling interests, and stockholders’ equity | $ | 375,735 | $ | 353,980 | ||||
See accompanying notes.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| SALES AND OPERATING REVENUES: | ||||||||||||||||
| Coal sales | $ | 64,161 | $ | 54,600 | $ | 121,171 | $ | 100,479 | ||||||||
| Other revenues | 1,768 | 1,038 | 3,665 | 1,854 | ||||||||||||
| Total revenue | 65,929 | 55,638 | 124,836 | 102,333 | ||||||||||||
| EXPENSES: | ||||||||||||||||
| Operating expenses | 51,394 | 42,456 | 105,995 | 76,465 | ||||||||||||
| Depreciation, depletion and amortization | 11,164 | 9,715 | 20,695 | 20,022 | ||||||||||||
| Asset retirement obligations accretion | 250 | 373 | 496 | 736 | ||||||||||||
| Exploration costs | 215 | 159 | 272 | 217 | ||||||||||||
| General and administrative | 3,722 | 3,383 | 6,871 | 6,204 | ||||||||||||
| Total operating expenses | 66,745 | 56,086 | 134,329 | 103,644 | ||||||||||||
| LOSS FROM OPERATIONS | (816 | ) | (448 | ) | (9,493 | ) | (1,311 | ) | ||||||||
| Interest expense (1) | (2,337 | ) | (2,182 | ) | (4,121 | ) | (4,080 | ) | ||||||||
| Equity method investment income | 188 | 63 | 338 | 63 | ||||||||||||
| LOSS BEFORE INCOME TAXES | (2,965 | ) | (2,567 | ) | (13,276 | ) | (5,328 | ) | ||||||||
| INCOME TAX EXPENSE (BENEFIT): | ||||||||||||||||
| Current | — | — | — | — | ||||||||||||
| Deferred | 421 | 397 | 244 | (1,332 | ) | |||||||||||
| Total income tax expense (benefit) | 421 | 397 | 244 | (1,332 | ) | |||||||||||
| NET LOSS | $ | (3,386 | ) | $ | (2,964 | ) | $ | (13,520 | ) | $ | (3,996 | ) | ||||
| NET LOSS PER SHARE: | ||||||||||||||||
| Basic and diluted | $ | (0.11 | ) | $ | (0.10 | ) | $ | (0.44 | ) | $ | (0.13 | ) | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||||
| Basic and diluted | 30,809 | 30,613 | 30,797 | 30,612 | ||||||||||||
| (1) Interest Expense: | ||||||||||||||||
| Bank interest | 1,712 | 2,307 | 3,422 | 4,443 | ||||||||||||
| Other interest | 58 | — | 58 | — | ||||||||||||
| Non-cash interest: | ||||||||||||||||
| Change in interest rate swap valuation | (250 | ) | (766 | ) | (867 | ) | (1,614 | ) | ||||||||
| Amortization of debt issuance costs | 817 | 641 | 1,508 | 1,251 | ||||||||||||
| Total non-cash interest | 567 | (125 | ) | 641 | (363 | ) | ||||||||||
| Total interest expense | $ | 2,337 | $ | 2,182 | $ | 4,121 | $ | 4,080 | ||||||||
See accompanying notes.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (13,520 | ) | $ | (3,996 | ) | ||
| Deferred income taxes | 244 | (1,332 | ) | |||||
| Equity income – Sunrise Energy | (338 | ) | (63 | ) | ||||
| Depreciation, depletion, and amortization | 20,695 | 20,022 | ||||||
| Gain on sale of assets | (367 | ) | — | |||||
| Change in fair value of interest rate swaps | (867 | ) | (1,614 | ) | ||||
| Change in fair value of fuel hedge | — | (379 | ) | |||||
| Amortization of debt issuance costs | 1,508 | 1,251 | ||||||
| Asset retirement obligations accretion | 496 | 736 | ||||||
| Cash paid on asset retirement obligation reclamation | (1,184 | ) | — | |||||
| Stock-based compensation | 108 | 567 | ||||||
| Provision for loss on customer contracts | 159 | — | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (3,571 | ) | 28 | |||||
| Inventory | (6,107 | ) | (7,682 | ) | ||||
| Parts and supplies | (2,232 | ) | (392 | ) | ||||
| Prepaid expenses | 705 | (108 | ) | |||||
| Accounts payable and accrued liabilities | 4,065 | 5,652 | ||||||
| Other | 485 | 198 | ||||||
| Cash provided by operating activities | 279 | 12,888 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Capital expenditures | (22,903 | ) | (10,837 | ) | ||||
| Proceeds from sale of equipment | 758 | — | ||||||
| Cash used in investing activities | (22,145 | ) | (10,837 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Payments on bank debt | (14,700 | ) | (18,875 | ) | ||||
| Borrowings of bank debt | 33,700 | 11,250 | ||||||
| Issuance of convertible note payable | 1,000 | — | ||||||
| Issuance of related party convertible notes payable | 9,000 | — | ||||||
| Debt issuance costs | (590 | ) | (418 | ) | ||||
| Taxes paid on vesting of RSUs | — | (2 | ) | |||||
| Cash provided by (used in) financing activities | 28,410 | (8,045 | ) | |||||
| Increase (decrease) in cash, cash equivalents, and restricted cash | 6,544 | (5,994 | ) | |||||
| Cash, cash equivalents, and restricted cash, beginning of period | 5,829 | 12,071 | ||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 12,373 | $ | 6,077 | ||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH CONSIST OF THE FOLLOWING: | ||||||||
| Cash and cash equivalents | $ | 8,882 | $ | 2,582 | ||||
| Restricted cash | 3,491 | 3,495 | ||||||
| $ | 12,373 | $ | 6,077 | |||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | 4,055 | $ | 4,446 | ||||
| SUPPLEMENTAL NON-CASH FLOW INFORMATION: | ||||||||
| Change in capital expenditures included in accounts payable and prepaid expense | $ | 2,004 | $ | 3,613 | ||||
| Debt issuance costs included in accounts payable and accrued liabilities | $ | 853 | $ | — | ||||
| Convertible notes payable and related party convertible notes payable converted to common stock | $ | 10,000 | $ | — | ||||
See accompanying notes.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
| Additional | Total | |||||||||||||||||||
| Common Stock Issued | Paid-in | Retained | Stockholders' | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, March 31, 2022 | 30,785 | $ | 308 | $ | 104,181 | $ | 67,667 | $ | 172,156 | |||||||||||
| Stock-based compensation | — | — | 53 | — | 53 | |||||||||||||||
| Stock issued on redemption of convertible note | 232 | 2 | 998 | — | 1,000 | |||||||||||||||
| Stock issued on redemption of related party convertible notes | 1,966 | 20 | 8,980 | — | 9,000 | |||||||||||||||
| Net loss | — | — | — | (3,386 | ) | (3,386 | ) | |||||||||||||
| Balance, June 30, 2022 | 32,983 | $ | 330 | $ | 114,212 | $ | 64,281 | $ | 178,823 | |||||||||||
