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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number 0-26509
NATIONAL COAL CORP.
(Exact name of registrant as specified in its charter)
| Florida | 65-0601272 | |
| State or other jurisdiction of incorporation or organization |
(I.R.S. Employer Identification No.) |
8915 George Williams Road Knoxville, TN 37923
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (865) 690-6900
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Stock, par value $.0001 per share | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.
| Large Accelerated Filer | ¨ | Non-accelerated Filer | x | |||
| Accelerated Filer | ¨ | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009, based on the closing price of the common stock as reported by The NASDAQ Global Market on such date, was approximately $40,912,068.
As of March 29, 2010, the issuer had 34,313,889 shares of common stock, par value $.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer’s Proxy Statement for its 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report.
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INDEX TO FORM 10-K
(i)
Table of Contents
PART I
This report, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Business,” contains “forward-looking statements” that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new services; our expectations concerning litigation, regulatory developments or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:
| • | continued weakness in US and worldwide economic conditions; |
| • | demand for coal, electricity and competing energy sources; |
| • | changes in environmental standards related to coal combustion causing coal users to switch to other fuels; |
| • | difficulties in implementing our business strategies; |
| • | reliance on customers honoring existing contracts and entering into new contracts; |
| • | dependence on one customer for a substantial portion of our sales; |
| • | unexpected disruption of rail or truck systems that transport our coal; |
| • | our ability to attract and retain skilled labor to meet our needs; |
| • | our ability to purchase coal from various third party sources; |
| • | inherent risks in surface and underground coal mining being subject to unexpected disruptions in our ability to produce coal including geological conditions, equipment failure, accidents and weather; |
| • | the effects of governmental regulation including obtaining permits and the increasingly stringent federal and state proposals to regulate greenhouse gas emissions and to comply with various environmental standards for us and our customers; |
| • | increases in the price of certain products and commodities used in our mining operations that could impact our production and transportation costs; |
| • | the costs of reclamation associated with re-mining previously mined properties; |
| • | our assumptions regarding economically recoverable coal reserve estimates; |
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| • | our ability to continue to provide cash collateral for reclamation surety bonds; |
| • | industry competition and various factors that cause fluctuations in the demand for coal and the price of coal; |
| • | our ability to continue to be able to provide capital necessary to finance our growth strategies amidst tightened credit standards and markets; |
| • | our ability to continue as a going concern; |
| • | our ability to refinance our $42.0 million 10.5% Notes due December 2010; |
| • | our ability to raise funds in debt or equity markets at terms acceptable to us, or if at all; |
| • | our ability to comply with restrictions imposed by our existing credit facilities; |
| • | our ability to obtain waivers from lenders if we do not comply with various financial covenants required under existing credit facilities; |
| • | other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” |
Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
| Item 1. | Business. |
Corporate Overview
We mine, process and sell high quality bituminous steam coal from mines located in East Tennessee. From October 2007 until August 2009, we had mining operations in North Alabama, and from November 2004 until March 2008, we had mining operations in Southeast Kentucky. We sold our Kentucky operations in March 2008, and our subsidiary, National Coal of Alabama, Inc., which operated our Alabama mining operations, defaulted on its senior secured debt, resulting in the lender’s foreclosure on our subsidiary’s outstanding capital stock. As a result, National Coal of Alabama, Inc. ceased to be our subsidiary in August 2009. Throughout this report, we refer to our continuing operations as the operating results of our Tennessee operations, and the operating results of our Kentucky operations for the period from November 2004 through March 31, 2008. We refer to our discontinued operations as the operating results of our Alabama operations for the period from October 2007 through August 2009.
Our continuing operations in Tennessee include the coal mineral rights to approximately 65,000 acres of land and lease the rights to approximately 14,000 additional acres. As of December 31, 2009, our mining complexes included two active and three inactive underground mines, one active and two inactive surface mines, and one inactive highwall mine. In addition, we have two preparation plants and two unit train loading facilities served by the Norfolk Southern railroad. We hold five permits that allow us to open new or re-open existing mines close to current operations. As of December 31, 2009, we controlled approximately 39.1 million estimated recoverable tons of coal reserves as defined by the SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted at the time of the reserve determination.
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At December 31, 2009, we had cash and cash equivalents of approximately $1.2 million and negative working capital of approximately $54.8 million. Included in working capital is $45.0 million of principal amount of secured indebtedness that matures on December 15, 2010. Cash flows provided by (used in) continuing operations were approximately $38,000 and $(9.6) million for the years ended December 31, 2009 and 2008, respectively.
During the year ended December 31, 2009, our continuing operations generated total revenues of $88.0 million and sold approximately 1.2 million tons of coal. Revenues are derived primarily from the sale of coal to electric utility companies in the Southeastern United States pursuant to long-term contracts or open purchase order arrangements with long-time customers. Georgia Power Company represented approximately 95% of our continuing operations’ coal revenues for the year ended December 31, 2009.
We typically sell our coal for a specified per ton amount and at a negotiated price pursuant to both short-term contracts and contracts of twelve months or greater. The weighted average selling price per ton for continuing operations is $79.62, $76.03 and $73.70 on 0.9 million, 0.8 million and 0.5 million tons contracted for fiscal years 2010, 2011 and 2012, respectively. Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lower gross margins, which could have a material adverse effect on our operating cash flows. Additionally, our customers may have the ability to delay the timing of their purchases, which could negatively impact operating cash flows. Finally, coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or our customers during the duration of specified events beyond the control of the affected party.
During the first quarter of 2010, we experienced a significant reduction in cash receipts following the suspension of coal shipments to Georgia Power Company due to freezing weather in the Southeast United States, which cash shortfall has been financed primarily by our vendors, resulting in a significant increase in accounts payable since the beginning of the year. Additionally, at December 31, 2009 we had $45.0 million in principal amount of secured debt that is scheduled to mature on December 15, 2010, and as of the date this report is filed with the SEC, we are in default under our $5.0 million short-term revolving credit agreement. Accordingly, our immediate focus is to improve our operating liquidity in the short-term by reducing accounts payable to historical levels, to pay off our $5.0 million short-term revolving credit facility or otherwise obtain our lender’s forbearance from accelerating the indebtedness and otherwise exercising its remedies thereunder, and to pay off the balance of our secured debt by its scheduled maturity date. We have explored and continue to explore a number of options to achieve both of these objectives, including selling assets, refinancing our debt, exchanging our equity for our debt, selling the company, merging with another company, or some combination of these options. We are also considering whether to pursue these and other potential transactions after filing for protection under the federal bankruptcy laws. Our long term strategy of increasing revenue, expanding production and achieving profitable operations can only be pursued after we successfully address our short-term objectives.
Corporate History
Our business activity prior to April 30, 2003 reflected only the start-up of National Coal Corporation, a Tennessee corporation, which consisted of the formation of the corporation and the acquisition of certain properties referred to as the New River Tract. Prior to April 30, 2003, National Coal Corp., a Florida corporation, formerly known as Southern Group International, Inc., was a “blank check” company, which is a company that had no specific business plan or purpose or had indicated that its business plan was to engage in a merger or acquisition with an unidentified company or companies. On April 30, 2003, National Coal Corporation consummated a reorganization in which all of the outstanding shares of National Coal Corporation, a privately-held Tennessee corporation, were exchanged for 8,549,975 shares of Southern Group International, Inc., which subsequently changed its name to National Coal Corp., a Florida corporation. National Coal Corporation was formed in January 2003, and from inception through June 30, 2003, National Coal Corporation was in the exploration stage with no operating revenue. We began mining in Tennessee in the third quarter of 2003 and were no longer in the exploration stage.
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In April 2004, we acquired from U.S. Coal, Inc., mining permits, the Turley, Tennessee rail loadout facility, the Smoky Junction, Tennessee preparation plant, and mining equipment for an aggregate purchase price of $4.2 million plus the assumption of certain liabilities.
In October 2004, we acquired from Robert Clear Coal Corporation certain mining assets including mining permits and mining equipment for an aggregate purchase price of $5.5 million plus the assumption of certain liabilities and the obligation to replace $3.9 million of the seller’s reclamation bonds.
We acquired Kentucky operations known as Straight Creek and Pine Mountain, from Appalachian Fuels, LLC in November 2004. The assets were acquired for $12.5 million plus the assumption of certain liabilities and the obligation to replace $6.5 million of the seller’s reclamation bonds and included mining permits, a preparation plant, a rail loadout facility and mining equipment. This acquisition included two mining areas in Kentucky, each geographically separated and having access to a preparation plant and loading facility. We subsequently sold the Pine Mountain real property and mineral leases for $2.0 million and sold an option to acquire the remaining Pine Mountain properties consisting of a preparation plant for $1.0 million. We did not operate any coal mines on the Pine Mountain tracts during the time we controlled the properties. We sold the Straight Creek operations on March 31, 2008 for $11.0 million in cash and the release of approximately $7.0 in restricted cash used for reclamation bonds, $3.6 million in reclamation liabilities and $2.6 million of equipment related debt.
We acquired the Baldwin preparation plant and rail loadout facility located in Devonia, Tennessee in 2005 from Lexington Coal in return for the assumption of certain reclamation liabilities and subsequently spent $7.0 million during 2006 to refurbish and modernize the facility. The Baldwin facilities became fully operational in the third quarter of 2008.
In February 2006, we purchased a 42-mile short line railroad for approximately $2.0 million from Norfork Southern Railroad which provides controlled access to our owned reserves on the New River tract to the Norfolk Southern main line rail facilities at Oneida, Tennessee. We spent an additional $0.5 million to refurbish the line and make it operational. We engaged a third party contractor to maintain and operate our short line railroad which became fully operational in the third quarter of 2008.
We acquired our Alabama operations on October 19, 2007 through the acquisition of 100% of the common stock of Mann Steel Products, Inc. (Mann Steel), and changed its name to National Coal of Alabama, Inc. We operated four mining areas in Alabama, defined by geographic location of mineral and surface leases. These properties were mined utilizing various surface mining methods that included the removal of surface overburden with earth moving equipment such as excavators, loaders and a dragline. The coal mined on these properties was transported to customers via truck, third party rail loadout or barge. In August 2009, National Coal of Alabama, Inc. defaulted on its senior secured notes resulting in the lender’s foreclosure on our subsidiary’s outstanding capital stock. As a result, National Coal of Alabama, Inc. is no longer a subsidiary, effective August 3, 2009. The results of operations for National Coal of Alabama, Inc. are included in discontinued operations in the accompanying financial statements.
In 2008 we acquired a 1,000 acre mineral and surface tract in eastern Tennessee that includes approximately 2.3 million tons of high quality coal. The purchase price was $7.0 million of which $2.0 million was paid in cash and $5.0 million in the issuance of 756,430 shares of our common stock. We also acquired a 524 acre mineral lease in eastern Tennessee that included approximately 1.4 million tons of recoverable high quality coal for $0.5 million.
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Mining Operations
As of December 31, 2009, we operate one surface mine and two underground mines in Tennessee. We also operated mines in Kentucky and Alabama until March 31, 2008 and August 3, 2009, respectively.
Tennessee Properties
We have two mining areas in Tennessee defined by their proximity to our preparation plant facilities and rail loading facilities:
Baldwin Facility. The Baldwin preparation plant and rail loading facilities reside on the Southern portion of the New River Tract, a 65,000 acre parcel of owned mineral rights in Scott, Anderson and Campbell counties. This facility was refurbished at a cost of $7.0 million during 2006 for the purpose of providing coal processing and railroad loading operations to support our underground and surface mining activities from the New River Tract. The Baldwin facilities include the 750 ton per hour preparation plant, rail loadout and the short line railroad.
Smoky Junction and Turley Facilities. The Smoky Junction preparation plant and the Turley rail loading facility reside on the northern portion of the New River Tract. In addition to mines in the northern portion of the New River Tract, controlled properties that utilize the Turley and Smoky Junction facilities include Ketchen and TVA leased properties. The Ketchen property consists of approximately 7,000 acres of leased surface mining reserves and the TVA property consists of approximately 4,400 acres of leased underground reserves. In addition, the two tracts totaling approximately 2,600 acres and 4.0 million tons of estimated coal reserves that we acquired in 2008 for $7.5 million are located in close proximity to the Smoky Junction preparation plant and the Turley rail loadout. The Smoky Junction preparation plant is a 250 ton per hour facility that allows us to process coal from various mining operations in this area of the New River Tract and from our leased TVA and Ketchen properties. The Turley loadout is a Norfork Southern rail siding that provides us the capability to load raw or processed coal from mines from the New River, TVA or Ketchen tracts.
Permitted Non-Operating Mines
Currently, we have three issued mining permits for new mines that are not yet operating and two issued permits for mines which were operating but have been idled. We have also applied for permits, or have permit applications in various stages of processing.
Former Kentucky Properties
We acquired our Kentucky operations on the Straight Creek and Pine Mountain tracts from Appalachian Fuels, LLC in November 2004. We had two mining areas in Kentucky, each geographically separated and each having access to a preparation plant and loading facility:
Straight Creek. During 2007 and 2008, all of our mining in Kentucky occurred on this tract of leased and owned mineral rights in Harlan, Bell and Leslie counties. All coal was processed at the Brittain preparation plant which had an estimated annual processing capacity of 1.8 million tons per year. All coal was loaded onto trains at the Viall rail loading facility which was located on the CSX railroad. We sold the Straight Creek operation on March 31, 2008 for $11.0 million in cash and the release of $3.6 million in reclamation liabilities and $2.6 million of equipment related debt.
Pine Mountain. On November 13, 2007, we received $2.0 million from the sale of real property and mineral leases at Pine Mountain, an idle mining complex and an additional $1.0 million from the sale to
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the same purchaser of an option entitling them to purchase for $10.00 our remaining properties which included the preparation plant. We did not mine the Pine Mountain tracts during the time that we controlled the property.
Former Alabama Properties
We acquired our Alabama operations on October 19, 2007 through the acquisition of 100% of the common stock of Mann Steel Products, Inc., and changed its name to National Coal of Alabama, Inc. We had four active mining areas in Alabama, defined by geographic location of mineral and surface leases. The mining properties were located in Marion, Winston, Walker, Fayette, and Tuscaloosa counties. All of the mining complexes had access to customers via truck, third party rail or barge loading facilities. The following is a description of Alabama properties that we owned until August 3, 2009.
L. Massey. The L. Massey surface mine produced 350,927 tons during 2008 and 46,055 tons during 2009. L. Massey utilized truck, shovel and dozer mining techniques. All coal was loaded onto trucks operated by independent contractors and transported directly to the customer, to third-party rail loadouts or to a barge loadout, which was operated by Powhatan Dock, LLC, a 49% owned investment of National Coal of Alabama, Inc.
Poplar Springs. The Poplar Springs facilities include two surface mines that produced 354,752 tons during 2008 and 119,144 tons during 2009. Poplar Springs utilized an excavator, bulldozers and wheel-loaders to extract coal until the dragline was moved to this mine in the third quarter of 2008. All coal was loaded onto trucks operated by independent contractors and transported directly to customers, to third-party rail loadouts or to the Powhatan barge loadout.
Crescent Valley. The Crescent Valley surface mine began production in July 2008 and produced 111,375 tons during 2008 and 85,232 tons during 2009. Crescent Valley utilized an excavator, bulldozers and wheel-loaders to extract coal. All coal was loaded onto trucks operated by independent contractors and transported directly to customers, to third-party rail loadouts or to the Powhatan barge loadout.
Davis Creek. The Davis Creek surface mine began production in September 2008 and produced 23,114 tons during 2008 and 22,557 during 2009. Davis Creek utilized an excavator, bulldozers and wheel-loaders to extract coal. All coal was loaded onto trucks operated by independent contractors and transported directly to customers, to third-party rail loadouts or to the Powhatan barge loadout.
Kansas. The Kansas surface mine began production in February 2009 and produced 119,120 tons during 2009. Kansas utilized an excavator, bulldozers and wheel-loaders to extract coal. All coal was loaded onto trucks operated by independent contractors and transported directly to customers, to third-party rail loadouts or to the Powhatan barge loadout.
Hickory Grove. The Hickory Grove surface mine produced 20,435 tons during 2008. Hickory Grove utilized an excavator, bulldozers and wheel-loaders to extract coal. All coal was loaded onto trucks operated by independent contractors and transported directly to customers, to third-party rail loadouts or to the Powhatan barge loadout. All planned mining activity was completed on the active permits and this mine was closed and reclaimed in February 2008.
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The following table provides permitted reserves by mine location as of December 31, 2009 and the associated production for the years ending December 31, 2009, 2008 and 2007 for both owned and sold properties.
| Mine Name |
Location | Mining Method |
Status | 2009 Production (000’s) |
2008 Production (000’s) |
2007 Production (000’s) |
Remaining Permitted Reserves (000’s) |
Year Opened or Acquired |
|||||||||
| Tennessee: |
|||||||||||||||||
| Mine #3 |
New River Tract | Surface | Inactive | 53 | 105 | 83 | — | 2006 | |||||||||
| Mine #3 HWM |
New River Tract | HWM | Inactive | 81 | 139 | 107 | — | 2006 | |||||||||
| Mine #5 |
New River Tract | UG | Active | 113 | — | — | 906 | 2008 | |||||||||
| Mine #7 |
Ketchen Lease | Surface | Active | 317 | 311 | 285 | 3,100 | 2004 | |||||||||
| Mine #11 |
TVA Lease | UG | Closed | 8 | 242 | 359 | 144 | 2004 | |||||||||
| Mine #14 |
TVA Lease | UG | Active | 205 | 76 | 4 | 674 | 2004 | |||||||||
| Mine #17 |
New River Tract | UG | Inactive | 21 | 37 | — | 5,728 | 2006 | |||||||||
| Total Tennessee Mines |
798 | 910 | 838 | 10,552 | |||||||||||||
| Kentucky (sold March 31, 2008): |
|||||||||||||||||
| Mine KY#1 |
Straight Creek | UG | Sold | — | 25 | 248 | — | 2004 | |||||||||
| Mine KY#2 |
Straight Creek | UG | Sold | — | — | — | — | 2005 | |||||||||
| Mine KY#3 |
Straight Creek | HWM | Sold | — | — | — | — | 2005 | |||||||||
| Mine KY#4 |
Straight Creek | Surface | Sold | — | — | — | — | 2005 | |||||||||
| Mine KY#6 |
Straight Creek | HWM | Sold | — | 24 | 6 | — | 2006 | |||||||||
| Mine KY#10 |
Straight Creek | HWM | Sold | — | 10 | 65 | — | 2007 | |||||||||
| Total Kentucky Mines |
— | 59 | 319 | — | |||||||||||||
| Alabama (sold August 3, 2009) |
|||||||||||||||||
| L Massey |
Marion Co. | Surface | Sold | 46 | 351 | 79 | — | 2004 | * | ||||||||
| Poplar Springs |
Winston Co. | Surface | Sold | 119 | 355 | 58 | — | 2005 | * | ||||||||
| Hickory Grove |
Winston Co. | Surface | Sold | — | 21 | 56 | — | 2006 | * | ||||||||
| Crescent Valley |
Walker Co. | Surface | Sold | 85 | 111 | — | — | 2008 | * | ||||||||
| Kansas |
Walker Co. | Surface | Sold | 119 | — | — | — | 2009 | * | ||||||||
| Davis Creek |
Tuscaloosa | Surface | Sold | 23 | 23 | — | — | 2008 | * | ||||||||
| Total Alabama Mines |
392 | 861 | 193 | — | |||||||||||||
| Total All Mines |
1,190 | 1,830 | 1,350 | 10,552 | |||||||||||||
UG – Underground Mine, HWM – Highwall Miner
| * | Date opened shown. Alabama mines were acquired October 19, 2007. Production for 2007 is for the period from October 20, 2007 to December 31, 2007. Production for 2009 is for the period from January 1, 2009 through August 3, 2009. |
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Transportation
Our Tennessee mining operations are within close proximity to our rail loadouts and major interstate highways, which give us flexibility for transporting our coal via truck or rail. In addition, our Turley rail loadout and our Baldwin preparation plant and loading facility are served by Norfork Southern. The Baldwin facility is served via a 42-mile short line railroad which we purchased in February 2006 from Norfolk Southern Railroad. We began operating our short line railroad utilizing an independent, experienced short line rail operator during the third quarter of 2008. The short line railroad connects our Baldwin facility to the Norfolk Southern main line in Oneida, Tennessee. The loaded trains are then transferred to the control of Norfolk Southern for delivery to our customers.
We utilize independent contractors to transport coal from the mine sites to preparation plants, loadout facilities, and certain customers.
Marketing and Sales
Our marketing and sales efforts are performed by employees, consultants and independent coal brokers. We focus primarily on increasing our customer base of electric utilities and industrial concerns in the Southeastern region of the United States.