| Balance, December 31, 2021 | 30,785 | $ | 308 | $ | 104,126 | $ | 77,801 | $ | 182,235 | |||||||||||
| Stock-based compensation | — | — | 108 | — | 108 | |||||||||||||||
| Stock issued on redemption of convertible note | 232 | 2 | 998 | — | 1,000 | |||||||||||||||
| Stock issued on redemption of related party convertible notes | 1,966 | 20 | 8,980 | — | 9,000 | |||||||||||||||
| Net loss | — | — | — | (13,520 | ) | (13,520 | ) | |||||||||||||
| Balance, June 30, 2022 | 32,983 | $ | 330 | $ | 114,212 | $ | 64,281 | $ | 178,823 | |||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock Issued | Paid-in | Retained | Stockholders' | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance, March 31, 2021 | 30,613 | $ | 306 | $ | 103,679 | $ | 80,523 | $ | 184,508 | |||||||||||
| Stock-based compensation | — | — | 285 | — | 285 | |||||||||||||||
| Net loss | — | — | — | (2,964 | ) | (2,964 | ) | |||||||||||||
| Balance, June 30, 2021 | 30,613 | $ | 306 | $ | 103,964 | $ | 77,559 | $ | 181,829 | |||||||||||
| Balance, December 31, 2020 | 30,610 | $ | 306 | $ | 103,399 | $ | 81,555 | $ | 185,260 | |||||||||||
| Stock-based compensation | — | — | 567 | — | 567 | |||||||||||||||
| Stock issued on vesting of RSUs | 4 | — | — | — | — | |||||||||||||||
| Taxes paid on vesting of RSUs | (1 | ) | — | (2 | ) | — | (2 | ) | ||||||||||||
| Net loss | — | — | — | (3,996 | ) | (3,996 | ) | |||||||||||||
| Balance, June 30, 2021 | 30,613 | $ | 306 | $ | 103,964 | $ | 77,559 | $ | 181,829 | |||||||||||
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| (1) | GENERAL BUSINESS |
The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements included herein have been prepared pursuant to the Securities and Exchange Commission's ( the "SEC") rules and regulations; accordingly, certain information and footnote disclosures normally included in generally accepted accounting principles ("GAAP") financial statements have been condensed or omitted.
The results of operations and cash flows for the three and six months ended June 30, 2022, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2022.
Our organization and business, the accounting policies we follow, and other information are contained in the notes to our consolidated financial statements filed as part of our 2021 Annual Report on Form 10-K. This quarterly report should be read in conjunction with such Annual Report on Form 10-K.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. This was early adopted on January 1, 2022 and did not have a significant impact on our consolidated financial position and consolidated results of operations.
The condensed consolidated financial statements include the accounts of Hallador Energy Company (hereinafter known as “we, us, or our”) and its wholly-owned subsidiaries Sunrise Coal, LLC (Sunrise) and Hourglass Sands, LLC (Hourglass), and Sunrise’s wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Sunrise is engaged in the production of steam coal from mines located in western Indiana.
As announced in our Form 8-K filed on February 18, 2022, on February 14, 2022, Hallador Energy Company, through its subsidiary Hallador Power Company, LLC, entered into an Asset Purchase Agreement (the "Purchase Agreement") to acquire Hoosier Energy’s 1-Gigawatt Merom Generating Station (Merom) located in Sullivan County, Indiana, in return for assuming certain decommissioning costs and environmental responsibilities. The transaction, which includes a 3.5-year power purchase agreement (PPA), is anticipated to close in September 2022, upon obtaining required governmental and financial approvals.
Going Concern - Alleviation of Substantial Doubt
In accordance with ASU 2014-15, “ Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (Subtopic 205-40), we have evaluated whether there are conditions and events, considered in the aggregate, which raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that our financials are issued. We performed the analysis, and our overall assessment was there were conditions or events, considered in the aggregate as of June 30, 2022, which raised substantial doubt about our ability to continue as a going concern within the next year, but such doubt was adequately mitigated by our plans to address the substantial doubt.
Also, during our analysis and overall assessment as we were preparing our Form 10-Q in April for the quarter ended March 31, 2022, we determined that we were in violation of one of our financial covenants for the quarter ended March 31, 2022 due to lower than expected Adjusted EBITDA, a significant non-GAAP factor in the calculation of the ratio, and could be in violation of financial covenants in future quarters, which management determined raises substantial doubt about the Company’s ability to continue as a going concern. These factors did not exist when we filed our Form 10-K on March 28, 2022 as we were projecting at the time that all covenants would be met for the next twelve months and beyond.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. During our analysis and overall assessment in July for the quarter ended June 30, 2022, it became clear that we were likely to violate one or more of our financial covenants for the quarter ending September 30, 2022 due to lower than expected Adjusted EBITDA, a significant non-GAAP factor in the calculation of the ratios. This factor raised substantial doubt about the Company's ability to continue as a going concern. Management's plans were to seek an amendment to the credit agreement to provide relief or obtain a waiver of the projected violations.
In August 2022, as disclosed in Note 5, we executed an amendment to our credit agreement providing relief on the covenants in question until the time our internal projections show we will again meet the covenants in the quarter ending December 31, 2022.