During the year ended December 31, 2009, we sold 1.2 million tons of coal from our continuing operations at an average price of $73.35 per ton, resulting in approximately $85.6 million in coal sales. Georgia Power Company represented approximately 95% of our continuing operations’ coal revenues for the year ended December 31, 2009.
Since we commenced operations in July 2003, we have worked to develop a reputation for reliability, consistent quality and customer service. Our long term strategy is to continue to develop strong relationships with our existing and new customers and increase our sales efforts as market conditions allow in order to expand and diversify our customer base and secure favorable long-term contracts.
Customers
Most of our coal sales are derived from contracts of twelve months or longer and open purchase order arrangements with long standing customers. Some of our contracts contain price-reopeners and fuel surcharge provisions which allow adjustments to the price we receive for our coal when certain market conditions are met. We intend to expand the number of customers we serve as our coal production increases and enter into long term sales contracts when pricing is favorable. The following table summarizes, as of December 31, 2009, the tons of coal that we are committed to deliver during the calendar years 2010 through 2012 at prices determined under existing contracts and open purchase order arrangements:
| Calendar Year |
Tons | Dollar Value | Avg.$/Ton | |||||
| 2010 |
880,000 | $ | 70,069,750 | $ | 79.62 | |||
| 2011 |
825,000 | 62,721,000 | $ | 76.03 | ||||
| 2012 |
480,000 | 35,376,000 | $ | 73.70 | ||||
| Total |
2,185,000 | $ | 168,166,750 | $ | 76.96 | |||
Employees
At December 31, 2009, we had 273 full-time employees, of which 242 were engaged in direct mining or processing operations, 11 in mining supervision and 20 in executive management, accounting and general
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administration. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be favorable. We utilize the services of independent consultants as needed. The operating employees and supervisors are based in East Tennessee. The Chief Executive Officer, Chief Operating Officer and Chief Financial Officer are based in Knoxville, Tennessee.
Short Term Business Strategy
Our near term strategy is to strengthen our balance sheet and working capital position, to pay off our $5.0 million short-term revolving credit agreement or otherwise obtain our lender’s forbearance from accelerating the indebtedness and otherwise exercising its remedies as a result of our default thereunder, and to pay off our $42.0 million of senior secured notes by their scheduled maturity date in December 2010, all of which are necessary for us to execute our long term growth plan. We are exploring a number of opportunities to reduce our debt burden and inject additional working capital into the company. It is critical that we achieve these short term goals to continue as a going concern.
Long Term Business Strategy
Focus on safety and environmental stewardship. We are committed to establishing a reputation as the operator of the safest and most environmentally responsible mines in the country. Success at minimizing lost-time injuries will improve our cost structure, foster strong governmental and community relationships, and enhance our financial performance. We believe that environmental regulations will continue to become more restrictive, and that our commitment to environmental excellence will enhance our ability to comply with those regulations.
Increase production and develop reserves. We plan to expand coal production as market conditions allow. We hold permits allowing us to open three new mines and reopen two mines which have been idled on our properties. At December 31, 2009, we controlled an estimated 39.1 million recoverable tons of coal, and we believe that we have substantial unproven coal reserves which may be developed after additional exploration work is completed.
Improve production efficiencies. We plan to continue to improve our operating efficiencies through greater economies of scale and capital improvements. As we expand our production capabilities, we plan to leverage further our fixed cost infrastructure and reduce our per ton production costs. In order to achieve new efficiencies, we spent approximately $7.0 million in 2006 to modernize our Baldwin preparation plant and rail loadout facility. In February 2006, we purchased a forty-two mile railroad line that enables us to transport coal from the Baldwin facility to the Norfolk Southern mainline at Oneida, TN. The railroad began operating during the third quarter of 2008 and further reduces our internal transportation costs from this area.
Continue to develop strong customer relationships. Since we commenced operations in July 2003, we have worked to develop a reputation for reliability, consistent quality and customer service. We intend to continue to develop strong relationships with our existing customers and new customers in order to enhance our market position and secure favorable long-term contracts.
Continue to acquire contiguous reserves. Our mining properties in Tennessee are located in close proximity to one another and are well served by adjacent railroad and interstate highway access. We believe that opportunities may exist to acquire nearby reserves to further leverage our railroad access and preparation plant facilities. Furthermore, we believe that opportunities still exist to secure additional reserves in close proximity to our existing reserves.
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Competition
The coal industry is intensely competitive. We compete with numerous domestic coal producers and coal importers. We also compete with producers of other fuels used in electricity generation, including nuclear, and natural gas. In addition to competition from other fuels, major determinants of the price for which our coal can be sold include coal quality, the marginal cost of producing coal in other regions of the country, and transportation costs.
Coal Mining
Coal mining operations can be divided into surface and underground mining methods. The most appropriate mining method is determined by coal seam characteristics including geology, location, and recoverable reserve base. Drill-hole data is used initially to define the size, depth and quality of the coal reserve area before committing to a specific extraction method. For underground mining there are two primary methods: room and pillar, and longwall; for surface mining there are three primary methods: truck-and-shovel mining, dragline mining, and highwall mining - the newest technique.
Surface mining. This method is used to extract coal deposits found closer to the surface and involves the removal of earth and rock covering the coal with various earth moving equipment. Typically, coal mining operations will begin at the part of the coal seam that is closest to the surface and most economical to mine. As the seam is mined, it typically becomes more difficult and expensive to mine because the seam may become thinner or protrude more deeply into the earth, requiring removal of more material over the seam, known as “overburden.” As the amount of overburden increases, the cost to mine coal also increases. Many seams of coal in Central Appalachia are between one to ten feet thick and may be located hundreds of feet below the surface.
Surface mining uses draglines, large power shovels, or front-end loaders (“loaders”) to remove the earth or overburden that covers the coal. The overburden is moved to a previously mined area, either by the dragline or by large off-road trucks, to facilitate the reclamation process. The coal is then loaded into trucks for transport to a preparation plant, rail loadout facility, or customers. Productivity depends on size of equipment, geological composition, and the ratio of overburden to coal.
Highwall mining. Highwall mining is a mining method in which a continuous mining machine is driven by remote control into the coal seam exposed by previous surface mining operations, which created a vertical wall on the face of the exposed topography. A continuous haulage system then carries the coal from the coal face to the surface for stockpiling and transport. This process forms a series of parallel, unsupported cuts along the highwall. The remaining coal pillars between adjacent entries must support the overburden structure.
Underground mining. Those seams that are too deep to surface mine may be economically mined with specialized equipment matched to the thickness of the coal seam. Underground mining methods consist of “room and pillar” and “longwall mining.” Room and pillar mining typically requires using a continuous miner to cut a system of entries into the coal, leaving pillars to support the strata above the coal. Shuttle cars then transport the coal from the digging face to a conveyor belt for transport to the surface. This method is often used to mine thin coal seams, and where geological conditions are not amenable to longwall mining. Coal recovery is typically 50% or less. All of our underground mining operations utilize room and pillar with continuous mining methods.
We operate our surface mine utilizing truck-and-shovel extraction and both underground mines utilizing room and pillar mining.
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Coal Characteristics
Heat value. The heat value of coal is commonly measured in Btu per pound of coal. Coal found in the Eastern and mid-Western regions of the United States, including Central and Southern Appalachia, tends to have a heat content ranging from 10,000 to 15,000 Btu per pound. The effect of moisture in coal, as sold, is included in references to Btu per pound of coal, unless otherwise indicated.
Sulfur content. Sulfur content can vary from seam to seam and sometimes within each seam. Coal combustion produces sulfur dioxide, the amount of which varies depending on the chemical composition and the concentration of sulfur in the coal. Low sulfur coal has a variety of definitions, and in using this term, we refer to coal with sulfur content of 1.5% or less by weight. Compliance coal refers to coal, which, when consumed in the production of energy, produces less than 1.2 pounds of sulfur dioxide per million Btu. The strict emissions standards of the Clean Air Act have increased demand for lower sulfur coals. We expect continued high demand for lower sulfur coals as electric generators meet the current Phase II requirements of the Clean Air Act (1.2 pounds or less of sulfur dioxide per million Btu). It is possible that no coal will be considered compliance coal if emissions standards are restricted to such a level that emissions control technology must always be used regardless of the coal’s sulfur content.
Other. Ash is the inorganic residue remaining after the combustion of coal. As with sulfur content, ash content varies from seam to seam. Ash content is an important characteristic of coal for electric generating plants as it affects combustion performance and utilities must handle and dispose of ash following combustion.
Moisture content of coal varies by the type of coal, the region where it is mined and the location of coal within a seam. In general, high moisture content decreases the heat value and increases the weight of the coal, thereby making it more expensive to transport with less combustion efficiency. Moisture content in coal, as sold, can range from approximately 5% to 30% of the coal’s weight. Generally, the moisture content of coal from Central Appalachia ranges from 5% to 9%.
The other major market for coal is the steel industry. The type of coal used in steel making is referred to as metallurgical coal and is distinguished by special quality characteristics that include high carbon content, low expansion pressure and various other chemical attributes. Metallurgical coal is also high in heat content (as measured in Btu), and therefore is desirable to utilities as fuel for electricity generation. Consequently, metallurgical coal producers have the ongoing opportunity to select the market that provides maximum revenue. The price offered by steel makers for the metallurgical quality attributes is typically higher than the price offered by utility coal buyers that value only the heat content.
Once raw coal is mined, it is often crushed, sized and washed in preparation plants where product consistency and heat content are improved. This process involves crushing the coal to the required size, removing impurities and, where necessary, blending it with other coal to match customer specifications.
When some types of coal are super-heated in the absence of oxygen, they form a hard, dry, caking form of coal called “coke.” Steel production uses coke as a fuel and reducing agent to smelt iron ore in a blast furnace. Most of the coking coal comes from coal found in Northern and Central Appalachia.
Coal Prices
Coal prices vary dramatically by region and are determined by a number of factors. The two principal components of the delivered price of coal are the price of coal at the mine - which is influenced by mine operating costs and coal quality, and the cost of transporting coal from the mine to the point of use. Electric utilities purchase coal on the basis of its total delivered cost per million Btu. The higher the Btu of the coal, the fewer tons the utility needs to buy to meet its requirements.
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Price at the mine. The price of coal at the mine is influenced by its cost of production; geological characteristics such as seam thickness, overburden ratios and depth of underground reserves and prices received for similar quality coal sold by our competitors. Eastern United States coal is more expensive to mine than Western coal because of thinner coal seams and thicker overburden. Underground mining, prevalent in the Eastern United States, has higher costs than surface mining because it requires more people, greater development costs, and higher costs to remove impurities.
In addition to direct mining costs, the price of coal at the mine is also a function of quality characteristics such as heat value, sulfur, ash and moisture content. Metallurgical coal has higher carbon and lower ash content and is usually priced higher than steam coal produced in the same regions. Higher prices are paid for metallurgical coals with low volatility characteristics. Very few coal seams possess these unique metallurgical coal qualities.
Transportation costs. Coal used for domestic consumption is generally sold freight on board, or FOB, at the mine and shipped by railroad, truck, or barge. The buyer normally bears the cost of transportation from the loadout to its final destination. Export coal, however, is usually sold at the loading port, and coal producers are responsible for arranging and paying for shipment to the export coal-loading facility. The buyer does not acquire ownership of the coal or pay for it until it is loaded onto the ship.
Most electric utilities arrange long-term shipping contracts with rail, truck, or barge companies to assure stable delivered costs. Transportation can be a large component of a buyer’s cost, especially if long distances are involved such as from the Western areas of the US to the Southeast. Although the buyer pays the freight, transportation costs are still important to coal mining companies because buyers typically make their purchase decisions based on the delivered cost per Btu, and transportation costs may add to or detract from a specific mine’s price position. According to the National Mining Association, railroads account for nearly two-thirds of total coal shipments in the United States. Trucks and overland conveyors haul coal over shorter distances, while lake carriers and ocean vessels move coal mainly to export markets. Some domestic coal is shipped over the Great Lakes. Most coal mines are served by a single rail company, but much of the Powder River Basin is served by two competing rail carriers. Coal mines in Central and Southern Appalachia generally are served by either the Norfolk Southern or the CSX rail lines.
Regulatory Matters
Federal, state and local authorities regulate the United States coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, the reclamation and restoration of mining properties, the discharge of materials into the environment, surface subsidence from underground mining, and the effects of mining on groundwater quality and availability. The Mine Safety and Health Administration, or MSHA, is the U.S. Department of Labor agency responsible for the health and safety of miners. The Office of Surface Mining, or OSM, is the Department of the Interior agency which governs the issuance of permits and is responsible for overseeing the reclamation, restoration and other environmental processes for the coal mining industry.
Our primary customer is in the electric power generation industry and is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for our coal. The possibility exists that new legislation or regulations may be adopted which would have a significant impact on our operations or our customers’ ability to use coal and may require our customers to change their operations significantly or incur substantial costs.
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The industry is also affected by significant legislation mandating certain benefits for current and retired coal miners. Numerous federal, state and local governmental permits and approvals are required for mining operations. We believe that we have obtained all permits currently required to conduct our present mining operations and are in compliance with all MSHA and OSM regulations pursuant to our operations. We may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that a proposed development for, or production of, coal may have on the environment. These requirements could prove costly and time-consuming, and could delay commencing or continuing development or impact producing operations. Future legislation and administrative regulations may emphasize the protection of the environment and, as a consequence, our activities may be more closely regulated. Such legislation and regulations, as well as future interpretations and more rigorous enforcement of existing laws, may require substantial increases in equipment and operating costs and delays, interruptions or a termination of operations, the extent of which cannot be predicted.
There is currently a bill that has been introduced in the Tennessee Legislature that could have an adverse effect on our ability to mine coal profitably in Tennessee. The bill prohibits the commissioner from issuing or renewing a water quality permit for surface coal mining operations to alter or disturb any ridge line above two thousand (2,000) feet elevation above sea level. A number of our seams of coal in the state of Tennessee are above two thousand (2,000) feet in elevation. Accordingly, if the bill were to pass the Legislature, our ability to economically recover coal from those seams may be negatively impacted.
We endeavor to conduct our mining operations in compliance with all applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements, violations during mining operations occur from time to time. The majority of any such violations result from natural causes, such as heavy rainfall, diverse temperature conditions, or unknown geological conditions that cause physical changes to the land surface or water levels resulting in excess sedimentation in streams or landslides. None of the violations to date or the monetary penalties assessed upon us have been material.
Mine Safety and Health
Stringent health and safety standards have been in effect since Congress enacted the Coal Mine Health and Safety Act of 1969. The Federal Mine Safety and Health Act of 1977 significantly expanded the enforcement of safety and health standards and imposed safety and health standards on all aspects of mining operations.
Most states, including the state in which we operate, have programs for mine safety and health regulation and enforcement. Collectively, federal and state safety and health regulation in the coal mining industry is perhaps the most comprehensive and pervasive system for protection of employee health and safety affecting any segment of United States industry. While regulation has a significant effect on our operating costs, our regional competitors are subject to the same degree of regulation.
Environmental Laws
We are subject to various federal and state environmental laws. Some of these laws, discussed below, place many requirements on our coal mining operations. Federal and state regulations require regular monitoring of our mines and other facilities to ensure compliance.
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Surface Mining Control and Reclamation Act
The Surface Mining Control and Reclamation Act of 1977 (“SMCRA”), which is administered by OSM, establishes mining, environmental protection and reclamation standards for all aspects of surface mining as well as many aspects of underground mining. Mine operators must obtain SMCRA permits and permit renewals for mining operations from the OSM. Where state regulatory agencies have adopted federal mining programs under the act as in Kentucky, the state becomes the regulatory authority.
SMCRA permit provisions include requirements for coal prospecting; mine plan development; topsoil removal, storage and replacement; selective handling of overburden materials; mine pit backfilling and grading; protection of the hydrologic balance; subsidence control for underground mines; surface drainage control; mine drainage and mine discharge control and treatment; and re-vegetation.
Before a SMCRA permit is issued, a mine operator must submit a bond or otherwise secure the performance of reclamation obligations. The Abandoned Mine Land Fund, which is part of SMCRA, requires a fee on all coal produced. The proceeds are used to reclaim mine lands closed prior to 1977 and to pay health care benefit costs of orphan beneficiaries of the Combined Fund. The fee, which partially expired on September 30, 2004, is $0.35 per ton on surface-mined coal and $0.15 per ton on deep-mined coal. As of October 1, 2007, the fee dropped to $0.315 per ton on surface-mined coal and $0.135 per ton on underground-mined coal. Since September 30, 2004, a fee is assessed each year to cover the expected health care benefit costs of the orphan beneficiaries.
SMCRA stipulates compliance with many other major environmental programs. These programs include the Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act (“RCRA”), Comprehensive Environmental Response, Compensation, and Liability Acts (“CERCLA”) superfund and employee right-to-know provisions. In addition to OSM, other Federal and State regulatory agencies are involved in monitoring or permitting specific aspects of mining operations. The United States Environmental Protection Agency (“EPA”) is the lead agency for States or Tribes with no authorized programs under the Clean Water Act, RCRA and CERCLA. The United States Army Corps of Engineers (“COE”) regulates activities affecting navigable waters and the United States Bureau of Alcohol, Tobacco and Firearms (“ATF”) regulates the use of explosives in blasting.
We do not believe there are any substantial matters that pose a risk to maintaining our existing mining permits or hinder our ability to acquire future mining permits. It is our policy to comply with all requirements of the Surface Mining Control and Reclamation Act and the state laws and regulations governing mine reclamation.
Clean Air Act
The coal industry has witnessed a shift in demand to low sulfur coal production driven by regulatory restrictions on sulfur dioxide emissions from coal-fired power plants. The Clean Air Act, the Clean Air Act Amendments and the corresponding state laws that regulate the emissions of materials into the air, affect coal mining operations both directly and indirectly. Direct impacts on coal mining and processing operations may occur through Clean Air Act permitting requirements and/or emission control requirements relating to particulate matter, such as fugitive dust, including future regulation of fine particulate matter measuring ten micrometers in diameter or smaller. The Clean Air Act indirectly affects coal mining operations by extensively regulating the air emissions of sulfur dioxide, nitrogen oxides, mercury and other compounds emitted by coal-fueled electricity generating plants.
For example, in 1995, Phase I of the Clean Air Act Acid Rain program required high sulfur coal plants to reduce their emissions of sulfur dioxide to 2.5 pounds or less per million Btu, and in 2000, Phase II of the Clean Air Act tightened these sulfur dioxide restrictions further to 1.2 pounds of sulfur dioxide per million Btu. Currently, electric power generators operating coal-fired plants can comply with these requirements by:
| • | burning compliance coal, either exclusively or mixed with higher sulfur coal; |
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| • | installing pollution control devices such as scrubbers, which reduce the sulfur emissions from burning coal; |
| • | reducing electricity generating levels; or |
| • | purchasing or trading emission credits to allow them to comply with the sulfur dioxide emission compliance requirements. |
However, as new and proposed laws and regulations, including the Clean Air Interstate Rule and the Clean Air Mercury Rule, require further reductions in emissions, coal-fired utilities may need to install additional pollution control equipment, such as wet scrubbers, to comply. Installation of such additional pollution control equipment could potentially result in a decrease in the demand for low sulfur coal (because sulfur would be removed by the new equipment), potentially driving down prices for low sulfur coal.
Clean Water Act
The Clean Water Act of 1972 affects coal mining operations by establishing water quality standards and regulating alteration of surface water bodies. Much of the responsibility for standard setting, monitoring, and enforcement is delegated to state agencies, with federal oversight. There are three major aspects in the standard-setting process. First, the states establish use designations for all surface water bodies. Second, scientifically-based water quality criteria (numeric or narrative) are established to be protective of the designated uses. These criteria include total maximum daily load (“TMDL”) discharge standards which are monitored and enforced through the National Pollution Discharge Elimination System (“NPDES”). Water discharges from each mine operation are regulated within the NPDES process. The third component is the anti-degradation standard, which establishes characteristics of “high quality streams”, and prohibits their degradation. Standards for discharging water from mine sites to high quality streams are very stringent. Upgrading stream designations to “high quality” in the areas in which coal mine operations are located can potentially result in increased water treatment costs that can increase both permitting costs and coal production costs.
Resource Conservation and Recovery Act
The Resource Conservation and Recovery Act, which was enacted in 1976, affects coal mining operations by establishing requirements for the treatment, storage and disposal of hazardous waste. Coal mine waste, such as overburden and coal cleaning waste, are exempted from hazardous waste management.
Subtitle C of RCRA exempted fossil fuel combustion wastes from hazardous waste regulation until the EPA completed a report to Congress and made a determination on whether the wastes should be regulated as hazardous. In a 1993 regulatory determination, the EPA addressed some high-volume, low- toxicity coal combustion wastes generated at electric utility and independent power producing facilities.