Accordingly, the above factors have alleviated substantial doubt about the entity's ability to continue as a going concern.
| LONG-LIVED ASSET IMPAIRMENTS |
Long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable. For the three and six month periods ended June 30, 2022 and for the three and six month periods ended June 30, 2021, there were no impairment charges recorded for long-lived assets.
| (3) | INVENTORY |
Inventory is valued at lower of average cost or net realizable value (NRV). As of June 30, 2022, and December 31, 2021, coal inventory includes NRV adjustments of $5.7 million and $3.8 million, respectively.
| (4) | OTHER LONG-TERM ASSETS (in thousands) |
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Advanced coal royalties | $ | 6,464 | $ | 6,678 | ||||
| Other | 1,670 | 1,694 | ||||||
| Total other assets | $ | 8,134 | $ | 8,372 | ||||
| BANK DEBT |
On March 25, 2022, we executed an amendment to our credit agreement with PNC, administrative agent for our lenders. The primary purpose of the amendment was to return the allowable leverage ratio and debt service coverage ratio to their December 31, 2021 levels through September 30, 2022, with the debt service coverage waived for March 31, 2022.
On May 20, 2022, we executed an additional amendment to our credit agreement with PNC, administrative agent for our lenders. The primary purpose of this amendment was to modify the allowable leverage ratio and debt service coverage ratio through June 30, 2022, to provide relief for current and anticipated covenant violations.
On August 5, 2022, we executed an additional amendment to our credit agreement with PNC, administrative agent for our lenders. The primary purpose of this amendment was to modify the allowable leverage ratio and debt service coverage ratio through September 30, 2022 to provide relief for anticipated covenant violations.
Bank debt is comprised of term debt ($16.5 million as of June 30, 2022) and a $120 million revolver ($114.2 million borrowed as of June 30, 2022). The term debt amortization concludes with the final payment in March 2023. The revolver matures in September 2023. Our debt is recorded at amortized cost, which approximates fair value due to the variable interest rates in the agreement and is collateralized primarily by our assets.
Liquidity
As of June 30, 2022, with the provisions of the amendments, we had additional borrowing capacity of $0.1 million and total liquidity of $9.0 million. Our additional borrowing capacity is net of $5.7 million in outstanding letters of credit as of June 30, 2022, that were required to maintain surety bonds. Liquidity consists of our additional borrowing capacity and cash and cash equivalents.
Fees
Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $4.0 million as of December 31, 2021. Additional costs incurred with the March 25, 2022 and May 20, 2022 amendments were $0.6 million and $0.9 million, respectively. These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of June 30, 2022, and December 31, 2021, were $3.9 million and $4.0 million, respectively.
Bank debt, less debt issuance costs, is presented below (in thousands):
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Current bank debt | $ | 16,538 | $ | 25,725 | ||||
| Less unamortized debt issuance cost | (3,316 | ) | (2,627 | ) | ||||
| Net current portion | $ | 13,222 | $ | 23,098 | ||||
| Long-term bank debt | $ | 114,200 | $ | 86,013 | ||||
| Less unamortized debt issuance cost | (593 | ) | (1,346 | ) | ||||
| Net long-term portion | $ | 113,607 | $ | 84,667 | ||||
| Total bank debt | $ | 130,738 | $ | 111,738 | ||||
| Less total unamortized debt issuance cost | (3,909 | ) | (3,973 | ) | ||||
| Net bank debt | $ | 126,829 | $ | 107,765 | ||||
Covenants
The credit facility includes a Maximum Leverage Ratio (consolidated funded debt/trailing twelve months adjusted EBITDA), calculated as of the end of each fiscal quarter for the trailing twelve months, not to exceed the amounts below:
| Fiscal Periods Ending | Ratio | ||
| June 30, 2022 | 6.00 to 1.00 | ||
| September 30, 2022 | 4.50 to 1.00 | ||
| December 31, 2022 | 2.50 to 1.00 | ||
| March 31, 2023 and thereafter | 2.25 to 1.00 |
As of June 30, 2022, our Leverage Ratio of 3.27 was in compliance with the 6.0 covenant defined in the current and prior amendments.
Beginning December 31, 2022, the credit facility requires a Minimum Debt Service Coverage Ratio (consolidated adjusted EBITDA/annual debt service) calculated as of the end of each fiscal quarter for the trailing twelve months of 1.25 to 1.00 through the maturity of the credit facility.
Interest Rate
The interest rate on the facility ranges from LIBOR plus 2.75% to LIBOR plus 4.00%, depending on our Leverage Ratio, with a LIBOR floor of 0.50%. We entered into swap agreements to fix the LIBOR component of the interest rate at 2.92% on the entire amount of the declining term loan balance and on $52.7 million of the revolver. Those agreements matured in May 2022. At June 30, 2022, we are paying LIBOR plus 4.0% on the outstanding bank debt.
Paycheck Protection Program
As previously reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2020, we entered into a Paycheck Protection Program Promissory Note and Agreement on April 15, 2020, evidencing an unsecured $10 million loan (the “PPP Loan”) under the Paycheck Protection Program (or “PPP”) made through First Financial Bank, N.A., (the "Lender"). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”).
Under the terms of the CARES Act, PPP loan recipients can apply for forgiveness. The SBA can grant forgiveness of all or a portion of loans made under the PPP if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the PPP Loan proceeds for qualifying expenses and applied for the forgiveness of the PPP Loan in accordance with the terms of the CARES Act.
On July 23, 2021, we received a notification from the Lender that the SBA approved our PPP Loan forgiveness application for the entire PPP Loan balance of $10 million, together with interest accrued thereon. The Lender notified us that the forgiveness payment was received on July 26, 2021. The forgiveness of the PPP Loan was recognized as other income.
The SBA retains the right to review the Company's loan file for a period subsequent to the date the loan is forgiven, with the potential for the SBA to pursue legal remedies at its discretion.
| (6) | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (in thousands) |
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | 31,099 | $ | 27,835 | ||||
| Accrued property taxes | 2,006 | 2,529 | ||||||
| Accrued payroll | 4,792 | 2,413 | ||||||
| Workers' compensation reserve | 3,346 | 2,560 | ||||||
| Group health insurance | 2,250 | 1,800 | ||||||
| Fair value of interest rate swaps | — | 867 | ||||||
| Other | 4,480 | 3,524 | ||||||
| Total accounts payable and accrued liabilities | $ | 47,973 | $ | 41,528 | ||||
| (7) | REVENUE |
Revenue from Contracts with Customers
We account for a contract with a customer when the parties have approved the contract and are committed to performing their respective obligations, the rights of each party are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. We recognize revenue when we satisfy a performance obligation by transferring control of a good or service to a customer. We utilize the normal purchase normal sales exception for all long-term sales contracts.