In May 2000, the EPA concluded that coal combustion wastes do not warrant regulation as hazardous under RCRA. The EPA is retaining the hazardous waste exemption for these wastes. However, the EPA has determined that national non-hazardous waste regulations under RCRA Subtitle D are needed for coal combustion wastes disposed in surface impoundments and landfills and used as mine-fill. The agency also concluded beneficial uses of these wastes, other than for mine filling, pose no significant risk and no additional national regulations are needed. As long as this exemption remains in effect, it is not anticipated that regulation of coal combustion waste will have any material effect on the amount of coal used by electricity generators.
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Federal and State Superfund Statutes
Superfund and similar state laws affect coal mining and hard rock operations by creating a liability for investigation and remediation in response to releases of hazardous substances into the environment and for damages to natural resources. Under Superfund, joint and several liabilities may be imposed on waste generators, site owners or operators and others regardless of fault.
Global Climate Change
The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Climate Change, which is intended to limit emissions of greenhouse gases such as carbon dioxide. In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emission targets for developed nations, which became binding on all countries that had ratified the Kyoto Protocol in February 2005, as a result of Russia’s ratification in November 2004. Although the specific emission targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. Although the United States did not ratify the emission targets and no comprehensive regulations focusing on greenhouse gas emissions are in place, these restrictions, whether through ratification of the emission targets or other efforts to stabilize or reduce greenhouse gas emissions, could adversely affect the price and demand for coal. According to the Energy Information Administration’s Emissions of Greenhouse Gases in the United States during 2004, coal accounted for 34% of the total. Efforts to control greenhouse gas emissions could result in reduced use of coal if electricity generators switch to lower carbon sources of fuel.
Regulation of greenhouse gases in the United States may happen as a result of the recent change in administration at the Federal level. Much discussion has taken place, along with proposed legislative initiatives, at both the State and Federal levels that would regulate greenhouse emissions. Any significant change in regulation may require additional controls on coal-fueled power plants and industrial boilers which could lead to switching to lower carbon fuels. Ultimately, such regulations could lead to a reduction in demand for coal.
In July 2008, the EPA published an Advanced Notice of Proposal Rulemaking (“ANPR”) seeking comments and discussions of the complex issues associated with the possible regulation of greenhouse gases under the Clean Air Act. The deadline for comments on the ANPR was November 28, 2009. The EPA sought comments and discussion on (i) advantages and disadvantages of regulating greenhouse gases under one provision of the Clean Air Act; (ii) how a decision to regulate greenhouse gases under one provision of the Clean Air Act would lead to regulation under other provisions; (iii) issues relevant to legislation to regulate greenhouse gases and the potential overlap of the Clean Air Act and such future legislation; and (iv) scientific information relevant to, and the issues raised by, an analysis as to whether greenhouse gas emissions from automobiles may reasonably be anticipated to endanger public health or welfare. In December 2009, the EPA made a determination that greenhouse gases cause or contribute to air pollution and may reasonably be anticipated to endanger public health or welfare, which findings are prerequisites to the EPA regulating greenhouse gases under the Clean Air Act.
Apart from governmental regulation, on February 4, 2008, three large investment banks announced that they had adopted climate change guidelines for lenders. These guidelines require the evaluation of carbon risks in the financing of utility power plants which may make it more difficult for utilities to obtain financing for coal fired plants. If comprehensive laws focusing on greenhouse gas emission reductions were to be enacted by the United States or individual states where we sell coal, it may adversely affect the use of and demand for fossil fuels, particularly coal, which would have a material adverse effect on our results of operations, cash flows and financial condition.
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Permitting
Mining companies must obtain numerous permits from both Federal and State regulatory agencies that impose strict environmental and safety regulations and oversight on their operations. These provisions include requirements for coal prospecting, mine plan development, topsoil removal, storage and replacement, selective handling of overburden materials, mine pit backfilling and grading, protection of the hydrologic balance, subsidence control for underground mines, surface drainage control, mine drainage and mine discharge control and treatment, and revegetation.
We must obtain permits from applicable state regulatory authorities before we begin to mine reserves. The mining permit application process is initiated by collecting baseline data to adequately characterize the pre-mine environmental condition of the permit area. This work includes surveys of cultural resources, soils, vegetation, wildlife, assessment of surface and ground water hydrology, climatology and wetlands. In conducting this work, we collect geologic data to define and model the soil and rock structures and coal that will be mined. We develop mine and reclamation plans by utilizing this geologic data and incorporating elements of the environmental data. The mine and reclamation plans incorporate the provisions of SMCRA, state programs and the complementary environmental programs that impact coal mining. Also included in the permit application are documents defining ownership and agreements pertaining to coal, minerals, oil and gas, water rights, rights of way, and surface land along with documents required of the Office of Surface Mining’s Applicant Violator System.
Once a permit application is prepared and submitted to the regulatory agency, it goes through a completeness review, technical review and public notice and comment period prior to approval. SMCRA mine permits can take over a year to prepare, depending on the size and complexity of the mine, and often take six months to three years for approval. Regulatory authorities have considerable discretion in the timing of permit issuance and the public has the right to comment on and otherwise engage in the permitting process, including through intervention in the courts.
We do not believe there are any substantial matters that pose a risk to maintaining our existing mining permits or hinder our ability to acquire future mining other than possible legislative matters that may be enacted by various state and federal agencies. It is our policy to ensure that our operations are in full compliance with the requirements of the SMCRA and state laws and regulations governing mine reclamation
Glossary of Terms
Ash. The impurities consisting of iron, alumina and other incombustible matter contained in coal. Since ash increases the weight of coal, it adds to the cost of handling and can affect the burning characteristics of coal.
British Thermal Unit or “Btu.” A measure of the thermal energy required to raise the temperature of one pound of pure liquid water one degree Fahrenheit at the temperature at which water has its greatest density (39 degrees Fahrenheit).
Coal Seam. Coal deposits occur in layers. Each layer is called a “seam.”
Compliance Coal. Coal having a sulfur dioxide content of 1.2 pounds or less per million Btu when consumed in the production of energy, as required by Phase II of the Clean Air Act.
Continuous Mining. A form of underground, room-and-pillar mining that uses a continuous mining machine to cut coal from the seam and load it onto conveyors or into shuttle cars which transport it to the surface for processing.
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Fossil Fuel. Fuel such as coal, petroleum or natural gas formed from the fossil remains of organic material.
Overburden. The layers of earth and rock covering a coal seam. In surface mining operations, overburden is removed prior to coal extraction.
Reclamation. A process of restoring land and the environment to an approved state following mining activities. The process commonly includes “re-contouring” or reshaping the land to its approximate original appearance, restoring topsoil and planting native grass and ground covers. Reclamation operations are usually underway before the mining of a particular site is completed. Reclamation is closely regulated by both state and federal law.
Reserves. That part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination.
Room-and-Pillar Mining. The most common method of underground mining in which the mine roof is supported mainly by coal pillars left at regular intervals. Rooms are created where the coal was mined; pillars are areas of coal left between the rooms to support overlying strata and surface structures.
Scrubber (flue gas desulfurization unit). Any of several forms of chemical/physical devices which operate to neutralize sulfur compounds formed during coal combustion. These devices combine the sulfur in gaseous emissions with other chemicals to form inert compounds, such as gypsum, that must then be removed for disposal. Although effective in substantially reducing sulfur from combustion gases, scrubbers require about 6% to 7% of a power plant’s electrical output and thousands of gallons of water to operate.
Steam Coal. Coal used by power plants and industrial steam boilers to produce electricity or process steam. It generally is lower in Btu heat content and higher in volatile matter than metallurgical coal.
Sub-Bituminous Coal. A dull, black coal that ranks between lignite and bituminous coal. Its moisture content is between 20% and 30% by weight, and its heat content ranges from 7,800 to 9,500 Btu per pound of coal.
Sulfur. One of the elements present in varying quantities in coal that contributes to environmental degradation when coal is burned. Sulfur dioxide is produced as a gaseous by-product of coal combustion. Coal is commonly classified by its sulfur content due to the importance of sulfur in environmental regulations. “Low sulfur” coal has a variety of definitions but typically is used as a classification for coal containing 1.5% or less sulfur.
Ton. A “short” or net ton is equal to 2,000 pounds. A “long” or British ton is 2,240 pounds; a “metric” ton is approximately 2,205 pounds. The short ton is the unit of measure referred to in this document.
Available Information
We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, along with any related amendments and supplements on our website as soon as reasonable practicable after we electronically file or furnish such materials with or to the Securities and Exchange Commission, or the SEC. These reports are available, free of charge, at www.nationalcoal.com. Our website and the information contained in it do not constitute part of this annual report or any other report we file with, or furnish, to the SEC.
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| Item 1A. | Risk Factors. |
Several of the matters discussed in this document contain forward-looking statements that involve risks and uncertainties. Factors associated with the forward-looking statements that could cause actual results to differ materially from those projected or forecast are included in the statements below. In addition to other information contained in this report, readers should carefully consider the following cautionary statements.
Risks Related To Our Business
We are in default under our $5.0 million short-term revolving credit facility, entitling the lender to accelerate repayment of the indebtedness prior to its scheduled maturity and to otherwise exercise its remedies.
The Report of Independent Registered Public Accounting Firm issued by our auditors relating to our financial statements for the period ended December 31, 2009 contains an explanatory paragraph regarding uncertainty in our ability to continue as a going concern. Under the terms of our $5.0 million short-term revolving credit facility, any audit report containing such a “going concern” qualification constitutes a default; accordingly, we are in default as of the date this report is filed with the SEC. When a default occurs, no further borrowings can be made under our $5.0 million short-term revolving credit facility until the default is remedied. We have not yet obtained any forbearance agreement that would limit our lender’s rights and/or remedies with respect to our default. Accordingly, our lender will impose a default rate of interest and can at any time accelerate repayment of the indebtedness prior to its scheduled maturity and otherwise exercise its rights and remedies under the terms of our $5.0 million short-term revolving credit facility including, without limitation, the right to foreclose on the collateral securing our indebtedness. Our indebtedness under this facility is secured by a lien on substantially all of our assets and of our subsidiaries and by a pledge of our subsidiaries’ stock, and is further supported by guarantees from our subsidiaries.
We have $42.0 million of senior secured debt that matures on December 15, 2010 and we are in default under our $5.0 million short-term revolving credit facility, and we have a working capital deficiency, a stockholders’ deficit, and a history of significant operating losses, including a significant net operating loss for 2009. We expect that our operating losses will continue. Consequently, we cannot assure you that we will continue as a going concern or operate profitably in the future.
At December 31, 2009, we had cash and cash equivalents of approximately $1.2 million and negative working capital of approximately $54.8 million and a stockholders’ deficit of $12.3 million. We have a history of substantial net losses. In 2009 and 2008, we generated losses from continuing operations of $17.7 million and $25.5 million, respectively. We are in default under our $5 million short-term revolving credit facility.
These factors are continuing to affect our operations and we cannot assure you that we will be able to operate profitably in the future. As of December 31, 2009, we have limited financial resources with which to achieve our objectives and obtain profitability and positive cash flows. Achievement of both our short-term and long-term objectives will depend on our ability to obtain additional financing, to generate revenue from our current and planned business operations, and control costs. However, there is no assurance that we will be able to achieve these objectives.
Our auditors have included a going concern explanatory paragraph in their report on our financial statements. As a result, our financial statements do not reflect any adjustment which would result from our failure to continue to operate as a going concern. Any such adjustment, if necessary, would materially affect the value of our assets.
We need to raise additional equity or refinance our $42.0 million of senior secured debt and our $5.0 million short-term revolving credit facility. We may also need to seek additional short-term bridge financing.
Because we have had a history of operating losses, expect to have a net loss for 2010 and National Coal of Alabama, Inc. defaulted on its 12% Notes due 2012 in 2009, it may be difficult for us to refinance our existing credit facilities or raise additional equity at terms acceptable to us, or if at all. Additionally, we were notified on January 5, 2010 by The Nasdaq Stock Market that we were not in compliance with the Nasdaq Marketplace Rule 5450(a)(1) because shares of our common stock had closed at a per share bid price of less than $1.00 for 30 consecutive days, further complicating our ability to raise equity financing.
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Despite existing debt levels, we may still be able to incur substantially more debt, which would increase the risks associated with our leverage.
We may be able to incur substantial amounts of additional debt in the future. Although the terms of our existing credit facilities may limit our ability to incur additional debt, such terms do not and will not prohibit us from incurring substantial amounts of additional debt for specific purposes or under certain circumstances. The incurrence of additional debt could adversely impact our ability to service payments on senior debt.
We may not be able to generate the amount of cash needed to pay interest and principal amounts on our debt.
We rely primarily on our ability to generate cash flows from operations to service our debt. If we do not generate sufficient cash flows to meet our debt service and working capital requirements, we may need to seek additional financing. If we are unable to obtain financing, we could be forced to sell our assets or those of our subsidiaries under unfavorable circumstances to make up for any shortfall in our payment obligations. Our existing credit facilities limit our ability to sell assets and also restrict the use of the proceeds from any such sale. Therefore, even if forced to do so, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our debt obligations.
We may be unable to comply with restrictions imposed by our credit facilities and other financing arrangements.
The agreements governing our outstanding senior debt impose a number of restrictions on us. For example, the terms of our credit facilities contain financial and other covenants that create limitations on our ability to effect acquisitions or dispositions, incur additional debt and may require us to maintain various financial ratios and comply with various other financial covenants. Our ability to comply with these restrictions may be affected by events beyond our control and, as a result, we may be unable to comply with these restrictions. A failure to comply with these restrictions could adversely affect our ability to borrow under our credit facilities or result in an event of default under these agreements. In the event of a default, our lenders could terminate their commitments to us and declare all amounts borrowed, together with accrued interest and fees, immediately due and payable. If this were to occur, we might not be able to pay these amounts, or we might be forced to seek an amendment to our financing arrangements which could make the terms of these arrangements more onerous for us.
In the second, third and fourth quarters of 2008, National Coal of Alabama, Inc failed to meet certain financial covenants required under its 12% Notes due 2012. In each instance, waivers of covenant failures and modifications of future financial covenants were obtained. With respect to the second and fourth quarter waivers only, we were charged penalties of $300,000 each quarter for covenant waiver and modification.
During the second quarter of 2009, National Coal of Alabama, Inc. was obligated to pay to its debt holders approximately $1.9 million of accrued interest on its 12% Notes due 2012. The date for making the interest payment was extended by the holders of the 12% Notes due 2012 to July 17, 2009, and on July 21, 2009, National Coal of Alabama, Inc. defaulted on its 12% Notes due 2012 as the interest payment had not been made. As a result, on August 3, 2009, the debt holders foreclosed on the capital stock of Nation Coal of Alabama, Inc. which it held as collateral.
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Continuing unfavorable economic conditions could have a material adverse effect on our results of operations
Economic conditions in the United States and throughout much of the world continue to remain depressed. The continued distress in the financial market has resulted in extreme volatility and declines in security prices and diminished liquidity and credit availability. There can be no assurance that our liquidity and our ability to access the credit or capital markets will not continue to be affected by changes in the financial markets and the global economy. Continuing turmoil in the financial markets could make it more difficult for us to access capital, sell assets, refinance our existing indebtedness, attain waivers for covenant violations from our lenders if necessary, attain future bonding capacity required to expand our operations, enter into agreements for new indebtedness, or obtain funding through the issuance of our securities.
We face numerous uncertainties in estimating our economically recoverable coal reserves, and inaccuracies in our estimates could result in lower than expected revenues, higher than expected costs or decreased profitability.
We estimate that as of December 31, 2009, we control approximately 39.1 million tons of proven and probable reserves that are recoverable at this time. We base our reserve estimates on engineering, economic and geological data assembled and analyzed by our staff and independent mining engineering firm. Our estimates of our proven and probable reserves and our recoverable reserves, as well as the Btu or sulfur content of our reserves are revised and updated periodically to reflect the resolution of uncertainties and assumptions, the production of coal from the reserves and new drilling or other data received.
There are numerous uncertainties inherent in estimating quantities and qualities of and costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable coal reserves and net cash flows necessarily depend upon a number of variable factors and assumptions, all of which may vary considerably from actual results such as:
| • | geological and mining conditions which may not be fully identified by available exploration data or which may differ from experience in current operations; |
| • | historical production from the area compared with production from other similar producing areas; |
| • | the assumed effects of regulation and taxes by governmental agencies; and |
| • | assumptions concerning coal prices, operating costs, mining technology improvements, severance and excise tax, development costs and reclamation costs. |
For these reasons, estimates of the economically recoverable quantities and qualities attributable to any particular group of properties, classifications of reserves based on risk of recovery and estimates of net cash flows expected from particular reserves prepared by different engineers or by the same engineers at different times may vary substantially. Actual coal tonnage recovered from identified reserve areas or properties and revenues and expenditures with respect to our reserves may vary materially from estimates. As a result, the reserve estimates set forth in this report may differ materially from our actual reserves. Inaccuracies in our estimates related to our reserves could result in lower than expected revenues, higher than expected costs, or decreased profitability.
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Our future success depends upon our ability to continue acquiring and developing coal reserves that are economically recoverable and to raise the capital necessary to fund our expansion.
Our recoverable reserves will decline as we produce coal. We have not yet applied for the permits required or developed the mines necessary to use all of the coal deposits under our mineral rights. Furthermore, we may not be able to mine all of our coal deposits as efficiently as we do at our current operations. Our future success depends upon our conducting successful exploration and development activities and acquiring properties containing economically recoverable coal deposits. In addition, we must also generate enough capital, either through our operations or through outside financing, to mine these additional reserves. Our long-term strategy includes increasing our coal reserves through acquisitions of other mineral rights, leases, or producing properties and continuing to use our existing properties. Our ability to further expand our operations may be dependent on our ability to obtain sufficient working capital, either through cash flows generated from operations, or financing activities, or both. Mining coal in Central and Southern Appalachia can present special difficulties. Characteristics of the land and the permitting process may adversely affect our mining operations, our costs and the ability of our customers to use the coal that we mine. The geological characteristics of our coal reserves, such as depth of overburden and coal seam thickness, make them complex and costly to mine. As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines. These factors could have a material adverse effect on our mining operations and costs, and our customers’ ability to use the coal we mine.
Our ability to implement our planned development and exploration projects is dependent on many factors, including the ability to receive various government permits.
Our planned development and exploration projects and acquisition activities may not result in the acquisition of significant additional coal deposits and we may not have continuing success developing additional mines. For example, we may not be successful in acquiring contiguous properties that will leverage our existing facilities. In addition, in order to develop our coal deposits, we must receive various governmental permits. Before a mining permit is issued on a particular parcel, interested parties are eligible to file petitions to declare the land unsuitable for mining. For example, on November 10, 2005, two environmental groups filed a petition to halt the expansion of surface mining activities on the New River Tract and surrounding areas. Although this petition was dismissed, management’s time and the Company’s resources were consumed in the process. We cannot predict whether we will continue to receive the permits necessary for us to expand our operations.
Defects in title or loss of any leasehold interests in our properties could adversely affect our ability to mine these properties.
We conduct, or plan to conduct, a significant part of our mining operations on properties that we lease. A title defect or the loss of any lease could adversely affect our ability to mine the associated reserves. Title to most of our owned or leased properties and mineral rights is not usually verified until we make a commitment to develop a property, which may not occur until after we have obtained necessary permits and completed exploration of the property. In some cases, we rely on title information or representations and warranties provided by our lessors or grantors. Our right to mine some of our reserves may be adversely affected if defects in title or boundaries exist or if a lease expires. Any challenge to our title could delay the exploration and development of the property and could ultimately result in the loss of some or all of our interest in the property and could increase our costs. In addition, if we mine on property that we do not own or lease, we could incur liability for such mining. Some leases have minimum production requirements or require us to commence mining in a specified term to retain the lease. Failure to meet those requirements could result in losses of prepaid royalties and, in some rare cases, could result in a loss of the lease itself.
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Due to variability in coal prices, the length of our coal supply agreements, as well as certain provisions in our coal supply agreements, we may be unable to sell coal at a profit.
We typically sell our coal for a specified per ton amount and at a negotiated price pursuant to both short-term contracts and contracts of twelve months or greater. For the year ended December 31, 2009, 98% of our coal sales were under contracts of twelve months or greater. Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lower our gross margins. Coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or our customers during the duration of specified events beyond the control of the affected party. Most of our coal supply agreements contain provisions requiring us to deliver coal meeting quality thresholds for certain characteristics such as Btu, sulfur content, ash content, hardness and ash fusion temperature. Failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or, in the extreme, termination of the contracts. Consequently, due to the risks mentioned above with respect to long-term supply agreements, we may not achieve the revenue or profit we expect to achieve from these sales commitments. In addition, we may not be able to successfully convert these sales commitments into long-term supply agreements.