Our revenue is derived from sales to customers of coal produced at our facilities. Our customers typically purchase coal directly from our mine sites or our Princeton Loop, where the sale occurs and where title, risk of loss, and control pass to the customer at that point. Our customers arrange for and bear the costs of transporting their coal from our mines to their plants or other specified discharge points. Our customers are typically domestic utility companies. Our coal sales agreements with our customers are fixed-priced, fixed-volume supply contracts, or include a pre-determined escalation in price for each year. Price re-opener and index provisions may allow either party to commence a renegotiation of the contract price at a pre-determined time. Price re-opener provisions may automatically set a new price based on prevailing market price or, in some instances, require us to negotiate a new price, sometimes within specified ranges of prices. The terms of our coal sales agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary by customer.
Coal sales agreements will typically contain coal quality specifications. With coal quality specifications in place, the raw coal sold by us to the customer at the delivery point must be substantially free of magnetic material and other foreign material impurities and crushed to a maximum size as set forth in the respective coal sales agreement. Price adjustments are made and billed in the month the coal sale was recognized based on quality standards that are specified in the coal sales agreement, such as Btu factor, moisture, ash, and sulfur content, and can result in either increases or decreases in the value of the coal shipped.
Disaggregation of Revenue
Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. 83% and 85% of our coal revenue for the three and six months ended June 30, 2022 was sold to customers in the State of Indiana with the remainder sold to customers in Florida. 73% and 75% of our coal revenue for the three and six months ended June 30, 2021 respectively, was sold to customers in the State of Indiana with the remainder sold to customers in Florida, Georgia, and North Carolina.
Performance Obligations
A performance obligation is a promise in a contract with a customer to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. In most of our contracts, the customer contracts with us to provide coal that meets certain quality criteria. We consider each ton of coal a separate performance obligation and allocate the transaction price based on the base price per the contract, increased or decreased for quality adjustments.
We recognize revenue at a point in time, as the customer does not have control over the asset at any point during the fulfillment of the contract. For substantially all of our customers, this is supported by the fact that title and risk of loss transfer to the customer upon loading of the truck or railcar at the mine. This is also the point at which physical possession of the coal transfers to the customer, as well as the right to receive substantially all benefits and the risk of loss in ownership of the coal.
We have remaining performance obligations relating to fixed-priced contracts of approximately $724 million, which represent the average fixed prices on our committed contracts as of June 30, 2022. We expect to recognize approximately 82% of this revenue in and 2023, with the remainder recognized thereafter.
We have remaining performance obligations relating to contracts with price re-openers of approximately $166 million, which represents our estimate of the expected re-opener price on committed contracts as of June 30, 2022. We expect to recognize all of this revenue beginning in
The tons used to determine the remaining performance obligations are subject to adjustment in instances of force majeure and exercise of customer options to either take additional tons or reduce tonnage if such option exists in the customer contract.
Contract Balances
Under ASC 606, the timing of when a performance obligation is satisfied can affect the presentation of accounts receivable, contract assets, and contract liabilities. The main distinction between accounts receivable and contract assets is whether consideration is conditional on something other than the passage of time. A receivable is an entity’s right to consideration that is unconditional. Under the typical payment terms of our contracts with customers, the customer pays us a base price for the coal, increased or decreased for any quality adjustments. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our condensed consolidated balance sheets. As of January 1, 2021, accounts receivable for coal sales billed to customers was $14.4 million. We do not currently have any contracts in place where we would transfer coal in advance of knowing the final price of the coal sold, and thus do not have any contract assets recorded. Contract liabilities arise when consideration is received in advance of performance.
| (8) | INCOME TAXES |
For the six months ended June 30, 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. For the six months ended June 30, 2021, we utilized a discrete period method to calculate taxes, as we did not believe the annual effective tax rate method would have represented a reliable estimate. The effective tax rate for the six months ended June 30, 2022, and 2021 was ~(2)% and ~25%, respectively. Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion in excess of tax basis. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.
| STOCK COMPENSATION PLANS |
| Non-vested grants at December 31, 2021 | 183,000 | |||
| Awarded - price $2.42 | 10,000 | |||
| Vested | — | |||
| Forfeited | (7,500 | ) | ||
| Non-vested grants at June 30, 2022 | 185,500 |
For the three and six months ended June 30, 2022 our stock compensation was $0.1 million and $0.1 million, respectively. For the three and six months ended June 30, 2021, our stock compensation was $0.3 million and $0.6 million, respectively.
Non-vested RSU grants will vest as follows:
| Vesting Year | RSUs Vesting | |||
| 2023 | 185,500 | |||
The outstanding RSUs have a value of $1.0 million based on the June 30, 2022, closing stock price of $5.41.
At June 30, 2022, we had 1,398,671 RSUs available for future issuance.
| (10) | LEASES |
Information related to leases was as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease information: | ||||||||||||||||
| Operating cash outflows from operating leases | 53 | $ | 50 | $ | 111 | $ | 97 | |||||||||
| Weighted average remaining lease term in years | 1.74 | 2.69 | 1.74 | 2.69 | ||||||||||||
| Weighted average discount rate | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||
Future minimum lease payments under non-cancellable leases as of June 30, 2022, were as follows:
| Year | Amount | |||
| (In thousands) | ||||
| 2022 | $ | 104 | ||
| 2023 | 174 | |||
| 2024 | 59 | |||
| Total minimum lease payments | $ | 337 | ||
| Less imputed interest | (8 | ) | ||
| Total operating lease liability | $ | 329 | ||
| As reflected on balance sheet: | ||||
| Accounts payable and accrued liabilities | $ | 208 | ||
| Other long-term liabilities | 121 | |||
| Total operating lease liability | $ | 329 | ||
At June 30, 2022, and December 31, 2021, we had approximately $329,000 and $424,000, respectively, of right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.
| (11) | SELF-INSURANCE |
We self-insure our underground mining equipment. Such equipment is allocated among mining units dispersed over ten miles. The historical cost of such equipment was approximately $269 million and $260 million as of June 30, 2022, and December 31, 2021, respectively.
Restricted cash of $3.5 million and $3.3 million as of June 30, 2022, and December 31, 2021, respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments.
| (12) | NET LOSS PER SHARE |
We compute net loss per share using the two-class method, which is an allocation formula that determines net loss per share for common stock and participating securities, which for us are our outstanding RSUs.
The following table (in thousands, except per share amounts) sets forth the computation of net loss per share:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss | $ | (3,386 | ) | $ | (2,964 | ) | $ | (13,520 | ) | $ | (3,996 | ) | ||||
| Less loss allocated to RSUs | 18 | 30 | 79 | 41 | ||||||||||||
| Net loss allocated to common shareholders | $ | (3,368 | ) | $ | (2,934 | ) | $ | (13,441 | ) | $ | (3,955 | ) | ||||
| (13) | FAIR VALUE MEASUREMENTS |
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. We have no Level 1 instruments.
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. We have no Level 2 instruments.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our Level 3 instruments are comprised of interest rate swaps and impairment measurements. The fair values of our swaps were estimated using discounted cash flow calculations based upon forward interest-rate yield curves. The notional values of our two interest rate swaps were $52.7 million and $22.1 million when they matured in May 2022. Although we utilize third-party broker quotes to assess the reasonableness of our prices and valuation, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2. Certain properties' asset retirement obligation liabilities use Level 3 non-recurring fair value measures.
The following table summarizes our financial assets and liabilities measured on a recurring basis at fair value at June 30, 2022, and December 31, 2021, by the respective level of the fair value hierarchy (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| December 31, 2021 | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps | $ | — | $ | — | $ | 867 | $ | 867 | ||||||||
| June 30, 2022 | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps | $ | — | $ | — | $ | — | $ | — | ||||||||
The table below highlights the change in fair value of the interest rate swaps which are based on a discounted future cash flow model (in thousands):
| Ending balance, December 31, 2021 | $ | (867 | ) | |
| Change in estimated fair value | 867 | |||
| Ending balance, June 30, 2022 | $ | — |
| (14) | EQUITY METHOD INVESTMENTS |
We own a 50% interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment and generates revenue from gas sales. Sunrise Energy plans to continue developing and exploring for oil, gas, and coal-bed methane gas reserves on or near our underground coal reserves. The carrying value of the investment included in our condensed consolidated balance sheets as of June 30, 2022, and December 31, 2021, was $3.9 million and $3.5 million, respectively.
| (15) | CONVERTIBLE NOTES |
On May 2, 2022, and May 20, 2022, we issued senior unsecured convertible notes (the "Notes") to five parties, in the aggregate principal amount of $10 million, with $9 million going to related parties affiliated with independent members of our board of directors and the remainder to a non-affiliated party. The funds received from the Notes were used to provide additional working capital to the Company. The Notes were scheduled to mature on December 29, 2028, and accrue interest at 8% per annum, with interest payable on the date of the maturity. Pursuant to the terms of the Notes, the holders of the Notes may convert the entire principal balance and all accrued and unpaid interest then outstanding during the period beginning June 1, 2022, and ending on May 31, 2027, into shares of the Company Common Stock (the "Conversion Shares") at a conversion price the greater of (i)$3.33 and (ii) the 30-day trailing volume-weighted average sales price for the Common Stock on the Nasdaq Capital Market ending on and including the date on which this Note is converted. Each Conversion Share will consist of share of our common stock. The conversion price and number of shares of the Company’s Common Stock issuable upon conversion of the Notes are subject to adjustment from time to time for any subdivision or consolidation of the Company’s shares and other standard dilutive events. At any time on or after June 1, 2025, the Company may, at its option and upon 30 days' written notice provided to the Holders, elect to redeem the Notes (in whole and not in part) and the Holders shall be obligated to surrender the Notes, at a redemption price equal to 100% of the outstanding Principal Balance, together with any accrued but unpaid interest thereon to the redemption date. After receipt of such redemption notice from the Company, the Holder may, at its option, elect to convert the Principal Balance and accrued interest into Conversion Shares by giving written notice of such election to the Company no later than 5 days prior to the date fixed for redemption.
In June, the four holders of the $9 million related party convertible notes converted them into 1,965,841 shares of common stock of the Company and the one holder of the $1 million convertible note converted it into 231,697 shares of common stock pursuant to the terms of the notes and their related agreements.
| (16) | SUBSEQUENT EVENTS |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION UPDATES THE MD&A SECTION OF OUR 2021 ANNUAL REPORT ON FORM 10-K AND SHOULD BE READ IN CONJUNCTION THEREWITH.
Our condensed consolidated financial statements should also be read in conjunction with this discussion. The following analysis includes a discussion of metrics on a per ton basis derived from the condensed consolidated financial statements, which are considered non-GAAP measurements. These metrics are significant factors in assessing our operating results and profitability.
Thermal coal demand and pricing remain strong due to the increased demand for electricity and constrained growth in thermal coal production. Labor shortages, global supply chain interruptions, and environmental and political pressures are limiting the ability of operators to increase thermal coal production to meet domestic and international demand. In addition, higher natural gas prices and boycotts on Russian coal caused by the war in Ukraine are further amplifying the tightness in thermal coal markets. Due to these factors, the near-term outlook for thermal coal prices is positive.
OVERVIEW
| I. |
|
Q2 2022 Net Loss $3.4 million. |
| a. | In Q2, Hallador made significant progress reducing operating costs and adding new sales contracts that will begin shipping in Q4 2022. |
| b. | Our margins improved in Q2 by over $6 per ton over Q1 2022. Further margin expansion is expected in Q4 and 2023 as a result of dramatically higher priced sales contracts. |
| c. |
1.6 million tons were shipped at an average sales price of $40.23 during the quarter. Remaining tons to ship for 2022 are expected to average over $49 per ton. |
| d. | Production: Q2 2022 production costs were $31.83 per ton, which represents a $7.71 per ton decrease from Q1 2022. |
| e. | Cash Flow & Debt: During Q2, our operating cash flow decreased $2.7 million and we increased our bank debt by $10.7 million as we started to build inventory and increased capital expenditures to prepare for the opening of the Prosperity and Freelandville mines in Q3 2022. |
| i. | As of June 30, 2022, our bank debt was $130.7 million, liquidity was $9.0 million, and our leverage ratio came in at 3.27X, within our covenant of 6.00X. |
| II. | Q3 2022 Activity |
| a. | Financing |
| i. | We were successful in executing an amendment with our banks increasing our debt to EBITDA covenant for Q3 and waiving our debt service coverage ratio for Q3 as disclosed in Note 5 to our condensed consolidated financial statements, thereby alleviating the going concern that we reported in Q1. We expect to be in compliance with all bank covenants going forward. |
| ii. | In August, we issued an additional $19 million in convertible notes to add to our June 30, 2022 liquidity of $9.0 million. The notes were purchased by parties affiliated with two of our board members and one non-affiliated party. |
| b. | Sales |
| i. | During the quarter, we added 2.2 million tons of new coal contracts priced at over $125 per ton to be delivered during the last half of 2022 through 2025. The majority of these tons are to be delivered the last half of 2022 through 2023, which is expected to materially increase our margins during this period and put the Company in position to be net debt free by the end of 2023. The delivery of all of these tons could be delayed by transport logistics |
| c. | Production |
| i | Production volumes improved during Q2 with production of 1.8 million tons, the highest production level since 2019.