We are subject to market risk with respect to a substantial portion of our coal production commencing in 2011.
We have not yet priced a substantial portion of the coal we have the capability of producing over the next several years in order to take advantage of possible future market demand or to realize possible long term opportunities with certain users of the high quality coal reserves we control. At December 31, 2009, our un-priced and uncommitted future production was approximately 0.1 million tons in 2010, 0.3 million tons in 2011, 0.7 million tons in 2012, or approximately 12%, 28% and 56%, respectively, of our planned production for such periods. For the year ended December 31, 2009, 98% of the coal we produced was sold under contracts of twelve months or greater. Unless and until we enter into long-term contracts for our coal at fixed prices, the price at which we will sell our future production remains unknown. If coal prices drop or do not improve sufficiently prior to 2011, we may be forced to sell our coal at depressed prices, which would have a material adverse affect on our operations and profitability.
The coal industry is highly cyclical, which subjects us to fluctuations in prices for our coal.
We are exposed to swings in the demand for coal, which has an impact on the prices for our coal. The demand for coal products and, thus, the financial condition and results of operations of companies in the coal industry, including us, are generally affected by macroeconomic fluctuations in the world economy and the domestic and international demand for energy. Any material decrease in demand for coal could have a material adverse effect on our operations and profitability. In recent years, volatility in coal prices has become the norm rather than the exception.
We depend heavily on one customer, the loss of which would adversely affect our operating results.
For the year ended December 31, 2009, Georgia Power Company represented approximately 95% of our continuing operation’s coal revenues. At December 31, 2009, we had coal supply agreements with this customer that expire at various times throughout 2011 and 2012. When these agreements expire, we may not be successful at renegotiating them and this customer may not continue to purchase coal from us
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pursuant to long-term coal supply agreements. If this customer were to significantly reduce its purchases of coal from us or if we were unable to sell coal to it on terms as favorable to us as the terms under our current agreements, our financial condition and results of operations could suffer materially. Additionally, any disruption in Georgia Power Company’s business would result in a disruption in our business.
There is no assurance that we will find purchasers of our product at profitable prices.
If we are unable to achieve supply contracts, or are unable to find buyers willing to purchase our coal at profitable prices, our revenues and operating profits could suffer.
A substantial or extended decline in coal prices could reduce our revenues and the value of our coal reserves.
The prices we can charge for coal are influenced by factors beyond our control, including:
| • | the supply of, and demand for, domestic and foreign coal; |
| • | the demand for electricity; |
| • | the cost of transportation; |
| • | the proximity to and capacity of transportation facilities; |
| • | domestic and foreign governmental regulations and taxes; |
| • | air emission standards for coal-fired power plants; |
| • | regulatory, administrative and court decisions; |
| • | the price and availability of alternative fuels, including the effects of technological developments; and |
| • | the effect of worldwide energy conservation measures. |
Our results of operations are dependent upon the prices we charge for our coal as well as our ability to improve productivity and control costs. Any adverse change in the supply to demand ratio would cause spot prices to decline and require us to increase productivity and lower costs in order to maintain our margins. If we are not able to maintain our margins, our operating results could be adversely affected. Therefore, price declines may adversely affect operating results for future periods and our ability to generate cash flows necessary to improve productivity and invest in operations.
Our ability to collect payments from our customers could be impaired due to credit issues.
Our ability to receive payment for coal sold and delivered depends on the continued creditworthiness of our customers. If deterioration of the creditworthiness of our customers or trading counterparties occurs, our business could be adversely affected.
If the coal industry experiences overcapacity in the future, our profitability could be impaired.
During the mid-1970s and early 1980s, a growing coal market and increased demand for coal attracted new investors to the coal industry, spurred the development of new mines and resulted in added production capacity throughout the industry, all of which led to increased competition and lower coal prices. Similarly, a meaningful increase in coal prices could encourage the development of expanded capacity by new or existing coal producers. Any overcapacity could reduce coal prices in the future.
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If transportation for our coal becomes unavailable or uneconomic for our customers, our ability to sell coal could suffer.
Transportation costs represent a significant portion of the total cost of delivered coal and, as a result, play a critical role in a customer’s purchasing decision. Increases in transportation costs could make our coal less competitive as a source of energy or could make some of our operations less competitive than other sources of coal.
Coal producers depend upon rail, barge, trucking, overland conveyor and other systems to deliver coal to their customers. While U.S. coal customers typically arrange and pay for transportation of coal from the mine to the point of use, disruption of these transportation services because of weather-related problems, strikes, lock-outs or other events could temporarily impair our ability to supply coal to our customers and thus could adversely affect our results of operations. In January 2010, Georgia Power Company exercised its rights of force majeure under our coal supply contract due to freezing weather in the Southeast United States, which resulted in their suspension of our shipment of approximately 40,000 tons of coal. While Georgia Power Company is obligated under our contract to purchase this coal within twelve months after the end of the event, the suspension of these shipments resulted in an immediate reduction in cash receipts of approximately $3.0 million during January and February 2010.
The coal industry is intensely competitive, and our failure to compete effectively could reduce our revenue and margins, and delay or prevent our ability to service our debt.
We operate in a highly competitive industry with regional, national and international energy resources companies. We compete based primarily on price, and we believe that the principal factors that determine the price for which our coal can be sold are:
| • | competition from energy sources other than coal; |
| • | coal quality; |
| • | efficiency in extracting and transporting coal; and |
| • | proximity to customers. |
Some of our competitors have longer operating histories and substantially greater financial and other resources than we do. Our failure to compete effectively could reduce our revenues and margins, and delay or prevent our ability to make payments on our debt.
Significant competition from entities with greater resources could result in our failure.
We operate in a highly competitive industry with national and international energy resources companies. Some of our competitors have longer operating histories and substantially greater financial and other resources than we do. Our competitors’ use of their substantially greater resources could overwhelm our efforts to operate successfully and could cause our failure.
There is no assurance that our limited revenues will be sufficient to operate profitably, or that we will generate greater revenues in the future.
We were formed to create a regional coal producer with desires to expand as opportunities arose. We had no revenues from inception until the third quarter 2003 when we began mining operations. We are not profitable and have a limited operating history. We must be regarded as a risky venture with all of the unforeseen costs, expenses, problems, risks and difficulties to which such ventures are subject.
Our coal sales for the year ended December 31, 2009 were approximately $85.6 million. There is no assurance that we can continue to achieve sales at that level or generate profitable sales. We expect that
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many other coal producers could produce coal at lower costs per ton than our production cost per ton. If those companies price their coal based on their lower cost, it could adversely affect our revenues and profits, if any. There is no assurance that we will ever operate profitably. There is no assurance that we will generate continued revenues or any profits, or that the market price of our common stock will be increased thereby.
Our inability to diversify our operations may subject us to economic fluctuations within our industry.
Our limited financial resources reduce the likelihood that we will be able to diversify our operations. Our probable inability to diversify our activities into other coal mining areas will subject us to economic fluctuations within our market area and therefore increase the risks associated with our operations.
The loss of key management personnel could adversely affect our business.
We are heavily dependent upon the skills, talents, and abilities of our executive officers and board of directors to implement our business plan. Given the intense competition for qualified management personnel in our industry, the loss of the services of any key management personnel may significantly and detrimentally affect our business and prospects. We may not be able to retain some or all of our key management personnel, and even if replaceable, it may be time consuming and costly to recruit qualified replacement personnel.
We face risks inherent to mining which could increase the cost of operating our business.
Our mining operations are subject to conditions beyond our control that can delay coal deliveries or increase the cost of mining at particular mines for varying lengths of time. These conditions include weather and natural disasters, unexpected maintenance problems, key equipment failures, variations in coal seam thickness, variations in the amount of rock and soil overlying the coal deposit, variations in rock and other natural materials, and other variations in geologic conditions. Any of these factors could increase the cost of operating our business, which would lower or eliminate our margins.
Increases in the price of steel, diesel fuel or rubber tires could negatively affect our operating costs.
Our coal mining operations use significant amounts of steel, diesel fuel and rubber tires. The costs of roof bolts we use in our underground mining operations depend on the price of scrap metal. We also use significant amounts of diesel fuel and tires for the trucks and other heavy machinery we use, particularly at our active surface mining operations. If the prices of steel, diesel fuel and other commodity based products increase, our operating costs could be negatively affected.
A shortage of skilled labor in the mining industry could pose a risk to achieving optimal labor productivity and competitive costs, which could adversely affect our profitability.
Efficient coal mining using modern techniques and equipment requires experienced, skilled laborers with proficiency in multiple mining tasks. In order to support our ongoing labor needs and possible expansion opportunities, we have sponsored both in-house and vocational coal mining programs at the local level in order to train additional skilled laborers. In the event the shortage of experienced labor continues or worsens or we are unable to train the necessary amount of skilled laborers, there could be an adverse impact on our labor productivity and costs and our ability to maintain or expand production and therefore have a material adverse effect on our earnings.
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Disruptions in the quantities of coal produced by our contract mine operators could impair our ability to fill customer orders or increase our operating costs. We may be unable to purchase sufficient quantities of coal from third parties to meet our contractual commitments or the price of such coal may be greater than we had expected.
We may sometime use independent contractors to mine coal at certain of our mining operations. Operational difficulties at contractor-operated mines, changes in demand for contract miners from other coal producers, and other factors beyond our control could affect the availability, pricing, and quality of coal produced for us by contractors. Disruptions in the quantities of coal produced for us by our contract mine operators could impair our ability to fill our customer orders or require us to purchase coal from other sources in order to satisfy those orders. If we are unable to fill a customer order or if we are required to purchase coal from other sources in order to satisfy a customer order, we could lose existing customers and our operating costs could increase.
Risks Related to Environmental and Other Regulation
The characteristics of coal may make it difficult for coal users to comply with various environmental standards. These standards are continually under review by international, federal and state agencies, related to coal combustion. As a result, coal users may switch to other alternative energy sources, which would affect the volume of our coal sales.
Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned. Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source, the volume of our coal sales and price. Stricter regulations could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future.
Proposed reductions in emissions of mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases may require the installation of costly emission control technology or the implementation of other measures, including trading of emission allowances and switching to other fuels. For example, in order to meet the federal Clean Air Act limits for sulfur dioxide emissions from power plants, coal users may need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), blend high sulfur coal with low-sulfur coal or switch to other fuels. Reductions in mercury emissions required by certain states will likely require some power plants to install new equipment, at substantial cost, or discourage the use of certain coals containing higher levels of mercury. Recent and new proposals calling for reductions in emissions of carbon dioxide and other greenhouse gases could significantly increase the cost of operating existing coal-fueled power plants and could inhibit construction of new coal-fueled power plants. Existing or proposed legislation focusing on emissions enacted by the United States or individual states could make coal a less attractive fuel alternative for our customers and could impose a tax or fee on the producer of the coal. If our customers decrease the volume of coal they purchase from us or switch to alternative fuels as a result of existing or future environmental regulations aimed at reducing emissions, our operations and financial results could be adversely impacted.
The government regulates mining operations, which imposes significant costs on us, and future regulations could increase those costs or limit our ability to produce coal. Proposals to regulate greenhouse gas emissions could impact the market for our coal, increase our costs and reduce the value of our coal reserves.
Federal, state and local authorities regulate the coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution,
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plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability.
Numerous governmental permits and approvals are required for mining operations. We are required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for or production of coal may have upon the environment. The costs, liabilities and requirements associated with these regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. The possibility exists that new legislation and/or regulations and orders may be adopted that may materially adversely affect our mining operations, our cost structure and/or our customers’ ability to use coal. New legislation or administrative regulations (or judicial interpretations of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us or our customers to change operations significantly or incur increased costs. The majority of our coal supply agreements contain provisions that allow a purchaser to terminate its contract if legislation is passed that either restricts the use or type of coal permissible at the purchaser’s plant or results in specified increases in the cost of coal or its use. These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations. In addition, The United States and more than 160 other nations are signatories to the 1992 Framework Convention on Climate Change, which is intended to limit emissions of greenhouse gases such as carbon dioxide. In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emission targets for developed nations, which became binding on all countries that had ratified the Kyoto Protocol in February 2005, as a result of Russia’s ratification in November 2004. Although the specific emission targets vary from country to country, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. Although the United States did not ratify the emission targets and no comprehensive regulations focusing on greenhouse gas emissions are in place, these restrictions, whether through ratification of the emission targets or other efforts to stabilize or reduce greenhouse gas emissions, could adversely affect the price and demand for coal. According to the Energy Information Administration’s Emissions of Greenhouse Gases in the United States during 2004, coal accounted for 34% of the total. Efforts to control greenhouse gas emissions could result in reduced use of coal if electricity generators switch to lower carbon sources of fuel.
In July 2008, the EPA published an Advanced Notice of Proposal Rulemaking (“ANPR”) seeking comments and discussions of the complex issues associated with the possible regulation of greenhouse gases under the Clean Air Act. The deadline for comments on the ANPR was November 28, 2009. The EPA sought comments and discussion on (i) advantages and disadvantages of regulating greenhouse gases under one provision of the Clean Air Act; (ii) how a decision to regulate greenhouse gases under one provision of the Clean Air Act would lead to regulation under other provisions; (iii) issues relevant to legislation to regulate greenhouse gases and the potential overlap of the Clean Air Act and such future legislation; and (iv) scientific information relevant to, and the issues raised by, an analysis as to whether greenhouse gas emissions from automobiles may reasonably be anticipated to endanger public health or welfare. In December 2009, the EPA made a determination that greenhouse gases cause or contribute to air pollution and may reasonably by anticipated to endanger public health or welfare, which findings are prerequisites to the EPA regulating greenhouse gases under the Clean Air Act.
Regulation of greenhouse gases in the United States may happen as a result of the recent change in administration at the Federal level. Much discussion has taken place, along with proposed legislative initiatives, at both the State and Federal levels that would regulate greenhouse emissions. President Obama has pledged to implement an economy wide cap and trade program to reduce greenhouse gases 80 percent by 2050. The President also pledged the United States to be a world leader on greenhouse gas reduction and re-engage with the United Nations Framework Convention on Climate Change to develop a
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greenhouse gas program. Any significant change in regulation may require additional controls on coal-fueled power plants and industrial boilers which could lead to switching to lower carbon fuels. Ultimately, such regulations could lead to a reduction in the demand for coal.
There is currently a bill that has been introduced in the Tennessee Legislature that could have an adverse effect on our ability to mine coal profitably in Tennessee. The bill prohibits the commissioner from issuing or renewing a water quality permit for surface coal mining operations to alter or disturb any ridge line above two thousand (2,000) feet elevation above sea level. A number of our seams of coal in the state of Tennessee are above two thousand (2,000) feet in elevation. Accordingly, if the bill were to pass the Legislature, our ability to economically recover coal from those seams may be negatively impacted.
Apart from governmental regulation, on February 4, 2008, three large investment banks announced that they had adopted climate change guidelines for lenders. These guidelines require the evaluation of carbon risks in the financing of utility power plants which may make it more difficult for utilities to obtain financing for coal fired plants. If comprehensive laws focusing on greenhouse gas emission reductions were to be enacted by the United States or individual states where we sell coal, it may adversely affect the use of and demand for fossil fuels, particularly coal, which would have a material adverse effect on our results of operations, cash flows and financial condition.
Our operations could be adversely affected if we fail to maintain required bonds.
Federal and state laws require surety bonds or cash deposits to secure our obligations to reclaim lands used for mining, to pay federal and state workers’ compensation, to secure coal lease obligations and to satisfy other miscellaneous obligations. At December 31, 2009, we had approximately $4.9 million of cash invested in money market funds and certificates of deposit, against which irrevocable bank letters of credit or surety bonds are written in favor of the Office of Surface Mining of the US Department of Interior or the Kentucky Department of Natural Resources. Reclamation bonds are typically renewable on a yearly basis if they are not posted with cash. Our failure to maintain, or inability to acquire, bonds that are required by state and federal law would have a material adverse effect on us. That failure could result from a variety of factors including the following:
| • | lack of availability, higher expense or unfavorable market terms of new bonds; |
| • | restrictions on the availability of collateral for current and future third-party bond issuers under the terms of our existing credit facilities; and |
| • | the exercise by third-party bond issuers of their right to refuse to renew the bonds. |
Terrorist threats and environmental zealotry may negatively affect our business, financial condition and results of operations.
Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. Our business also may be affected by environmental activists who engage in activities intended to disrupt our business operations. In particular, environmental activists have conducted protests outside the homes of certain of our former executives, including our former Chief Executive Officer. We spent approximately $317,000, $300,000 and $400,000 during the years ended December 31, 2009, 2008 and 2007, respectively, on security measures. Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers may materially adversely affect our operations. As a result, there could be delays or losses in transportation and deliveries of coal to our customers, decreased sales of our coal and extension of time for payment of accounts receivable from our customers. Strategic targets
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such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States. In addition, disruption or significant increases in energy prices could result in government-imposed price controls. It is possible that any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations.
Our failure to obtain and renew permits necessary for our mining operations could negatively affect our business.
Mining companies must obtain numerous permits that regulate environmental and health and safety matters in connection with coal mining, including permits issued by various federal and state agencies and regulatory bodies. We believe that we have obtained the necessary permits to mine our developed reserves at our mining complexes. However, as we commence mining our undeveloped reserves, we will need to apply for and obtain the required permits. The permitting rules are complex and change frequently, making our ability to comply with the applicable requirements more difficult or even impossible. In addition, private individuals and the public at large have certain rights to comment on and otherwise engage in the permitting process, including through intervention in the courts. Accordingly, the permits we need for our mining operations may not be issued, or, if issued, may not be issued in a timely fashion. The permits may also involve requirements that may be changed or interpreted in a manner which restricts our ability to conduct our mining operations or to do so profitably. An inability to conduct our mining operations pursuant to applicable permits would reduce our production, cash flow and profitability.
If the assumptions underlying our estimates of reclamation and mine closure obligations are inaccurate, our costs could be greater than anticipated.
SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining, as well as most aspects of underground mining. We base our estimates of reclamation and mine closure liabilities on permit requirements and our engineering expertise related to these requirements. Our management and engineers periodically review these estimates. The estimates can change significantly if actual costs vary from assumptions or if governmental regulations change significantly. Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (ASC 410), which, requires us to record these obligations as liabilities at fair value. In estimating fair value, we consider the estimated current costs of reclamation and mine closure and applied inflation rates and a third-party profit, as required by ASC 410. The third-party profit is an estimate of the approximate markup that would be charged by contractors for work performed on our behalf. If actual costs differ from our estimates, our profitability could be negatively affected.
Our operations may have a negative impact on the environment or cause exposure to hazardous substances, and our properties may have environmental contamination, which could result in material liabilities to us.
Our operations currently use hazardous materials and generate limited quantities of hazardous wastes from time to time. We could become subject to claims for toxic torts, natural resource damages and other damages as well as for the investigation and clean up of soil, surface water, groundwater, and other media. Such claims may arise, for example, out of conditions at sites that we currently own or operate, as well as at sites that we previously owned or operated, or may acquire. Our liability for such claims may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.
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We maintain coal refuse areas and slurry impoundments at our Tennessee mining complexes. Such areas and impoundments are subject to extensive regulation. Slurry impoundments have been known to fail, releasing large volumes of coal slurry into the surrounding environment. Structural failure of an impoundment can result in extensive damage to the environment and natural resources, such as bodies of water that the coal slurry reaches, as well as liability for related personal injuries and property damages, and injuries to wildlife. Some of our impoundments overlie mined out areas, which can pose a heightened risk of failure and of damages arising out of failure. If one of our impoundments were to fail, we could be subject to substantial claims for the resulting environmental contamination and associated liability, as well as for fines and penalties.
Drainage flowing from or caused by mining activities can be acidic with elevated levels of dissolved metals, a condition referred to as “acid mine drainage,” which we refer to as AMD. The treating of AMD can be costly. Although we do not currently face material costs associated with AMD, it is possible that we could incur significant costs in the future.
These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and adversely affect us.
Risks Related To Our Common Stock
We may not be able to maintain our listing on the Nasdaq Global Market and if we fail to do so, the price and liquidity of our common stock may decline.
The Nasdaq Stock Market has quantitative maintenance criteria for the continued listing of common stock on the Nasdaq Global Market. The requirement currently affecting us is maintaining a minimum closing bid price per share of $1.00. On January 5, 2010, the Nasdaq Stock Market issued a letter to us stating that we were not in compliance with the minimum closing bid price requirement and, therefore, faced delisting proceedings. To regain compliance with the minimum bid price rule, the closing bid price of our common stock must close at $1.00 per share or more for a minimum of ten consecutive business days. In accordance with Marketplace Rule 5810(c)(A), we have 180 calendar days, or until July 6, 2010 to regain compliance.