We expect to increase production with the existing Oaktown Mining Complex, Hallador’s new Prosperity Surface Mine near Petersburg, IN and new surface production near Freelandville, IN. Production from both Prosperity and Freelandville are higher cost and is expected to increase total mining cost structure to $34 - $35 per ton in Q4 2022 and $36 per ton through 2023.
|
| III. | Q3 & Q4 2022 Activity |
| a. | Merom Generating Station |
| i. | We anticipate completing the acquisition of the Merom Power Plant in Q3 2022, subject to certain regulatory and financial approvals. |
| IV. | 2023 |
| a. | Coal & Power |
| i. | Our current 2023 average sales price is ~$17 per ton higher than the first half of 2022. |
| ii. | Traditionally, Hallador has generated $50 million of Adjusted EBITDA, a significant non-GAAP measure, annually. In 2023, we expect our Adjusted EBITDA, a significant non-GAAP measure, to grow to over $160 million, primarily as a result of the additional higher-priced coal contracts. |
| V. | Solid Sales Position Through 2023 |
| Contracted |
Estimated |
|||||||
| tons |
price |
|||||||
| Year |
(millions)* |
per ton |
||||||
| 2022 (Q3-Q4) |
4.0 | 49.00 | ||||||
| 2023 (annual) |
6.7 | 58.00 | ||||||
| 2024-2027 (total) |
7.0 | ** | ||||||
| 17.7 | ||||||||
___________
* Contracted tons are subject to adjustment in instances of force majeure and exercise of customer options to either take additional tons or reduce tonnage if such option exists in the customer contract.
**Unpriced or partially priced tons.
LONG-LIVED ASSET IMPAIRMENT REVIEW
See Note 2 to our condensed consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
| I. |
Liquidity and Capital Resources |
| a. |
As set forth in our condensed consolidated statements of cash flows, cash provided by operations was $0.3 million and $12.9 million for the six months ended June 30, 2022 and 2021 |
|
|
i. |
Operating margins from coal decreased during the first six months of 2022 by $8.3 million when compared to the first six months of 2021. |
| 1. |
Our operating margins were $5.37 per ton in the first six months of 2022 compared to $9.39 in the first six months of 2021 as a direct result of increased operating costs. Margins are expected to increase to ~$20 per ton starting in Q4 2022. |
| 2. |
We shipped 3.0 million tons in the first half of 2022 and expect to ship a total of 6.5 to 7.0 million tons in 2022. |
| b. |
Our projected capex budget for the remainder of 2022 is $15 million, of which approximately one-half is anticipated for maintenance capex. We also have scheduled payments on long-term debt totaling $11.0 million over the last six months of the year. |
| c. |
We expect cash provided by operations and additional borrowing either from our revolver or other sources, if necessary, to fund our maintenance capital expenditures and debt service for the remainder of the year. We raised $9 million in May 2022 in senior unsecured promissory notes from related parties and $1 million from an non-affiliated party. In August 2022 we raised an additional $9 million from related parties and $10 million from a non-affiliated entity. The additional margins expected to begin in Q4 from the higher priced coal contracts will significantly enhance our ability to pay for capital expenditures and debt service. |
| d. |
In the first half of 2022, we generated lower than expected EBITDA due to elevated cash costs related to: i) a temporary decrease in efficiency, as new hires were integrated into the workforce to support more shifts required to fulfill the increase in contracted tonnage, and ii) supply constraints and vendor cost increases. We amended our bank agreement in May 2022, and again in August 2022, to provide covenant relief to maintain our liquidity levels as costs are anticipated and have begun to improve over the remainder of 2022. |
| e. | See Note 5 to our condensed consolidated financial statements for additional discussion about our bank debt and related liquidity. |
| II. |
Material Off-Balance Sheet Arrangements |
| a. |
Other than our surety bonds for reclamation, we have no material off-balance sheet arrangements. In the event we are not able to perform reclamation, which is presented as asset retirement obligations (ARO) in our accompanying condensed consolidated balance sheets, we have surety bonds totaling $23.4 million to pay for ARO. |
CAPITAL EXPENDITURES (capex)
For the first six months of 2022, capex was $22.9 million allocated as follows (in millions):
| Oaktown – maintenance capex |
$ | 10.4 | ||
| Oaktown – investment |
10.4 | |||
| Other |
2.1 | |||
| Capex per the Condensed Consolidated Statements of Cash Flows |
$ | 22.9 |
Quarterly coal sales and cost data (in thousands, except per ton and percentage data) are provided below. Per ton calculations below are based on tons sold.