If we do not regain compliance by July 6, 2010, the Nasdaq staff will notify us that our common stock will be delisted. In that event and at that time, we may appeal Nasdaq’s delisting determination to a Nasdaq Listing Qualifications Panel. Alternatively, if we do not regain compliance with the minimum bid price rule by July 6, 2010, we can apply to list our common stock on The Nasdaq Capital Market if we satisfy the initial listing criteria for that market, other than the minimum bid price requirement. If our application is approved, we will be granted an additional 180 calendar days to regain compliance with the minimum bid price rule. We will seek to regain compliance within this 180 day cure period and will consider alternatives to address compliance with the continued listing standards of The Nasdaq Stock Market.
If we fail to maintain continued listing on the Nasdaq Global Market and must move to a market with less liquidity, our financial condition could be harmed and our stock price would likely further decline. If we are delisted, it could have a material adverse effect on the market price of, and the liquidity of the trading market for, our common stock.
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We do not intend to pay dividends on shares of our common stock.
Historically, we have not paid dividends on shares of our common stock and do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future. The terms of the indenture related to our existing credit facilities restrict our ability to pay dividends on shares of our common stock.
We operate in an industry that is subject to significant fluctuations in operating results from quarter to quarter that may result in unexpected reductions in revenue and stock price volatility.
Factors that may influence our quarterly operating results include, but may not be limited to:
| • | the worldwide demand for coal; |
| • | the price of coal; |
| • | the supply of coal and other competitive factors; |
| • | the costs to mine and transport coal; |
| • | the ability to obtain new mining permits; |
| • | the costs of reclamation of previously mined properties; and |
| • | industry competition. |
Due to these factors, it is possible that in some quarters our operating results may be below our shareholders’ expectations and those of public market analysts. If this occurs, the price of our common stock would likely be adversely affected.
Our stock price may decrease, which could adversely affect our business and cause our shareholders to suffer significant losses.
The following factors could cause the market price of our common stock to decrease, perhaps substantially:
| • | the failure of our quarterly operating results to meet expectations of investors or securities analysts; |
| • | adverse developments in the financial markets, the coal and energy industries and the worldwide or regional economies; |
| • | interest rates; |
| • | changes in accounting principles; |
| • | sales of common stock by existing security holders; |
| • | announcements of key developments by our competitors; and |
| • | the reaction of markets and securities analysts to announcements and developments involving our Company. |
If we need to sell or issue additional shares of common stock or assume additional debt to repay our existing debt or finance future growth, our shareholders’ ownership could be diluted or our earnings could be adversely impacted.
Our business strategy may include expansion through internal growth by acquiring complementary businesses or by establishing strategic relationships with targeted customers. In order to do so, or to fund our other activities, we may issue additional equity securities that could dilute our shareholders’ stock percentage ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company which could negatively impact our results of operations.
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Our director and officer indemnification policies in conjunction with the provisions of Florida law could result in substantial un-recoupable expenditures and reduced remedies against directors and officers.
Florida Revised Statutes provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person’s promise to repay us such amounts, if it is ultimately determined that such person was not entitled to indemnification. This indemnification policy could result in substantial expenditures by us that we will be unable to recoup.
Florida Revised Statutes exclude personal liability of our directors to us and our stockholders for monetary damages for breach of fiduciary duty except in certain specified circumstances. Accordingly, we will have a much more limited right of action against our directors than otherwise would be the case. This provision does not affect the liability of any director under federal or applicable state securities laws.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties |
Our executive offices are located at 8915 George Williams Road, Knoxville, Tennessee 37923. We own our corporate office space. The bases of operations for our mining activities are located in Anderson, Campbell and Scott Counties, Tennessee, and until August 3, 2009, in Walker, Winston, Marion, Fayette, and Tuscaloosa Counties, Alabama and, until March 31, 2008, in Bell, Harlan and Leslie Counties, Kentucky. We lease office space in Jacksboro, Tennessee. We also lease storage space in East Tennessee to house our maps and other geological data. We have pledged all of our owned and leased mining assets as collateral under our short-term revolving credit facility and the obligations under our 10.5% Notes due 2010.
Geology
The strata that exist above the water drainage level consist mainly of relatively thick shale and siltstone sequences with sandstone layers. Coal seams occur in the shale sequences. There are nine coal seams on the New River Tract that we are targeting, and all of these seams are above the water drainage level. There are other coal seams in this area that contain coal, but insufficient information is available to estimate mineability. The northern portion of the New River Tract property has not been explored by core drilling because the terrain generally is more difficult to access and the costs to explore this area are greater than we are willing to expend at this time.
Coal Reserves
“Reserves” are defined by the U.S. Securities and Exchange Commission’s (“SEC”) Industry Guide 7 as that part of a mineral deposit, which could be economically and legally extracted or produced at the time of the reserve determination. “Recoverable” reserves are defined as coal that is economically recoverable
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using existing equipment and methods under federal and state laws currently in effect. Some of our reserves are classified as proven reserves. “Proven (Measured) Reserves” are defined by the SEC Industry Guide 7 as reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling, and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. Information about our reserves consists of estimates based on engineering, economic and geological data assembled and analyzed by our internal engineers, as well as studies prepared by certified professional geologists based upon data provided by us. “Probable (Indicated) Reserves” for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for Proven (Measured) Reserves, is high enough to assume continuity between points of observation. Reserve estimates are updated periodically using geologic data taken from drill holes, adjacent mine workings, outcrop prospect openings and other sources. Coal tonnages are categorized according to coal quality, seam thickness, mineability and location relative to existing mines and infrastructure.
As with most other coal-producing companies in Central and Southern Appalachia, a portion of our coal reserves are controlled pursuant to leases from third party landowners. These leases convey mining rights to the coal producer in exchange for a per ton or percentage of gross sales price royalty payment to the lessor. These leases are not scheduled to expire prior to expiration of projected mining activities. Under current mining plans, we expect that all reported leased reserves will be mined out within the period of existing leases or within the time period of assured lease renewals.
Our reported coal reserves are those that can be economically and legally extracted or produced at the time of their determination. In determining whether our reserves meet this standard, we take into account, among other things, mining methods, seam thickness, previous mining, outcrop variability, and coal quality. We calculated our reserves by relying on measured seam thickness, known coal densities, measured coal acres and anticipated mining methodology minus any previous mining. We have obtained, or we believe we have a high probability of obtaining, all required permits or government approvals with respect to our reserves.
We currently estimate that at December 31, 2009, 39.1 million tons of our proven and probable in-place reserves are recoverable. This estimate takes into account various factors that affect our ability to recover our reserves, including but not limited to current coal prices; the mining methods that may be used to extract particular reserves; geological and mining conditions; historical production from similar areas with similar conditions; the assumed effects of regulations and taxes by governmental agencies; assumptions governing future prices; future operating, development and reclamation costs; and mining technology improvements.
Our reserve estimates are based on geological data assembled and analyzed by our staff of engineers. Reserve estimates will be periodically updated to reflect past coal production, new drilling information and other geologic or mining data. Acquisitions or sales of coal properties will also change our reserves. Changes in mining methods or technology may increase or decrease the recovery basis for a coal seam. Our reserve estimates are subject to change as a result of various factors, including the acquisition, divestiture or depletion of reserves or the future analysis of known or existing data. We engage third parties periodically to review or audit our reserve estimates. The most recent third party audit of certain of our reserves was conducted in 2009 by Marshall Miller & Associates, Inc. Future estimates of our reserves, including estimates prepared by engineering firms, could be materially different from current estimates. There are numerous uncertainties inherent in estimating quantities and qualities of recoverable reserves, including many factors beyond our control.
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In addition, we believe that we have unproven deposits that have not yet been classified as reserves. Unproven deposits are coal-bearing bodies that have not been sufficiently sampled and analyzed in trenches, outcrops, drilling, and underground workings to assume continuity between sample points. This coal does not qualify as a commercially viable coal reserve as defined by the SEC Industry Guide 7 until a final comprehensive evaluation based on unit cost per ton, recoverability, and other material factors concludes legal and economic feasibility. Unproven coal deposits may be classified as such by either limited property control or geologic limitations, or both. These unproven deposits are located immediately adjacent to our known reserves. There has been previous mining activity on or near some of these sites, but we have not yet done adequate drilling or other exploration necessary to properly define these areas as reserves.
With respect to our reserve estimates, see “Risk Factors – We face numerous uncertainties in estimating our economically recoverable coal reserves, and inaccuracies in our estimates could result in lower than expected revenues, higher than expected costs or decreased profitability.”
We decide on a case by case basis whether to obtain a title review from a licensed attorney prior to purchasing or leasing property. In determining whether to conduct a title review, we will consider information we have about the particular property, including, for example, personal knowledge of our employees or consultants, or historical information from the previous owners, or information obtained from surrounding property owners. We have not obtained title insurance in connection with acquisitions of coal reserves, and generally will not do so in future acquisitions. However, we do have title insurance on our Tennessee properties obtained in conjunction with the issuance of our 10.5% Notes due 2010. We had a title examination made of the New River Tract when we purchased it from Cumberland Timber Company, LLC.
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The following table provides proven and probable, recoverable reserve data assigned to specific tracts and coal seams in our Tennessee operations as of December 31, 2009:
| Location |
Coal Seam |
Control | Acres | Recoverable Reserves (in millions) |
Quality: Btu |
Quality: Sulfur (%) | ||||||
| New River Tract |
Owned | 65,000 | ||||||||||
| (Anderson, Campbell and Scott County) |
Big Mary | 1,769 | 4.3 | 12,822 | 2.6 | |||||||
| Beech Grove |
961 | 3.5 | 11,986 | 1.5 | ||||||||
| Lower Dean |
674 | 1.3 | 12,693 | 1.6 | ||||||||
| Windrock |
1,278 | 2.8 | 12,713 | 1.2 | ||||||||
| Lower Dean Thru Windrock |
110 | 0.5 | 12,501 | 1.4 | ||||||||
| Peewee |
1,140 | 2.3 | 12,958 | 0.8 | ||||||||
| Jellico |
2,524 | 6.8 | 13,123 | 3.4 | ||||||||
| Walnut Mountain |
149 | 1.1 | 12,652 | 1.1 | ||||||||
| Lower Sharp |
374 | 0.8 | 12,091 | 1.5 | ||||||||
| Red Ash |
511 | 1.1 | 12,612 | 1.3 | ||||||||
| Peewee Rider |
241 | 0.6 | 13,241 | 0.8 | ||||||||
| Ketchen Tract |
Leased | 7,000 | ||||||||||
| (Campbell County) |
Red Ash | 172 | 0.3 | 12,214 | 1.0 | |||||||
| Windrock |
676 | 2.4 | 12,214 | 3.5 | ||||||||
| Splint |
359 | 0.9 | 13,030 | 2.2 | ||||||||
| Walnut Mountain |
170 | 0.1 | 11,824 | 1.1 | ||||||||
| Lower Splint |
256 | 1.5 | 13,045 | 2.6 | ||||||||
| Coal Creek |
1,470 | 4.0 | 13,486 | 2.9 | ||||||||
| TVA Tract |
Leased | 4,400 | ||||||||||
| (Campbell and Scott County) |
Red Ash | 384 | 0.1 | 13,294 | 1.5 | |||||||
| Walnut Mountain |
242 | 0.7 | 13,246 | 1.2 | ||||||||
| Stinking Creek Tract |
Leased | 2,600 | ||||||||||
| (Campbell County) |
Rex | 1,706 | 4.0 | 13,642 | 0.8 | |||||||
| 79,000 | 39.1 |
Quality is provided on a “washed, dry basis” based on an average of samples taken and reported by independent third party engineering firms.
A map showing the locations of National Coal’s properties is included as Exhibit 99.1 to this Report on Form 10-K.
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| Item 3. | Legal Proceedings. |
We are a defendant in a lawsuit in the U.S. District Court for the Eastern District of Tennessee, entitled Sierra Club et al. v. National Coal Corporation, Civil Action No. 3:08-cv-00410, involving claims made by three environmental organizations — Sierra Club, Save Our Cumberland Mountains, and Tennessee Clean Water Network — under the citizens’ suit provisions of the Clean Water Act. In the lawsuit, the plaintiffs assert that we are discharging selenium to waters of the United States without a permit at our Mine No. 7 surface mine in Tennessee, identified as Zeb Mountain throughout the lawsuit. We deny the allegations and are vigorously contesting the matter. Selenium is a naturally-occurring element that is an essential nutrient for many organisms but has toxic effects at elevated concentrations. We have, and at all relevant times have had, a permit issued by the Tennessee Department of Environment and Conservation for discharge of water from our surface coal mining operations at our Mine No. 7 surface mine. Trial is scheduled for July 2010. Plaintiffs have asked the court to find that we have violated the Clean Water Act by discharging selenium without a permit, to enjoin us from operating the Mine No. 7 surface mine in such a manner as to allow unlawful discharges of selenium, and for civil penalties. If the plaintiffs are successful, we could incur an unspecified amount of civil penalties. Although the Clean Water Act allows a maximum of $32,500 per day for each violation, the maximum amount is not ordinarily imposed. We also may incur undetermined costs for treatment of water polluted by selenium and/or for costs of remediation to prevent or limit contamination of water by selenium. We believe we have meritorious defenses to all of the claims asserted in this action and will continue to vigorously defend our position; however, we cannot predict the outcome of this proceeding at this time, and cannot predict whether the outcome will have a material adverse effect on our financial condition.
We are a defendant in a lawsuit in the Circuit Court of Anderson County, Tennessee, entitled Seiber v. National Coal Corporation, Docket No. BOLA0054, alleging that National Coal Corporation was negligent in the case of a vehicular accident which resulted in the death of an independent contract truck driver. The plaintiffs are seeking $7.0 million in compensable damages and $10.0 million in punitive damages. We believe we have meritorious defenses to all of the claims asserted in this action and will continue to vigorously defend our position; however, we cannot predict the outcome of this proceeding at this time, and cannot predict whether the outcome will have a material adverse effect on our financial condition.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Common Stock
Our common stock is listed on the NASDAQ Global Market, trading under the symbol “NCOC”.
The following table sets forth, for the periods indicated, the high and low sales prices for our common stock from January 1, 2008 through December 31, 2009. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
| High | Low | |||||
| Year Ended December 31, 2008 |
||||||
| First Quarter |
$ | 5.56 | $ | 3.71 | ||
| Second Quarter |
10.83 | 4.47 | ||||
| Third Quarter |
8.87 | 4.60 | ||||
| Fourth Quarter |
5.15 | 0.81 | ||||
| Year Ended December 31, 2009 |
||||||
| First Quarter |
$ | 1.73 | $ | 0.56 | ||
| Second Quarter |
2.74 | 1.02 | ||||
| Third Quarter |
1.52 | 0.72 | ||||
| Fourth Quarter |
1.40 | 0.81 | ||||
On March 26, 2010, the closing sales price of our common stock as reported on the NASDAQ Global Market was $0.60 per share. As of March 26, 2010, there were approximately 177 holders of record of our common stock.
On January 5, 2010, we were notified by The Nasdaq Stock Market that we were not in compliance with the Nasdaq Marketplace Rule 5450(a)(1) because shares of our common stock had closed at a per share bid price of less than $1.00 for 30 consecutive days. In accordance with Marketplace Rule 5810(c)(A), we have 180 calendar days, or until July 6, 2010, to regain compliance.
Dividends
We are restricted from making cash dividend payments on our common stock under the terms of our 10.5% Notes due 2010 and our $5.0 million short-term revolving credit facility. We do not intend to pay dividends on our common stock.
Performance Graph
The following performance graph compares the yearly percentage change in the cumulative total shareholder return on the common stock of National Coal Corp. to the cumulative shareholder return for the same period of a peer group and the Russell 2000 Stock Index. The peer group is comprised of National Coal Corp., CONSOL Energy, Arch Coal, Inc., and Peabody Energy Corp. The graph assumes that all dividends were reinvested and that the investments were held through December 31, 2009.
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The material in this section is not “soliciting material,” and is not deemed “filed” with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act.
| 12/04 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | |||||||
| National Coal Corp. |
100.00 | 52.27 | 45.45 | 42.12 | 9.62 | 6.36 | ||||||
| Russell 2000 |
100.00 | 104.55 | 123.76 | 121.82 | 80.66 | 102.58 | ||||||
| Peer Group |
100.00 | 177.70 | 159.11 | 280.41 | 107.08 | 204.33 |
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| Item 6. | Selected Financial Data. |
The following selected consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of National Coal Corp. and the Notes to Consolidated Financial Statements included elsewhere in this report.
| (In thousands, except per share |
Twelve Months Ended December 31, |
|||||||||||||||||||
| 2009 | 2008(4) | 2007(4) | 2006 | 2005 | ||||||||||||||||
| Consolidated Statement of Income Data: |
||||||||||||||||||||
| Coal sales |
$ | 85,598 | $ | 61,828 | $ | 79,039 | $ | 86,830 | $ | 65,258 | ||||||||||
| Total revenue |
$ | 88,035 | $ | 65,051 | $ | 79,876 | $ | 87,517 | $ | 65,873 | ||||||||||
| Total operating expenses |
$ | 99,211 | $ | 82,149 | $ | 98,696 | $ | 103,974 | $ | 68,436 | ||||||||||
| Operating loss |
$ | (11,175 | ) | $ | (17,098 | ) | $ | (18,820 | ) | $ | (16,457 | ) | $ | (2,563 | ) | |||||
| Total other income (expense) |
$ | (6,554 | ) | $ | (8,410 | ) | $ | (6,780 | ) | $ | (6,964 | ) | $ | (4,228 | ) | |||||
| Net loss from continuing operations |
$ | (17,729 | ) | $ | (25,508 | ) | $ | (25,600 | ) | $ | (23,421 | ) | $ | (6,791 | ) | |||||
| Net loss from discontinued operations |
$ | (1,485 | ) | $ | (9,385 | ) | $ | (164 | ) | $ | — | $ | — | |||||||
| Net loss |
$ | (19,215 | ) | $ | (34,893 | ) | $ | (25,764 | ) | $ | (23,421 | ) | $ | (6,791 | ) | |||||
| Basic and diluted net loss per common share from continuing operations |
$ | (0.52 | ) | $ | (0.83 | ) | $ | (1.45 | ) | $ | (1.59 | ) | $ | (0.58 | ) | |||||
| Basic and diluted net loss per common share from discontinued operations |
$ | (0.04 | ) | $ | (0.30 | ) | $ | (.01 | ) | $ | — | $ | — | |||||||
| Weighted average common shares |
34,005 | 31,525 | 20,680 | 13,347 | 13,713 | |||||||||||||||
| Consolidated Balance Sheet Data: |
||||||||||||||||||||
| Total current assets |
$ | 4,507 | $ | 18,375 | $ | 23,539 | $ | 8,983 | $ | 29,000 | ||||||||||
| Total current liabilities |
$ | 59,326 | $ | 24,414 | $ | 29,680 | $ | 18,433 | $ | 10,669 | ||||||||||
| Working capital (deficit) |
$ | (54,819 | ) | $ | (6,039 | ) | $ | (6,141 | ) | $ | (9,450 | ) | $ | 18,331 | ||||||
| Restricted cash(1) |
$ | 6,212 | $ | 11,338 | $ | 16,512 | $ | 17,247 | $ | 7,323 | ||||||||||
| Property, plant and equipment(2) |
$ | 40,298 | $ | 43,675 | $ | 50,828 | $ | 55,838 | $ | 50,902 | ||||||||||
| Long-term debt(3) |
$ | 411 | $ | 43,207 | $ | 69,505 | $ | 67,487 | $ | 60,015 | ||||||||||
| Shareholders’ equity (deficit) |
$ | (12,303 | ) | $ | 5,491 | $ | (3,527 | ) | $ | (1,923 | ) | $ | 16,616 | |||||||
| Other Data: |
||||||||||||||||||||
| Tons of coal sold |
1,167 | 1,009 | 1,558 | 1,643 | 1,216 | |||||||||||||||
| Average price per ton sold |
$ | 73.35 | $ | 61.26 | $ | 50.72 | $ | 52.86 | $ | 56.67 | ||||||||||
| Average cost per ton sold |
$ | 68.83 | $ | 62.27 | $ | 49.45 | $ | 48.31 | $ | 42.04 | ||||||||||
| (1) | Consists of certificates of deposit and other cash primarily serving as collateral for reclamation liabilities, deposits for worker’s compensation liabilities, and utility and performance bonds. |
| (2) | Includes coal mineral rights, net of accumulated amortization and depletion. Excludes assets held for sale and discontinued operations. |
| (3) | Includes obligations under capital leases. |
| (4) | The 2008 and 2007 Selected Financial Data has been updated to reflect National Coal of Alabama, Inc. as discontinued operations. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read together with the Consolidated Financial Statements of National Coal Corp. and the Notes to Consolidated Financial Statements included elsewhere in this report. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of National Coal Corp. for the fiscal years ended December 31, 2009, 2008 and 2007. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operation are forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. For information regarding some of the risks and uncertainties that affect us and our industry, see “Risk Factors” included elsewhere in this report.