| All Mines |
3rd 2021 |
4th 2021 |
1st 2022 |
2nd 2022 |
T4Qs |
|||||||||||||||
| Tons produced |
1,440 | 1,447 | 1,397 | 1,762 | 6,046 | |||||||||||||||
| Tons sold |
2,042 | 1,554 | 1,377 | 1,595 | 6,568 | |||||||||||||||
| Coal sales |
$ | 79,036 | $ | 64,388 | $ | 57,010 | $ | 64,161 | $ | 264,595 | ||||||||||
| Average price/ton |
$ | 38.71 | $ | 41.43 | $ | 41.40 | $ | 40.23 | $ | 40.29 | ||||||||||
| Wash plant recovery in % |
73 | % | 70 | % | 67 | % | 71 | % | ||||||||||||
| Operating costs |
$ | 67,694 | $ | 54,583 | $ | 54,443 | $ | 50,776 | $ | 227,496 | ||||||||||
| Average cost/ton |
$ | 33.15 | $ | 35.12 | $ | 39.54 | $ | 31.83 | $ | 34.64 | ||||||||||
| Margin |
$ | 11,342 | $ | 9,805 | $ | 2,567 | $ | 13,385 | $ | 37,099 | ||||||||||
| Margin/ton |
$ | 5.55 | $ | 6.31 | $ | 1.86 | $ | 8.39 | $ | 5.65 | ||||||||||
| Capex |
$ | 7,238 | $ | 9,975 | $ | 9,082 | $ | 13,821 | $ | 40,116 | ||||||||||
| Maintenance capex |
$ | 2,324 | $ | 3,302 | $ | 4,481 | $ | 7,600 | $ | 17,707 | ||||||||||
| Maintenance capex/ton |
$ | 1.14 | $ | 2.12 | $ | 3.25 | $ | 4.76 | $ | 2.70 | ||||||||||
| All Mines |
3rd 2020 |
4th 2020 |
1st 2021 |
2nd 2021 |
T4Qs |
|||||||||||||||
| Tons produced |
1,234 | 1,233 | 1,592 | 1,292 | 5,351 | |||||||||||||||
| Tons sold |
1,585 | 1,613 | 1,174 | 1,403 | 5,775 | |||||||||||||||
| Coal sales |
$ | 64,754 | $ | 64,925 | $ | 45,879 | $ | 54,600 | $ | 230,158 | ||||||||||
| Average price/ton |
$ | 40.85 | $ | 40.25 | $ | 39.08 | $ | 38.92 | $ | 39.85 | ||||||||||
| Wash plant recovery in % |
71 | % | 68 | % | 74 | % | 69 | % | ||||||||||||
| Operating costs |
$ | 46,444 | $ | 54,640 | $ | 33,907 | $ | 42,364 | $ | 177,355 | ||||||||||
| Average cost/ton |
$ | 29.30 | $ | 33.87 | $ | 28.88 | $ | 30.20 | $ | 30.71 | ||||||||||
| Margin |
$ | 18,310 | $ | 10,285 | $ | 11,972 | $ | 12,236 | $ | 52,803 | ||||||||||
| Margin/ton |
$ | 11.55 | $ | 6.38 | $ | 10.20 | $ | 8.72 | $ | 9.14 | ||||||||||
| Capex |
$ | 3,995 | $ | 6,661 | $ | 5,720 | $ | 5,117 | $ | 21,493 | ||||||||||
| Maintenance capex |
$ | 1,365 | $ | 2,342 | $ | 2,343 | $ | 1,049 | $ | 7,099 | ||||||||||
| Maintenance capex/ton |
$ | 0.86 | $ | 1.45 | $ | 2.00 | $ | 0.75 | $ | 1.23 | ||||||||||
2022 vs. 2021 (first six months)
For the first six months of 2022, we sold 2,972,000 tons at an average price of $40.77 per ton. For the first six months of 2021, we sold 2,577,000 tons at an average price of $38.99 per ton. The increase in average price per ton was expected and is the result of our changing contract mix caused by the expiration of contracts and acquisition of new contracts. We expect to sell 6.5 to 7.0 million tons during 2022 with the remaining tons sold at an average price in excess of $49 per ton. Pricing for 2023 is expected to be in excess of $58 per ton.
Operating costs for all coal mines averaged $35.40 per ton and $29.60 per ton for the six months ended June 30, 2022, and 2021, respectively. Oaktown's costs over that same period were $33.63 and $27.55, respectively. Our operating costs for the quarter are higher than our prior guidance as explained in the overview.
Other revenues increased $1.8 million during the first six months of 2022 when compared to 2021 due to additional income from coal storage fees, royalty income on mineral interests, and increased scrap prices and volume.
General and administrative expense increased $0.7 million during the first six months of 2022 when compared to 2021 primarily as a result of legal and due diligence costs related to the acquisition of Merom. We expect general and administrative expense for the remainder of 2021 to be $6 - $7 million.
Our Sunrise Coal employees and contractors totaled 836 at June 30, 2022, compared to 716 at June 30, 2021.
2022 v. 2021 (second quarter)
For the second quarter 2022, we sold 1,595,000 tons at an average price of $40.23 per ton. For the second quarter 2021, we sold 1,403,000 tons at an average price of $38.92 per ton. The increase in average price per ton was expected and is the result of our changing contract mix caused by the expiration of contracts and acquisition of new contracts.
Operating costs for all coal mines averaged $31.83 per ton in 2022 and $30.20 per ton in 2021. Oaktown's costs over that same period were $29.87 and $27.85, respectively. See the overview for additional discussion of operating costs.
Other revenues increased $0.7 million over Q2 2021 due to additional income from coal storage fees, royalty income on mineral interests, and increased scrap prices and volume.
Depreciation, depletion and amortization increased $1.4 million in large part as a significant amount of our assets are depreciated and amortized based on production which was higher in Q2 2022.
General and administrative expense increased $0.3 million during the quarter as a result of legal and due diligence costs related to the acquisition of Merom.
EARNINGS (LOSS) PER SHARE
| 3rd 2021 |
4th 2021 |
1st 2022 |
2nd 2022 |
|||||||||||||
| Basic and diluted |
$ | 0.26 | $ | (0.25 | ) | $ | (0.33 | ) | $ | (0.11 | ) | |||||
| 3rd 2020 |
4th 2020 |
1st 2021 |
2nd 2021 |
|||||||||||||
| Basic and diluted |
$ | 0.06 | $ | (0.15 | ) | $ | (0.03 | ) | $ | (0.10 | ) | |||||
INCOME TAXES
Our effective tax rate (ETR) is estimated at ~(2)% and ~25% for the six months ended June 30, 2022, and 2021, respectively. For the six months ended June 30, 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. For the six months ended June 30, 2021, we utilized a discrete period method to calculate taxes, as we did not believe the annual effective tax rate method would have represented a reliable estimate. Our ETR differs from the statutory rate due primarily to statutory depletion in excess of tax basis and changes in the valuation allowance. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.