We own the coal mineral rights to approximately 65,000 acres of land and lease the rights to approximately 14,000 additional acres, all in Eastern Tennessee. As of December 31, 2009, our mining complexes included two active and three inactive underground mines, one active and two inactive surface mines, and one inactive highwall mine. In addition, we have two preparation plants and two unit train loading facilities in Tennessee served by the Norfolk Southern railroad. We hold five permits that allow us to open new or re-open existing mines in Tennessee close to current operations. As of December 31, 2009, we controlled approximately 39.1 million estimated recoverable tons of coal reserves as defined by the SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted at the time of the reserve determination.
On August 3, 2009, the holders of the 12% Notes due 2012 foreclosed on the outstanding capital stock of National Coal of Alabama, Inc., which stock had been pledged as collateral to secure repayment of the 12% Notes due 2012, and National Coal of Alabama, Inc. is no longer a subsidiary of ours as of such date. National Coal of Alabama, Inc. is presented as discontinued operations. We acquired our Alabama operations in October 2007, financed principally through the issuance of $60.0 million in 12% Notes due 2012. On July 21, 2009, National Coal of Alabama, Inc. defaulted on the payment of interest on the 12% Notes due 2012, and the holders accelerated the indebtedness. Additionally, the credit agreement provided that upon the acceleration of the entire unpaid balance of the indebtedness, the holders of the notes were entitled to receive a “make-whole amount, which was approximately $19.8 million and was accrued by National Coal of Alabama, Inc. As a result of the transaction, we recorded a gain on disposal of discontinued operations for the year ended December 31, 2009 of approximately $23.5 million. Upon the foreclosure, our remaining operations are all located in Tennessee. No creditor of National Coal of Alabama, Inc. or its immediate parent, NCC Corp., including the holders of the 12% Notes due 2012, has any recourse to National Coal Corp. or its other subsidiaries for any liabilities of NCC Corp. or National Coal of Alabama, Inc., including liabilities arising under the credit agreement.
During the year ended December 31, 2009, our continuing operations generated total revenues of $88.0 million and sold approximately 1.2 million tons of coal as compared to total revenues of $65.1 million in 2008 with sales of 1.0 million tons of coal and $79.9 million in 2007 with sales of 1.6 million tons of coal. Revenues are derived primarily from the sale of coal to electric utility companies in the Southeastern United States pursuant to long-term contracts or open purchase order arrangements with long-time customers. Georgia Power Company represented approximately 95% of our continuing operation’s coal revenues for the year ended December 31, 2009.
During the first quarter of 2010, we experienced a significant reduction in cash receipts following the suspension of coal shipments to Georgia Power Company due to freezing weather in the Southeast United States, which cash shortfall has been financed primarily by our vendors, resulting in a significant increase in accounts payable since the beginning of the year. The deterioration in our financial position has caused Centaurus Energy Master Fund, LP, the lender under our short-term revolving credit facility and the
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holder of $30.3 million (or 72.1%) of our 10.5% Notes due 2010, to assert that we are insolvent, which assertion we have disputed. We are nonetheless in default under our $5 million short-term revolving credit agreement as of the date this report is filed with the SEC. Under the terms of this facility, the annual financial statements that we file with the SEC must be reported on without a “going concern” qualification from our independent certified public accountants. Because the accompanying auditors’ report for the year ended December 31, 2009, does contain a going concern explanatory paragraph, we are in default of this covenant as of the date this report is filed with the SEC. While we have not obtained an agreement from Centaurus’s to forbear from exercising its available remedies, Centaurus has indicated that it will not immediately seek to accelerate the amounts due under the revolving credit agreement so long as we continue to pursue a transaction that pays down this indebtedness in the near term.
Additionally, we have concluded that we will not be able to generate from operations the amount of cash necessary to pay in December 2010 the amounts due on our 10.5% Notes due 2010 and our short-term revolving credit facility, the combined outstanding principal balance of which was $45.0 million at December 31, 2009. Accordingly, our immediate focus is to improve our operating liquidity in the short-term by reducing accounts payable to historical levels, to pay off our $5.0 million short-term revolving credit facility or otherwise obtain Centaurus’s forbearance from accelerating the indebtedness and otherwise exercising its remedies thereunder, and to pay off the balance of our secured debt by its maturity date. We have explored and continue to explore a number of options to achieve these objectives, including selling assets, refinancing our debt, exchanging our equity for our debt, selling the company, merging with another company, or some combination of these options. We are presently negotiating with a third party to sell a portion of our assets to improve our working capital, including by reducing amounts due Centaurus under our $5.0 million short-term credit facility, which will address our default under this facility and the immediate insolvency issues raised by Centaurus. In addition, we are also considering whether to pursue these and other potential transactions after filing for protection under the federal bankruptcy laws. Our long term strategy of increasing revenue, expanding production and achieving profitable operations can only be pursued after we successfully address our short-term liquidity objectives.
Since inception, we have expanded our production capacity by actively pursuing the development and permitting of properties acquired through strategic acquisitions. We have been able to increase the market for our coal to customers that may benefit from transportation costs advantages due to the location of our mines and loading facilities. In February 2006, we purchased a 42-mile short line railroad from Norfork Southern for approximately $2.0 million. This short line railroad which connects our New River reserves and Baldwin facilities to the Norfolk Southern main line rail facilities at Oneida, Tennessee became operational in the third quarter of 2008. We acquired the Baldwin preparation plant and rail load-out facility in 2005 in return for the assumption of certain reclamation liabilities and spent $7.0 million during 2006 to refurbish and modernize the preparation plant and rail load-out facility. The expenditures made on our transportation and preparation plant infrastructure including the short line railroad and the Baldwin facility reduce our transportation and coal preparation costs and provide us additional opportunities to market coal produced from our owned reserves on the New River tract.
When economically advantageous and market conditions are favorable, we intend to take advantage of our increased production capabilities. Over the longer term, we plan to continue to permit and develop additional properties from our current reserve base while continuing to explore opportunities in nearby areas. Once we resolve our short term liquidity crisis and restore our financial viability, we will continue to pursue our growth strategy.
Critical Accounting Policies, Judgments and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to computing depreciation, depletion, amortization, accretion, the basis of reclamation and workers compensation liabilities, asset impairment, valuing non-cash transactions, and recovery of receivables. Estimates are then based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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We believe our most critical accounting policies include revenue recognition, the corresponding accounts receivable and the methods of estimating depletion and reclamation expense of actual mining operations in relation to estimated total mineable tonnage on our properties.
Revenue Recognition. Under SEC Staff Accounting Bulletin No. 104 (ASC 605), Revenue Recognition, we recognize revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectability is reasonably assured. In the case of coal we mine and sell, we negotiate a specific sales contract with each customer, which includes a fixed price per ton, a delivery schedule, and terms for payment. When applicable, freight costs billed to the customers as part of the contract price are included as coal sales with the offsetting expense included in cost of sales. We recognize revenue from sales made pursuant to these contracts at the time the coal is loaded onto rail cars, barges and trucks at our load-out, mine, and processing plant facilities.
Property, Plant, Equipment and Mine Development. Property and equipment are stated at cost. Maintenance and repairs that do not improve efficiency or extend economic life are expensed as incurred. Plant and equipment are depreciated using the straight-line method over the estimated useful lives of assets which generally range from seven to thirty years for building and plant and one to seven years for equipment. On sale or retirement, asset cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in the statement of operations.
Leasing is used for certain capital additions when considered cost effective relative to other capital sources. All leases with an initial term greater than one year are accounted for under Statement of Financial Accounting Standards, or SFAS 13 (ASC 840), Accounting for Leases. These leases are classified as either capital or operating as appropriate. Leased equipment meeting the capital lease criteria of ASC 840 is capitalized and the present value of the related minimum lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on the straight-line method over the shorter of the estimated useful life or the initial lease term.
Reserves and mine development costs are recorded at cost or at fair value in the case of acquired businesses. Our coal reserves are controlled either through direct ownership or through leasing arrangements which generally last until the recoverable reserves are depleted. Depletion of reserves and amortization of mine development costs is computed using the units-of-production method over the estimated recoverable tons. Costs related to locating coal deposits and determining the extractive feasibility of such deposits are expensed as incurred.
We review our long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If impairment indicators are present and the future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value.
Asset Retirement Obligation. The Surface Mining Control and Reclamation Act of 1977 and similar state statutes require that mine properties be restored in accordance with specified standards and an approved reclamation plan. Significant reclamation activities include reclaiming refuse and slurry ponds, reclaiming the pit and support acreage at surface mines, and sealing portals at underground mines. Reclamation activities that are performed outside of the normal mining process are accounted for as asset retirement obligations in accordance with the provisions of SFAS 143 (ASC 410), Accounting for Asset Retirement Obligations. We record our reclamation obligations on a mine-by-mine basis based upon current permit requirements and estimated reclamation obligations for such mines as determined by third-party engineering estimates. In accordance with ASC 410, we determine the fair value of our asset retirement obligations using a discounted cash flow methodology based on a discount rate related to the rates of US
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treasury bonds with maturities similar to the expected life of a mine, adjusted for our credit standing. In estimating future cash flows, we consider third party profit and apply inflation factors as required by ASC 410.
On at least an annual basis, we review our entire reclamation liability and make necessary adjustments for permit changes granted by state authorities, additional costs resulting from accelerated mine closures, and revisions to cost estimates and productivity assumptions, to reflect current experience.
Stock-Based Compensation. We account for stock-based compensation using Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (ASC 718). We currently use a standard option pricing model to measure the fair value of stock options granted to employees. ASC 718 requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value and is effective for interim or annual periods beginning after December 15, 2005. We adopted this standard effective January 1, 2006 and have elected the modified prospective application transition method. Under the modified prospective application transition method, awards that are granted, modified, repurchased, or cancelled after the date of adoption should be measured and accounted for in accordance with the provisions of ASC 718. Awards granted prior to the effective date should continue to be accounted for in accordance with the provisions of ASC 718 with the exception that compensation expense related to unvested options must be recognized in the income statement based on the fair value of the options on the date of grant. ASC 718 also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.
Mineral Reserves. We amortize our acquisition costs, development costs, capitalized asset retirement costs and some plant and equipment using the units-of-production method and estimates of recoverable proven and probable reserves. We review these estimates on a regular basis and adjust them to reflect our current mining plans. The rate at which we record depletion also depends on the estimates of our reserves. If the estimates of recoverable proven and probable reserves decline, the rate at which we record depletion increases. Such a decline in reserves may result from geological conditions, coal quality, effects of governmental, environmental and tax regulations, and assumptions about future prices and future operating costs.
Accounting for income taxes. At December 31, 2009, we had federal operating loss carryforwards of $106.7 million and state net operating loss carryforwards of $99.6 million. If not utilized, these federal and state net operating loss carryforwards will begin to expire at various dates beginning in 2015. The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. In connection with the sale of National Coal of Alabama, Inc. during 2009, net deferred tax liabilities of $0.3 million were written off against the related loss and net operating loss carryforwards of $1.2 million were transferred to the acquiring entity.
A valuation allowance has been established to reserve the potential benefits of these carryforwards in our financial statements to reflect the uncertainty of future taxable income required to utilize available tax loss carryforwards and other deferred tax assets. FASB Interpretation No. 48 (ASC 740), Accounting for Uncertainties in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
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We did not recognize any interest and penalties related to uncertain tax positions in income tax in 2009, 2008 and 2007.
There are no income tax examinations currently in process. With few exceptions, we are no longer subject to U.S. federal examinations or state and local income tax examinations by tax authorities for years before 2003.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51” (“SFAS 160”) (ASC 810). ASC 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). ASC 810 would have an impact on the presentation and disclosure of the non-controlling interests of any non wholly-owned businesses acquired in the future. ASC 810 was effective for fiscal years beginning after December 15, 2008; earlier adoption is prohibited. The adoption of ASC 810 did not have a material impact on our financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS No. 161”) (ASC 815) which changes the disclosure requirements for derivative instruments and hedging activities. ASC 815 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 (ASC 815), “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of ASC 815 did not have a material impact on our financial position or results of operations.
In April 2009, the FASB issued ASC 320, “Recognition and Presentation of Other-Than-Temporary Impairments”. It amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. It was effective for interim and annual reporting periods ending after June 15, 2009. The adoption did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued ASC 820, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. It provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly. It does not change the definition of fair value under ASC 820. It was effective for interim and annual reporting periods ending after June 15, 2009. The adoption did not have a material impact on our consolidated financial statements.
In May 2009, the FASB issued ASC 855, Subsequent Events. It establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It was effective for interim and annual periods ending after June 15, 2009. The adoption did not have a material impact on our financial position or results of operations.
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In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the Codification). The Codification became the single official source of authoritative, non-governmental U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption did not have a material impact on our consolidated financial position or results of operations.
Results of Operations
Throughout this report, we refer to our continuing operations as the operating results of our Tennessee operations, and the operating results of our Kentucky operations for the period from November 2004 through March 31, 2008. We refer to our discontinued operations as the operating results of our Alabama operations for the period from October 2007 through August 2009.
The following table presents consolidated statement of operations data as a percentage of revenues as of December 31 for each of the years indicated:
| (in percentages) |
2009 | 2008 | 2007 | ||||||
| Revenues |
100.0 | 100.0 | 100.0 | ||||||
| Operating expenses: |
|||||||||
| Cost of sales |
91.2 | 96.6 | 96.5 | ||||||
| Cost of services |
2.6 | 4.3 | — | ||||||
| Depreciation, depletion, amortization and accretion |
11.3 | 13.6 | 18.4 | ||||||
| General and administrative |
7.6 | 11.7 | 8.7 | ||||||
| Total operating expenses |
112.7 | 126.2 | 123.6 | ||||||
| Loss from operations |
(12.7 | ) | (26.2 | ) | (23.6 | ) | |||
| Other income (expense): |
|||||||||
| Interest expense |
(7.8 | ) | (11.2 | ) | (11.3 | ) | |||
| Interest income |
0.2 | 1.1 | 1.5 | ||||||
| Other income (expense), net |
0.2 | (2.9 | ) | 1.3 | |||||
| Loss from continuing operations before income taxes |
(20.1 | ) | (39.2 | ) | (32.1 | ) | |||
| Income tax benefit |
— | — | — | ||||||
| Net loss from continuing operations, net of tax |
(20.1 | ) | (39.2 | ) | (32.1 | ) | |||
| Income (loss) from discontinued operations, net of tax |
(1.7 | ) | (14.4 | ) | (0.2 | ) | |||
| Net income (loss) |
(21.8 | ) | (53.6 | ) | (32.3 | ) | |||
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Comparison of Years Ended December 31, 2009 and December 31, 2008
Production
During the years ended December 31, 2009 and 2008, our mining from continuing operations produced 798,143 and 969,485 tons of coal, respectively, as follows:
| Year Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| Tons | % | Tons | % | |||||
| Production: |
||||||||
| Surface mines |
370,142 | 32.1 | 415,823 | 40.1 | ||||
| Highwall mines |
80,891 | 7.0 | 173,327 | 16.7 | ||||
| Underground mines |
347,110 | 30.1 | 380,335 | 36.7 | ||||
| Total tons produced |
798,143 | 69.2 | 969,485 | 93.5 | ||||
| Purchased coal |
355,786 | 30.8 | 67,424 | 6.5 | ||||
| Total tons available |
1,153,929 | 100.0 | 1,036,909 | 100.0 | ||||
During 2009 and 2008, our discontinued operations produced 392,108 tons and 860,604 tons, respectively. The 2008 figures above include 59,181 tons produced by our Kentucky operations which were sold on March 31, 2008.
Revenue
Tons sold and the associated revenue from continuing operations follows:
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2009 | 2008 | $ | % | ||||||||||
| Coal sales |
$ | 85,598,350 | $ | 61,827,845 | $ | 23,770,505 | 38.4 | ||||||
| Tons sold |
1,166,929 | 1,009,198 | 157,731 | 15.6 | |||||||||
| Average price per ton sold |
$ | 73.35 | $ | 61.26 | $ | 12.09 | 19.7 | ||||||
| Other revenues |
$ | 2,437,132 | $ | 3,223,401 | $ | (786,269 | ) | (24.4 | ) | ||||
The 38.4% increase in revenue from coal sales for the year ended December 31, 2009 as compared to the same period in 2008 was primarily the result of the 17% increase in 2009 in the average contracted selling price per ton sold from our continuing operations due primarily to the successful renegotiation of long-term contracts near the end of 2008. Also during the first quarter of 2008 we sold 100,878 tons at an average price of $48.12 at our Straight Creek mining operations in Kentucky that we sold on March 31, 2008.
The decrease in other revenues of 24.4% is primarily due to fluctuations in production volume relating to revenue from a contract mining services agreement between Xinergy Corp. and National Coal Corporation to mine coal from a highwall mine previously sold to Xinergy Corp. as part of the Straight Creek sale on March 31, 2008. The contract mining agreement with Xinergy Corp. was terminated during November 2009.
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Cost of Coal Sales
| Year Ended December 31, |
Increase/(decrease) | ||||||||||
| 2009 | 2008 | $ | % | ||||||||
| Cost of coal sales |
$ | 80,323,782 | $ | 62,847,621 | $ | 17,476,161 | 27.8 | ||||
| Tons sold |
1,166,929 | 1,009,198 | 157,731 | 15.6 | |||||||
| Average cost per ton sold |
$ | 68.83 | $ | 62.27 | $ | 6.56 | 10.5 | ||||
Total cost of coal sales increased 27.8% on a 38.4% increase in coal sales revenue in 2009. The average cost per ton sold increased $6.56 to $68.83 in 2009 from $62.27 in 2008. The primary reasons for the increase in average cost per ton sold follows:
During 2009, we idled one of our higher cost underground mines and closed an underground mine in order to take advantage of purchased coal prices that were lower than our mining costs at these two mines. As a result of the mine closures, our cost per ton sold during 2009 compared to 2008 from our continuing operations declined by $10.44 due primarily to decreases in labor of $3.26 per ton sold, freight and fuel costs of $5.38 per ton sold and equipment usage costs of $1.80 per ton sold.
To offset the production shortfall from the mine closures, we purchased 355,459 tons of coal at an average price of $60.65 in 2009 compared to 31,084 tons in 2008 at an average price of $47.58 per ton, leading to an increase in the average cost per ton sold of $16.85 in 2009.
We also sold our Straight Creek operations on March 31, 2008, which sold 100,878 tons at an average cost of $64.35 per ton during the 2008 period.
Depreciation, Depletion, Amortization and Accretion
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2009 | 2008 | $ | % | ||||||||||
| Depreciation, depletion, amortization and accretion |
$ | 9,925,328 | $ | 8,847,711 | $ | 1,077,617 | 12.2 | ||||||
| Tons sold |
1,166,929 | 1,009,198 | 157,731 | 15.6 | |||||||||
| Average cost per ton sold |
$ | 8.51 | $ | 8.77 | $ | (0.26 | ) | (3.0 | ) | ||||
The 12.2% increase in depreciation, depletion, amortization, and accretion expense for the year ended December 31, 2009 as compared to the same period in 2008 was primarily the result of:
| (i) | A $1.9 million increase in expense primarily attributable to new mine development in 2008 and 2009; and |
| (ii) | A $0.1 million increase in expense related to the reopening of one of our train loading facilities during the third quarter of 2008; offset by |
| (ii) | A reduction of $0.1 million in depreciation expense from our continuing operations attributable to approximately $13.0 million of equipment becoming fully depreciated during 2008; and |
| (iii) | The sale of approximately $16.1 million in property, plant, equipment, and mine development, and a resulting decrease of $0.9 million of corresponding expense, associated with the sale of our Straight Creek properties on March 31, 2008. |
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General and Administrative Expenses
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2009 | 2008 | $ | % | ||||||||||
| General and administrative expense |
$ | 6,677,219 | $ | 7,635,292 | $ | (958,073 | ) | (12.5 | ) | ||||
| Tons sold |
1,166,929 | 1,009,198 | 157,731 | 15.6 | |||||||||
| Average cost per ton sold |
$ | 5.72 | $ | 7.57 | $ | (1.85 | ) | (24.4 | ) | ||||
The 12.5% decrease in general and administrative expenses for the year ended December 31, 2009 as compared to the same period in the previous year is primarily attributable to the reduction in professional fees of $0.6 million, insurance expense of $0.2 million and legal fees of $0.3 million; offset by an increase in payroll expense of $0.1 million.
Other (Income) Expense
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||||
| 2009 | 2008 | $ | % | ||||||||||||
| Interest expense |
$ | 6,879,517 | $ | 7,277,975 | $ | (398,458 | ) | (5.5 | ) | ||||||
| Interest income |
(170,086 | ) | (730,102 | ) | 560,016 | (76.7 | ) | ||||||||
| Other |
(155,504 | ) | 1,861,879 | (2,017,383 | ) | (108.4 | ) | ||||||||
| Total other (income) expense |
$ | 6,553,927 | $ | 8,409,752 | $ | (1,855,825 | ) | (22.1 | ) | ||||||
The 5.5% decrease in interest expense for the year ended December 31, 2009 as compared to the same period in 2008, was primarily the result of:
| (i) | A reduction in interest expense on our 10.5% senior secured notes attributable to the exchange of $13.0 million in notes and $161,783 in accrued interest for 1,855,935 shares of our common stock during 2008; and |
| (ii) | A reduction in interest expense attributable to the repayment of a $10.0 million term loan credit facility during 2008, offset by |
| (iii) | An increase in interest expense related to our short-term revolving credit facility obtained in April 2009. |
Interest income decreased by 76.7% for the year ended December 31, 2009 compared to 2008 due to lower average cash balances in 2009.
Other (income) expense changed $2.0 million to income of $0.2 million for the year ended December 31, 2009 compared to expense of $1.9 million in 2008 primarily due to the loss on extinguishment of debt in 2008 of approximately $1.7 million resulting from the $13.0 million reduction in debt on our 10.5% senior secured notes and the loss resulting from the early repayment from the proceeds from the sale of our Straight Creek operations in March 31, 2008 of our $10.0 million term loan credit facility with Guggenheim Corporate Funding, LLC.
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Loss from Discontinued Operations, Net of Taxes
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2009 | 2008 | $ | % | ||||||||||
| Loss from discontinued operations, net of taxes |
$ | (1,485,157 | ) | $ | (9,385,238 | ) | $ | 7,900,081 | * | ||||
| * | Not meaningful |
Discontinued operations consist of the operating results of our Alabama operations from October 2007 through August 2009. During the year ended December 31, 2009 our discontinued operations sold 404,245 tons of coal at an average sales price per ton of $77.45, for total sales revenue of $31.3 million compared to 981,580 tons of coal sold at an average sales price per ton of $68.82, for total sales revenue of $67.5 million during the same period in 2008.
Comparison of Year Ended December 31, 2008 and December 31, 2007
Production
During the year ended December 31, 2008 and 2007, our mining from continuing operations produced 969,485 and 1,146,171 tons of coal, respectively, as follows:
| Year Ended December 31, | ||||||||
| 2008 | 2007 | |||||||
| Tons | % | Tons | % | |||||
| Production: |
||||||||
| Surface mines |
415,823 | 40.1 | 357,475 | 23.0 | ||||
| Highwall mines |
173,327 | 16.7 | 178,033 | 11.4 | ||||
| Underground mines |
380,335 | 36.7 | 610,663 | 39.2 | ||||
| Total tons produced |
969,485 | 93.5 | 1,146,171 | 73.7 | ||||
| Purchased coal |
67,424 | 6.5 | 409,998 | 26.3 | ||||
| Total tons available |
1,036,909 | 100.0 | 1,556,169 | 100.0 | ||||
During 2008 and 2007, our discontinued operations produced 860,604 tons and 204,740 tons, respectively. The 2008 figures above include 59,181 tons produced by our Kentucky operations, which were sold on March 31, 2008.
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Revenue
Tons sold and the associated revenue from continuing operations is as follows:
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2008 | 2007 | $ | % | ||||||||||
| Coal sales |
$ | 61,827,845 | $ | 79,038,521 | $ | (17,210,676 | ) | (21.8 | ) | ||||
| Tons sold |
1,009,198 | 1,558,286 | (549,088 | ) | (35.2 | ) | |||||||
| Average price per ton sold |
$ | 61.26 | $ | 50.72 | $ | 10.54 | 20.8 | ||||||
| Other revenue |
$ | 3,233,401 | $ | 837,278 | $ | 2,396,123 | 286.2 | ||||||
The 21.8% decrease in revenue from coal sales for the year ended December 31, 2008 as compared to the same period in 2007 was primarily the result of:
| (i) | The sale of the Straight Creek mining operations, which sold 740,989 tons at an average price of $46.77 during 2007 as compared to 100,878 tons sold during 2008 at an average price of $48.12 per ton; offset by |
| (ii) | The sale of the Straight Creek mining operations, which sold 740,989 tons at an average price of $46.77 during 2007 as compared to 100,878 tons sold during 2008 at an average price of $48.12 per ton. |
The increase in other revenues of $2.4 million consisted primarily of revenue from a contract mining services agreement between Xinergy Corp. and National Coal Corporation to mine coal from a highwall mine previously sold to Xinergy Corp. as part of the Straight Creek sale on March 31, 2008 and throughput fees charged to another coal producer for use of our train loading facilities in Southeast Kentucky, which were sold on March 31, 2008.
Cost of Coal Sales
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2008 | 2007 | $ | % | ||||||||||
| Cost of sales |
$ | 62,847,621 | $ | 77,064,753 | $ | (14,217,132 | ) | (18.4 | ) | ||||
| Tons sold |
1,009,198 | 1,558,286 | (549,088 | ) | (35.2 | ) | |||||||
| Average cost per ton sold |
$ | 62.27 | $ | 49.45 | $ | 12.82 | 25.9 | ||||||
| Cost of coal services |
$ | 2,818,582 | $ | — | $ | 2,818,582 | 100.0 | ||||||
Total cost of sales decreased 18.4% during the year ended December 31, 2008 as compared to the same period in 2007 while our average cost per ton increased $12.82 due primarily to:
| (i) | Our Tennessee mines sold 908,320 tons at an average cost per ton sold of $62.05 per ton for the year ended December 31, 2008 compared to 817,297 tons at an average cost per ton sold of $52.18 for the year ended December 31, 2007. This increased cost per ton sold of $9.87 is due principally to: (i) $3.57 increased per ton labor cost; (ii) $2.67 increased per ton diesel fuel cost; (iii) $1.84 increase per ton contract labor cost; (iv) $0.73 increase per ton worker’s compensation cost, due principally to an outlier claim in 2008; and (v) $0.50 increase per ton explosives costs. |
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| (ii) | The sale of our Kentucky operations on March 31, 2008, which sold 100,878 tons at a cost of $64.35 per ton for the year ended December 31, 2008 compared to 740,989 tons sold at a cost of $46.45 per ton for the same period in 2007. The higher price per ton in 2008 resulted in an average increase of $2.95 cost per ton. |
The increase in cost of services of $2.8 million during 2008 compared to 2007 is due to the contract mining agreement between Xinergy Corp. and National Coal Corporation to mine coal from a highwall mine previously sold to Xinergy Corp. as part of the Straight Creek sale on March 31, 2008.
Depreciation, Depletion, Accretion and Amortization expense
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2008 | 2007 | $ | % | ||||||||||
| Depreciation, depletion, amortization and accretion |
$ | 8,847,711 | $ | 14,661,153 | $ | (5,813,442 | ) | (39.7 | ) | ||||
| Tons sold |
1,009,198 | 1,558,286 | (549,088 | ) | (35.2 | ) | |||||||
| Average cost per ton sold |
$ | 8.77 | $ | 9.41 | $ | (0.64 | ) | (6.8 | ) | ||||
The 39.7% decrease in depreciation, depletion, amortization, and accretion expense for the year ended December 31, 2008 as compared to the comparable period in 2007, is attributable primarily to:
| (i) | The sale of approximately $16.1 million in property, plant, equipment, and mine development, and a resulting decrease of $3.7 million of corresponding expense, associated with the sale of the Straight Creek properties on March 31, 2008. |
| (ii) | The reduction in expense of approximately $2.1 million for Tennessee, principally due to assets that were fully depreciated in 2007. |
General and Administrative Expenses
| Year Ended December 31, |
Increase/(decrease) | ||||||||||||
| 2008 | 2007 | $ | % | ||||||||||
| General and administrative expense |
$ | 7,635,292 | $ | 6,969,932 | $ | 665,360 | 9.5 | ||||||
| Tons sold |
1,009,198 | 1,558,286 | (549,088 | ) | (35.2 | ) | |||||||
| Average cost per ton sold |
$ | 7.57 | $ | 4.47 | $ | 3.10 | 69.4 | ||||||
The 9.5% increase in general and administrative expenses for the year ended December 31, 2008 as compared to the same period in the previous year is primarily attributable to the addition of estimated legal settlement fees of $0.3 million, bad debt of $0.1 million and professional fees of $0.6 million offset by the reduction in insurance fees of $0.2 million and engineering consulting fees of $0.1 million.
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Other Income (Expense)
| Year Ended December 31, | Increase/(decrease) | ||||||||||||||
| 2008 | 2007 | $ | % | ||||||||||||
| Interest expense |
$ | 7,277,975 | $ | 8,990,387 | $ | (1,712,412 | ) | (19.0 | ) | ||||||
| Interest income |
(730,102 | ) | (1,179,458 | ) | 449,356 | (38.1 | ) | ||||||||
| Other |
1,861,879 | (1,030,932 | ) | 2,892,811 | (280.6 | ) | |||||||||
| Total other income (expense) |
$ | 8,409,752 | $ | 6,779,997 | $ | 1,629,755 | 24.0 | ||||||||
The 19.0% decrease in interest expense for the year ended December 31, 2008 as compared to the same period in 2007 was primarily the result of:
| (i) | a reduction in interest expense on our 10.5% senior secured notes attributable to the conversion of $13.0 million in notes and $161,783 in accrued interest for 1,855,935 shares of our common stock during 2008; and |
| (ii) | the repayment of the $10.0 million term loan credit facility with Guggenheim in 2008. |
Interest income declined from $1.2 million during the year ended December 31, 2007 to $0.7 million in 2008 as a result of lower average cash balances within our Tennessee operations in restricted cash and operating funds.
Other changed $2.9 million to an expense of $1.9 million for the year ended December 31, 2008 compared to income of $1.0 million for the year ended December 31, 2007 primarily due to: the loss on extinguishment of debt resulting from the $13.0 million reduction in debt on our 10.5% senior secured notes of $0.5 million and the loss resulting from the repayment of our Term loan credit facility of $1.2 million in 2008.
Loss from Discontinued Operations, Net of Taxes
| Year Ended December 31, |
Increase/(decrease) | |||||||||||||
| 2008 | 2007 | $ | % | |||||||||||
| Loss from discontinued operations, net of taxes |
$ | (9,385,238 | ) | $ | (164,327 | ) | $ | (9,220,911 | ) | * | ||||
| * | Not meaningful |
Discontinued operations consist of the operating results of our Alabama operations from October 2007 through August 2009. During the year ended December 31, 2008 our discontinued operations sold 981,580 tons at an average sales price of $68.82 for total sales revenue of $67.5 million compared to 204,740 tons sold at an average sales price of $63.03 for total sales revenue of $12.9 million during the same period in 2007.
Related Party Transactions
See “Certain Relationships, Related Transactions and Director Independence” included elsewhere in this report for a full description of transactions to which we were or will be a party, in which the transaction
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involved exceeds a material amount, and in which any director, executive officer, shareholder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.
Liquidity and Capital Resources
During the first quarter of 2010, Georgia Power Company exercised its rights of force majeure under our coal supply contract due to freezing weather in the Southeast United States, which resulted in their suspension of our shipment of approximately 40,000 tons of coal. While Georgia Power Company is obligated under our contract to purchase this coal within twelve months after the end of the event, the suspension of these shipments resulted in an immediate reduction in cash receipts of approximately $3.0 million during January and February 2010. This cash shortfall has been financed primarily by our vendors, resulting in a significant increase in accounts payable since the beginning of the year.
We notified Centaurus Energy Master Fund, LP, the lender under our $5 million short-term revolving credit facility and the holder of $30.3 million (or 72.1%) of our 10.5% Notes due 2010, of the suspension of coal shipments and the resulting adverse effect on our cash flows. Following meetings with Centaurus, we were informed that Centaurus was of the view that we were unable to pay our debts as they become due and otherwise insolvent and therefore in default under our $5 million revolving credit agreement, and that Centaurus believed it had remedies under the credit agreement, including its right to issue a formal notice of default and accelerate all amounts due under the credit agreement. We disagreed with Centaurus’s assertion that we were unable to pay our obligations as they became due, and advised Centaurus that we remained solvent and were not then in default under our credit agreement.
We are nonetheless in default under our $5 million short-term revolving credit agreement as of the date this report is filed with the SEC. Under the terms of the facility, the annual financial statements that we file with the SEC must be reported on without a “going concern” qualification from our independent certified public accountants. Because the accompanying auditors’ report for the year ended December 31, 2009, does contain a going concern explanatory paragraph, we are in default of this covenant as of the date this report is filed with the SEC. While we have not obtained an agreement from Centaurus to forbear from exercising its available remedies, Centaurus has indicated that it will not immediately seek to accelerate the amounts due under the revolving credit agreement so long as we continue to pursue a transaction that pays down this indebtedness in the near term.
In 2009, we concluded that cash generated from operations would not be sufficient to pay interest or principal on our 10.5% Notes due 2010, and we began exploring strategic alternatives to improve our liquidity and reduce our debt obligations. We engaged the services of a financial advisory firm to evaluate possible strategic and financing transactions. Among these alternatives, we have been pursuing a restructuring of our debt, the issuance of common stock in exchange for the purchase and cancellation of our debt, the sale of a portion of our operating assets, transactions in which we would issue preferred or additional common stock for cash, and merger transactions with other coal producers.
Our discussions with Centaurus and our default under the $5 million short-term credit agreement have caused us to accelerate our plans to address our short-term liquidity issues and pay off our secured debt, and pursue alternatives that can be consummated in the near term. We are presently negotiating with a third party to sell a portion of our assets to improve our working capital, including by reducing amounts due Centaurus under our $5.0 million short-term credit facility, which will address our default under this facility and the immediate insolvency issues raised by Centaurus. The transaction presently being negotiated is not expected to result in the pay-down of any principal amount of our 10.5% Notes due 2010, and we will continue to pursue all possible transactions to pay off this debt prior to its maturity in December 2010. Centaurus is cooperating with us to allow us to consummate the transaction presently being negotiated, and has refrained from attempting to exercise any remedies under our credit facilities following a default. We understand from Centaurus that its continued forbearance from exercising its remedies under our credit facilities requires that we consummate this transaction within the very near term.
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If we are unable to consummate the transaction to sell a portion of our assets that is presently being negotiated on terms acceptable to us and within a time period acceptable to Centaurus, or if our financial position worsens due to the withdrawal of credit support from our vendors or other circumstances, or based on other facts and circumstances both known and unknown to us, we may determine that it is in our best interest to voluntarily seek protection under federal bankruptcy laws. Seeking relief under federal bankruptcy laws, even if we are able to emerge from bankruptcy protection, which is not certain, could have a material adverse effect on our relationships with our existing and potential customers, employees, vendors, and others. Further, if we are unable to successfully implement a plan of reorganization, we could be forced to liquidate our assets.
At December 31, 2009, we had cash and cash equivalents of approximately $1.2 million and negative working capital of approximately $54.8 million. Cash flows provided by (used in) continuing operations were approximately $38,000, $(9.6) million and $(9.1) million for the years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, we had a stockholders’ deficit of $12.3 million and incurred net losses from continuing operations of $17.7 million for the year then ended. Management expects that we will continue to incur net losses for the foreseeable future.
The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates our realization of assets and satisfaction of liabilities in the normal course of business, and our auditors have included a going concern explanatory paragraph in their report on our financial statements. We have $42.0 million in senior secured notes that are due on December 15, 2010. Additionally, our $5.0 million short term line of credit, of which $3.0 million was outstanding at December 31, 2009, matures on December 15, 2010, but can be accelerated by Centaurus due to our default under that credit agreement. As of February 28, 2010, we had $0.6 million in cash and $0.5 million available under our short-term revolving credit facility. We expect that our operations during 2010 will require $0.5 million to $0.6 million of cash on a monthly basis. Therefore, we have an immediate need for additional financing to meet our operating and investing activities for the year as well as to make scheduled principal payments. Additionally, we must raise additional equity and/or refinance our senior secured debt and short-term revolving credit facility. We are pursuing a number of activities to address our immediate and long term liquidity needs, and we have engaged an investment banker to assist us in efforts to obtain additional financing and to explore a number of strategic alternatives. The 2009 default by National Coal of Alabama, Inc., of the 12% Notes due 2012 may make it difficult to obtain future financings on acceptable terms, if at all. Additionally, our share price has traded below $1.00 for 30 consecutive days, and NASDAQ has notified us that we are not in compliance with NASDAQ Market Place Rule 5450(a)(1), which will result in our shares being delisted from NASDAQ if we are unable to regain compliance by July 6, 2010. These factors, among others, may indicate that we will be unable to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to raise additional equity or refinance our existing debt and ultimately, to attain profitability. There is no assurance that we will be successful in raising additional funds or that, if we do raise additional funds, that we will be able to attain profitability or even continue in business.
During 2008, we successfully renegotiated several of our existing coal supply agreements resulting in an increased selling price per ton during 2009, including our contracts with Georgia Power Company, which represented approximately 95% of our continuing operation’s coal revenues for the year ended December 31, 2009.
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The weighted average selling price per ton is $79.62, $76.03, and $73.70 on 0.9 million, 0.8 million, and 0.5 million tons contracted for 2010, 2011, and 2012, respectively. We typically sell our coal for a specified per ton amount and at a negotiated price pursuant to both short-term contracts and contracts of twelve months or greater. For the year ended December 31, 2009, 98% of sales were pursuant to contracts of twelve months or greater. Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lower gross margins, which could have a material adverse effect on our operating cash flows. Additionally, our customers may have the ability to delay the timing of their purchases, which could negatively impact operating cash flows. Finally, coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or our customers during the duration of specified events beyond the control of the affected party.
We expect we will meet our contract commitments through a combination of produced tons and purchased coal. Our production can be negatively impacted by weather, labor shortages or equipment break-downs. Additionally, geological and mining conditions may not be fully identified by available exploration data or may differ from experience in current operations. Additionally, coal for purchase may not be available, or available only at unfavorable prices. The occurrence of such events can adversely affect production, the cost of sales or both, and could have a materially adverse effect on our operating cash flows.
We invested approximately $6.2 million in equipment and mine development in our continuing operations during the year ended December 31, 2009. During 2010, management expects to incur approximately $3.6 million to maintain existing assets. In prior years, we experienced the unanticipated loss of the use of key equipment, which resulted in lost production and lost revenues. We may experience similar mechanical failures in the future, which could have a material adverse effect on our operating cash flows.
Debt Obligations
The following table summarizes our long-term debt obligations, excluding capital leases, from continuing operations as of the dates indicated:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| 10.5% Senior Secured Notes, due 2010 |
$ | 42,000,000 | $ | 42,000,000 | ||||
| Equipment loans and installment purchase obligations |
1,284,210 | 3,137,897 | ||||||
| Insurance premium financing |
65,000 | 477,749 | ||||||
| 43,349,210 | 45,615,646 | |||||||
| Unamortized discounts |
(705,986 | ) | (1,386,810 | ) | ||||
| Current portion of long-term debt |
(42,372,933 | ) | (2,336,191 | ) | ||||
| Total long-term debt |
$ | 270,291 | $ | 41,892,645 | ||||
10.5% Senior Secured Notes Due 2010
On December 29, 2005, we issued $55.0 million in aggregate principal amount of 10.5% Senior Secured Notes due 2010 (the “10.5% Notes due 2010”) and 55,000 warrants to purchase a total of 1,732,632 shares of our common stock. The 10.5% Notes due 2010 and warrants were sold in units consisting of one $1,000 principal amount note and one warrant, which entitled the holder to purchase 31.5024 shares
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of our common stock at an exercise price of $8.50 per share, subject to adjustment. The warrants are subject to mandatory conversion if the price of our common stock remains above $12.75 for more than twenty days out of a thirty-day period. The units were sold in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”). The 10.5% Notes due 2010 are fully and unconditionally guaranteed by our wholly-owned subsidiaries, National Coal Corporation, NC Railroad, Inc. and NC Transportation, Inc. and were offered and sold within the United States only to qualified institutional buyers in reliance on Rule 144A under the Securities Act. We subsequently registered with the SEC a new issue of notes having substantially identical terms as the 10.5% Notes due 2010 in order to exchange freely tradable notes for the 10.5% Notes due 2010, and in July 2006, we issued $51.0 million in principal amount of freely tradable notes in exchange for the same principal amount of 10.5% Notes due 2010.