GOVERNMENT IMPOSITION REIMBURSEMENTS
Some of our legacy coal contracts allow us to pass on to our customers certain costs incurred resulting from changes in costs to comply with mandates issued by Mine Safety and Health Administration (MSHA) or other government agencies. After applying the provisions of ASU 2014-09, as of June 30, 2022, we do not consider unreimbursed costs from our customers related to these compliance matters to be material and have constrained such amounts and will recognize them when they can be estimated with reasonable certainty.
RESTRICTED STOCK GRANTS
See “Item 1. Financial Statements - Note 9. Stock Compensation Plans” for a discussion of RSUs.
CRITICAL ACCOUNTING ESTIMATES
We believe that the estimates of our coal reserves, our interest rate swaps, our asset retirement obligation liabilities, our deferred tax accounts, our valuation of inventory, the estimates used in our impairment analysis, and management's plans related to our going concern evaluation are our critical accounting estimates.
The reserve estimates are used in the depreciation, depletion and amortization calculations and our internal cash flow projections. If these estimates turn out to be materially under or over-stated, our depreciation, depletion and amortization expense and impairment test may be affected.
The fair value of our interest rate swaps and asset retirement obligation liabilities is determined using a discounted future cash flow model based on the key assumption of anticipated future interest rates and related credit adjustment considerations.
We have analyzed our filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We identified our federal tax return and our Indiana state tax return as “major” tax jurisdictions. We believe that our income tax filing positions and deductions would be sustained on audit and do not anticipate any adjustments that will result in a material change to our consolidated financial position.
Inventory is valued at lower of average cost or net realizable value (NRV). Anticipated utilization of low sulfur, higher-cost coal from our Ace in the Hole mine has the potential to create NRV adjustments as our estimated need changes.
Management’s evaluation of going concern is an estimate and when there is an indication of substantial doubt about the ability to continue as a going concern, management must assess its plans and evaluate whether management’s plans are probable of alleviating such going concern. No assurance can be given that management's plans to show continued improvement in production and sales prices will be fully realized or that the acquisition of the Merom Generating Station will proceed as planned.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes from the disclosure in our 2021 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS
We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our CEO, CFO, and CAO as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO, CFO, and CAO of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO, CFO, and CAO concluded that our disclosure controls and procedures are effective.
There have been no changes to our internal control over financial reporting during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 4. MINE SAFETY DISCLOSURES
See Exhibit 95.1 to this Form 10-Q for a listing of our mine safety violations.
On August 12, 2022, the Company issued a senior unsecured convertible note (the "Note") to one unrelated party, ALJ Regional Holdings, Inc. ($10.0 million of principal purchased). The funds received from the Notes will be used to provide additional working capital to the Company. The Notes will mature on December, 2026 and will accrue interest at 8% per annum, which interest will be payable on the date of the maturity.
Pursuant to the terms of the Notes, the holders of the Notes may convert the entire principal balance and all accrued and unpaid interest then outstanding during the period beginning August 18, 2022 and ending on the Maturity Date into shares of the Company Common Stock (the "Conversion Shares") at a conversion price equal to $6.15. The conversion price and number of shares of the Company’s Common Stock issuable upon conversion of the Note are subject to adjustment from time to time for any subdivision or consolidation of the Company’s shares and other standard dilutive events.
At any time on or after August 12, 2025, the Company may, at its option and upon 30 days written notice provided to the Holders, elect to redeem the Notes (in whole and not in part) and the Holders shall be obligated to surrender the Notes, at a redemption price equal to 100% of the outstanding Principal Balance, together with any accrued but unpaid interest thereon to the redemption date. After receipt of such redemption notice from the Company, the Holder may, at its option, elect to convert the Principal Balance and accrued interest into Conversion Shares by giving written notice of such election to the Company no later than 5 days prior to the date fixed for redemption.
The foregoing description of the Note is qualified in its entirety by reference to the full text of such documents, a copy of which is attached to this Report as Exhibit 10.14, which are incorporated herein by reference.
The issuance of the Note was and, upon conversion of the Note, the issuances of any conversion shares issued thereunder will be, exempt from registration under Section 4(a)(2) and/or Rule 506(b) of Regulation D as promulgated by the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), as transactions by an issuer not involving any public offering.
| Exhibit No. |
Document |
|
| 10.1 |
||
| 10.2 |
||
| 10.3 |
||
| 10.4 |
||
| 10.5 |
||
| 10.6 |
||
| 10.7 |
||
| 10.8 |
||
| 10.9 |
Hallador Energy Company Convertible Note Purchase Agreement dated July 29, 2022 (2) |
|
| 10.10 |
||
| 10.11 |
||
| 10.12 |
||
| 10.13 |
Hallador Energy Company Unsecured Convertible Promissory Note dated August 12, 2022 - ALJ * |
|
| 10.14 |
Seventh Amendment to the Third Amended and Restated Credit Agreement dated May 20, 2022(2) |
|
| 10.15 |
Eighth Amendment to the Third Amended and Restated Credit Agreement dated August 5 2022 (4) |
|
| 31.1 |
SOX 302 Certification - Chairman, President and Chief Executive Officer* |
|
| 31.2 |
||
| 31.3 |
||
| 32 |
||
| 95.1 |
||
| 101.INS |
Inline XBRL Instance Document* |
|
| 101.SCH |
Inline XBRL Schema Document* |
|
| 101.CAL |
Inline XBRL Calculation Linkbase Document* |
|
| 101.LAB |
Inline XBRL Labels Linkbase Document* |
|
| 101.PRE |
Inline XBRL Presentation Linkbase Document* |
|
| 101.DEF |
Inline XBRL Definition Linkbase Document* |
|
| 104 |
Cover Page Interactive Data File (embedded with the Inline XBRL document)* |
| ________________________________ |
| * Filed Herewith |
| (1) IBR to Form 8-K filed May 6, 2022 |
| (2) IBR to March 31, 2022, Form 10-Q |
| (3) IBR to Form 8-K filed August 4, 2022 |
| (4) IBR to Form 8-K filed August 11, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
HALLADOR ENERGY COMPANY |
|
|
|
|
|
|
|
|
|
|
|
|
| Date: August 15, 2022 |
|
/S/ LAWRENCE D. MARTIN |
|
|
|
Lawrence D. Martin, CFO |
|
|
|
|
|
|
|
|
|
|
|
|
| Date: August 15, 2022 |
|
/S/ R. TODD DAVIS |
|
|
|
R. Todd Davis, CAO |