During the year ended December 31, 2008, certain holders of our 10.5% Senior Secured Notes exchanged $13.0 million in notes and $161,783 in accrued interest for 1,855,935 shares of our common stock resulting in a $504,393 loss on extinguishment of debt included as a component of Other within Other income (expense), net in the accompanying condensed consolidated statement of operations.
The 10.5% Notes due 2010 were issued pursuant to an indenture with Wells Fargo Bank National Association, as trustee. Interest on the 10.5% Notes due 2010 accrues from the date of issuance or the most recent interest payment date, and is payable in cash semi-annually in arrears on June 15th and December 15th of each year, commencing on June 15, 2006. The warrants are exercisable on or after December 29, 2006 and the warrants will expire on December 15, 2010. All of the securities in this offering were initially purchased by the underwriter.
The 10.5% Notes due 2010 and the related guarantees are secured by a lien on substantially all of our and the guarantors’ property and assets, including a pledge of 100% of the capital stock or other equity interests of our domestic subsidiaries. The 10.5% Notes due 2010 will mature on December 15, 2010. The 10.5% Notes due 2010 are subordinated to the $5.0 million Term Note Credit Agreement now with Centaurus Energy Master Fund, LP, which holds a first priority secured lien senior to the 10.5% Notes due 2010, and is senior to our existing and future subordinated debt.
The 10.5% Notes due 2010 are redeemable, at our option, in whole or part, in each case at the redemption prices described in the table below. All redemptions prices are in addition to any accrued and unpaid interest to the date of the redemption.
| Time Period |
Percentage | ||
| December 15, 2009 – June 14, 2010 |
102.625 | % | |
| June 15, 2010 and thereafter |
100.000 | % |
The indenture governing the 10.5% Notes due 2010, among other things and subject to certain exceptions, limits our ability and the ability of our subsidiaries to:
| • | incur or guarantee additional indebtedness or issue preferred stock; |
| • | pay dividends or distributions on, or redeem or repurchase, capital stock; |
| • | make investments; |
| • | issue or sell capital stock of restricted subsidiaries; |
| • | engage in transactions with affiliates; |
| • | grant or assume liens; or |
| • | consolidate, merge or transfer all or substantially all of our assets. |
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Our failure to make required payments of interest and principal and to comply with other covenants may result in the acceleration of the principal of the 10.5% Notes due 2010.
Revolving Credit Agreement
On April 9, 2009 we entered into a Revolving Credit Agreement with Next View Partners, LLC, (“Next View”) as administrative agent and collateral agent for certain lenders. The credit facility provided for borrowings of up to $10.0 million, and was permitted indebtedness under the indenture for our 10.5% Notes due 2010. The agreement allowed us the right to borrow up to an aggregate of $5.0 million on or before June 30, 2009 and an aggregate of $10.0 million after June 30, 2009. All amounts under the revolving loans became due and payable on December 15, 2009, unless we obtained the consent of a super majority of holders of our 10.5% Notes, defined by two thirds ownership of the 10.5% Notes due 2010, to extend the maturity date until April 9, 2010.
On December 10, 2009, Centaurus Energy Master Fund, LP assumed and modified our Revolving Credit Agreement with Next View. Centaurus is a super majority of holders of our 10.5% Notes due 2010. The loan modification agreement reduced the face amount of the note issued from $10.0 million to $5.0 million, extended the maturity date of the loan from December 15, 2009 to December 15, 2010 and amended the minimum coal production and shipment amounts. As of December 31, 2009, we were in compliance with all relevant debt covenants and the outstanding balance was $3.0 million.
Interest under this facility is payable monthly in arrears at an annual rate of 15%. Our obligations under this credit facility are secured by a lien on substantially all the assets of National Coal Corp. and its subsidiaries. The credit facility contains several performance covenants, including minimum production and shipment amounts of coal and limitations on additional indebtedness. The facility includes customary default provisions, and all outstanding obligations may become immediately due and payable in the event of our default. We are in default under this facility as of the date this report is filed with the SEC.
Installment Purchase Obligations and Equipment Notes
In February 2009, we entered in a new equipment note pursuant to which we purchased a vehicle with an aggregate principal value of $34,852. The note requires payment over 36 months with a fixed interest rate of 8.69%. The obligation under the note is secured by the vehicle purchased.
In November and December 2008, we entered into new equipment notes pursuant to which we purchased vehicles with an aggregate principal value of $127,849. The notes require payments over 36 months with fixed interest rates ranging from of 8.19% to 8.69%. The obligations under the notes are secured by the vehicles purchased.
In August 2008, we entered into new equipment notes pursuant to which we purchased vehicles with an aggregate principal value of $129,104. The notes require payments over 36 months with a fixed interest rate of 6.99%. The obligations under the notes are secured by the vehicles purchased.
In June 2008, we acquired $1,175,000 of used equipment in exchange for $100,000 cash, a $244,000 note payable and the assumption of $831,000 in equipment loans. The $244,000 note payable requires repayment in one year at 8% interest. The assumed equipment loans require payments over 55 months at fixed interest rates ranging from 7.45% to 8.0%. The obligations under the notes are secured by the purchased equipment.
In April 2008, we entered into a new installment sales contract and new equipment notes with equipment manufacturers pursuant to which we acquired equipment with an aggregate principal value of approximately $1,179,451 and $681,040, respectively. The installment sales contract requires payments over 36 months at a fixed interest rate of 6.25% and the equipment notes require payments over 36 months with a fixed interest rate of 4.75%. The obligations are secured by the equipment purchased.
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In February, March and June 2008, we entered into new equipment notes with a bank and an equipment manufacturer pursuant to which we purchased vehicles with an aggregate principal value of approximately $103,000. These equipment notes require payments over 36 months at fixed interest rates of 7.75%. The obligations under the equipment notes are secured by the vehicles purchased.
In January and February 2007, we entered into new installment sale contracts with an equipment manufacturer pursuant to which we refinanced equipment with an aggregate principal value of approximately $719,000 formerly acquired under various capital leases. These installment sale contracts require payments over 36 months at fixed interest rates ranging from 5.29% to 8.75%. The obligations under the installment sale contracts are secured by the equipment purchased.
In August 2007, we entered into new installment sale contracts with equipment manufacturers pursuant to which we acquired equipment with an aggregate principal value of approximately $4,889,000. These installment sale contracts require payments over 36 to 60 months at fixed interest rates ranging from 5.97% to 7.99%. The obligations under the installment sale contracts are secured by the equipment purchased.
Approximately $2.6 million of equipment related debt was assumed by Xinergy Corp. on March 31, 2008, as a result of the sale of our Straight Creek, Kentucky properties.
Cash Flows
We currently satisfy our working capital requirements primarily through cash flows generated from operations and sales of debt and equity securities. For the year ended December 31, 2009, we had a net decrease in cash of approximately $2.7 million. Cash flows from operating, financing and investing activities for the year ended December 31, 2009, 2008, and 2007 are summarized in the following table:
| Year Ended December 31, | ||||||||||||
| Activity |
2009 | 2008 | 2007 | |||||||||
| (in thousands) |
||||||||||||
| Operating activities |
$ | 3,714 | $ | (4,195 | ) | $ | (9,171 | ) | ||||
| Investing activities |
(2,948 | ) | 3,928 | (70,786 | ) | |||||||
| Financing activities |
(3,489 | ) | (4,648 | ) | 86,599 | |||||||
| Net (decrease) increase in cash |
$ | (2,723 | ) | $ | (4,915 | ) | $ | 6,642 | ||||
Operating Activities
During 2009, we generated $3.7 million of cash from operations, a $7.9 million increase over 2008. Cash flows from continuing operations provided approximately $38,000, a $9.6 million improvement from 2008. A portion of the improvement in cash flows from continuing operations is the result of an increase of $5.5 million in accounts payable and accrued expenses, $1.2 million decrease in inventory levels, offset by a $1.5 million reduction in deferred revenue and $1.5 million decrease in other non-current liabilities.
The net cash used in operating activities of approximately $4.2 million during the year ended December 31, 2008 compared with prior year cash used in operations of $9.2 million was primarily attributable to the current period activity including a full year of operating results for National Coal of Alabama while only being offset by three months of operating losses associated with the Straight Creek mining operations. The comparable period in the prior year includes Straight Creek operating losses and included
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National Coal of Alabama operations for only three months. However, in the first quarter of 2008, our dragline equipment utilized in our L. Massey surface mine in Alabama suffered a major mechanical failure. The equipment was repaired and was back in full production on July 29, 2008. This breakdown resulted in estimated lost production of 140,000 tons and lost revenues of $9.5 million during the year ended December 31, 2008.
Investing Activities
The $6.8 million decrease in cash provided by investing activities from $3.9 million for the year ended December 31, 2008 to cash used in investing activities of $2.9 million for the year ended December 31, 2009 was primarily due to; (i) $10.6 million of proceeds received from the sale of our Straight Creek, Kentucky properties in March 2008 (ii) a $4.4 million decrease in capital expenditures in 2009 and (iii) a decrease in restricted cash released to operations of $1.3 million in 2009 compared to 2008.
Net cash used in investing activities from continuing operations was $0.8 million in 2009 compared to $6.9 million provided by investing activities in 2008. The $7.7 million decrease was primarily related to the Straight Creek sale on March 31, 2008 and a decrease in capital expenditures in 2009.
The change in cash provided by investing activities was $3.9 million for the year ended December 31, 2008 compared to cash used in investing activities of $70.8 million for the year ended December 31, 2007. The change was primarily attributable to: (i) the acquisition of Mann Steel Products, Inc. on October 19, 2007 for $58.7 million and a $10.2 million investment in reclamation bonds and other restricted cash during 2007 offset by (ii) the sale of our Straight Creek, Kentucky properties in March 2008 for $10.6 million and (iii) the release of $7.0 million of reclamation bonds associated with the Straight Creek mining operations during 2008.
Financing Activities
The net cash used in financing activities decreased $1.1 million to $3.5 million in 2009 from $4.6 million in 2008. Net cash used in financing activities from continuing operations was $2.7 million in 2009 and $2.7 million in 2008. During 2009, we obtained a short term revolving line of credit and had gross borrowings under this line of $5.0 million and made repayments totaling $2.0 million. We also repaid $2.0 million on capital lease obligations and made principal payments of $2.8 million on long term debt during 2009. Also during 2009, we entered into new capital leases totaling $0.3 million for equipment.
Net cash used in financing activities was $4.6 million for the year ended December 31, 2008 compared to the net cash provided by financing activities of $86.6 million for the year ended December 31, 2007 was primarily due to: (i) the proceeds we received from our 12% senior secured notes due 2012 during 2007 of $60.0 million to purchase Mann Steel Products Inc. and (ii) proceeds from the issuance of common stock of 34.1 million during 2007 compared to $10.9 million raised in equity financings for the year ended December 31, 2008. During 2008, cash was used to repay the Term Loan Credit Facility and notes and equipment related financing totaling approximately $15.8 million compared to $6.3 million in 2007.
Off-Balance Sheet Arrangements
At December 31, 2009, 2008, and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, except as noted below, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
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Contractual Obligations
The following summarizes our contractual obligations, including principal and interest, at December 31, 2009 and the effects such obligations are expected to have on liquidity and cash flow in future periods:
| Payments due by period | |||||||||||||||
| Less than 1 | 1-3 | 3-5 | After | ||||||||||||
| Total | Year | Years | Years | 5 Years | |||||||||||
| Long-term debt (including interest) |
$ | 47,754,606 | $ | 47,486,383 | $ | 268,223 | $ | — | $ | — | |||||
| Operating leases |
24,982 | 17,554 | 7,428 | — | — | ||||||||||
| Capital leases |
1,627,309 | 1,473,309 | 154,000 | — | — | ||||||||||
| Total contractual obligations |
$ | 49,406,897 | $ | 48,977,246 | $ | 429,651 | $ | — | $ | — | |||||
We rent mining equipment pursuant to operating lease agreements, and made lease payments totaling approximately $2.2 million during the year ended December 31, 2009. During November 2009, the equipment sublease between Xinergy Corp. and National Coal Corporation, entered into as part of the Straight Creek sale on March 31, 2008, was terminated thereby decreasing our contractual obligations by $599,703 during 2010.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Market Risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices.
Interest Rate Risks
Our interest expense is sensitive to changes in the general level of interest rates in the U.S. At December 31, 2009, we had $45.6 million aggregate principal amount of debt under fixed rate instruments and no debt under variable rate instruments. At December 31, 2008, we had $44.2 million aggregate principal amount of debt under fixed rate instruments and no debt under variable rate instruments.
Commodity Risks
We are subject to commodity price risk based on the fluctuating market price of coal. We manage this risk through securing long-term coal supply agreements rather than through use of derivative instruments. In the future, as existing long-term contracts expire or become subject to repricing, our coal sales will be made at then-current market prices. As a result, our revenues and net income will be significantly affected by fluctuations in the price of coal.
Coal prices are influenced by a number of factors and vary dramatically by region. The two principal components of the delivered price of coal are the price of coal at the mine, which is influenced by coal quality, and the cost of transporting coal from the mine to the point of use. Electricity generators purchase coal on the basis of its delivered cost per million Btu. As macroeconomic factors affect these commodity prices, the price of coal will similarly be impacted.
The cost of operating a mine is influenced by geological characteristics such as seam thickness, overburden ratios and depth of underground reserves. It is generally cheaper to mine coal seams that are
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thick and located close to the surface than to mine thin underground seams. Typically, coal mining operations will begin at the part of the coal seam that is easiest and most economical to mine. As the seam is mined, it becomes more difficult and expensive to mine because the seam either becomes thinner or extends more deeply into the earth, requiring removal of more overburden. Underground mining is generally more expensive than surface mining as a result of high capital costs including costs for modern mining equipment and construction of extensive ventilation systems and higher labor costs, including costs for labor benefits and health care.
In addition to the cost of mine operations, the price of coal at the mine is also a function of quality characteristics such as heat value and sulfur, ash and moisture content. Coal used for domestic consumption is generally sold freight on board at a loading point, and the purchaser normally pays the transportation costs. Export coal is usually sold at an export terminal, and the seller is responsible for shipment to the export coal loading facility while the purchaser pays the ocean freight. Most electric power generators arrange long-term shipping contracts with rail or barge companies to assure stable delivery costs. Transportation cost can be a large component of the purchaser’s cost. Although the customer pays the freight, transportation cost is still important to coal mining companies because the customer may choose a supplier largely based on the cost of transportation. Trucks and overland conveyors haul coal over shorter distances, while lake carriers and ocean vessels move coal to export markets. Some domestic coal is shipped over the Great Lakes. Railroads typically handle approximately 60% of U.S. coal production, with CSX and Norfolk Southern the dominant carriers in the eastern United States.
Some products used in mining activities, such as diesel fuel, are subject to price volatility. We use short-term fuel contracts to manage the volatility related to this exposure.
Foreign Currency
All of our transactions are denominated in U.S. dollars, and as a result, we do not have material exposure to currency exchange rate risk.
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| Item 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
National Coal Corp.
We have audited the consolidated balance sheets of National Coal Corp. (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Coal Corp. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has $42.0 million of senior secured debt due December 15, 2010 and a $5.0 million short-term revolving line of credit due on December 15, 2010 that is in default due to the going concern explanatory paragraph included herein. Additionally, the Company needs additional short-term financing. The Company has incurred significant net losses from continuing operations in each of the last three years and has a working capital deficit of $54.8 million and a stockholders’ deficit of $12.3 million as of December 31, 2009. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 31, 2010
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Consolidated Balance Sheets
| December 31, 2009 | December 31, 2008 | |||||||
| Assets |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 1,185,725 | $ | 3,908,469 | ||||
| Accounts receivable, net |
366,680 | 474,351 | ||||||
| Inventory |
1,403,972 | 2,957,654 | ||||||
| Prepaid and other current assets |
1,550,919 | 1,282,777 | ||||||
| Current assets of discontinued operations |
— | 9,751,877 | ||||||
| Total Current Assets |
4,507,296 | 18,375,128 | ||||||
| Property, plant, equipment and mine development, net |
40,298,450 | 43,674,758 | ||||||
| Deferred financing costs |
890,048 | 1,238,267 | ||||||
| Restricted cash |
6,211,637 | 11,338,137 | ||||||
| Other non-current assets |
906,097 | 1,562,901 | ||||||
| Long term assets of discontinued operations |
— | 71,620,026 | ||||||
| Total Assets |
$ | 52,813,528 | $ | 147,809,217 | ||||
| Liabilities and Stockholders’ (Deficit) Equity |
||||||||
| Current Liabilities: |
||||||||
| Accounts payable |
$ | 11,551,663 | $ | 6,188,085 | ||||
| Accrued expenses |
1,065,355 | 880,632 | ||||||
| Borrowings under short-term line of credit |
3,000,000 | — | ||||||
| Current maturities of long term debt |
42,372,933 | 2,336,191 | ||||||
| Current installments of obligations under capital leases |
1,237,358 | 1,886,251 | ||||||
| Current portion of asset retirement obligations |
98,528 | 145,282 | ||||||
| Deferred revenue |
— | 1,241,840 | ||||||
| Current liabilities of discontinued operations |
— | 11,735,695 | ||||||
| Total Current Liabilities |
59,325,837 | 24,413,976 | ||||||
| Long - term debt, less current maturities, net of discount |
270,291 | 41,892,645 | ||||||
| Obligations under capital leases, less current installments |
140,958 | 1,314,188 | ||||||
| Asset retirement obligations, less current portion |
3,790,212 | 3,763,720 | ||||||
| Deferred revenue |
1,000,000 | 1,303,655 | ||||||
| Other non-current liabilities |
589,139 | 2,138,235 | ||||||
| Long-term liabilities of discontinued operations |
— | 67,492,063 | ||||||
| Total Liabilities |
65,116,437 | 142,318,482 | ||||||
| Stockholders’ (Deficit) Equity: |
||||||||
| Common Stock, $.0001 par value; 80 million shares authorized; 34,313,889 and 34,184,824 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively |
3,431 | 3,418 | ||||||
| Additional paid in capital |
116,191,838 | 114,770,947 | ||||||
| Accumulated deficit |
(128,498,178 | ) | (109,283,630 | ) | ||||
| Total Stockholders’ (Deficit) Equity |
(12,302,909 | ) | 5,490,735 | |||||
| Total Liabilities and Stockholders’ (Deficit) Equity |
$ | 52,813,528 | $ | 147,809,217 | ||||
See Accompanying Notes to Consolidated Financial Statements.
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Consolidated Statements of Operations
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Revenues: |
||||||||||||
| Coal sales |
$ | 85,598,350 | $ | 61,827,845 | $ | 79,038,521 | ||||||
| Other revenues |
2,437,132 | 3,223,401 | 837,278 | |||||||||
| Total revenues |
88,035,482 | 65,051,246 | 79,875,799 | |||||||||
| Operating expenses: |
||||||||||||
| Cost of coal sales (exclusive of depreciation, depletion, amortization and accretion) |
80,323,782 | 62,847,621 | 77,064,753 | |||||||||
| Cost of coal services (exclusive of depreciation, depletion, amortization and accretion) |
2,325,490 | 2,818,582 | — | |||||||||
| Depreciation, depletion, amortization and accretion |
9,925,328 | 8,847,711 | 14,661,153 | |||||||||
| General and administrative |
6,636,346 | 7,635,292 | 6,969,932 | |||||||||
| Total operating expenses |
99,210,946 | 82,149,206 | 98,695,838 | |||||||||
| Loss from continuing operations |
(11,175,464 | ) | (17,097,960 | ) | (18,820,039 | ) | ||||||
| Other income (expense): |
||||||||||||
| Interest expense |
(6,879,517 | ) | (7,277,975 | ) | (8,990,387 | ) | ||||||
| Interest income |
170,086 | 730,102 | 1,179,458 | |||||||||
| Other |
155,504 | (1,861,879 | ) | 1,030,932 | ||||||||
| Other income (expense) |
(6,553,927 | ) | (8,409,752 | ) | (6,779,997 | ) | ||||||
| Loss from continuing operations before income taxes |
(17,729,391 | ) | (25,507,712 | ) | (25,600,036 | ) | ||||||
| Income tax benefit |
— | — | — | |||||||||
| Loss from continuing operations |
(17,729,391 | ) | (25,507,712 | ) | (25,600,036 | ) | ||||||
| Loss from discontinued operations, net of taxes |
(1,485,157 | ) | (9,385,238 | ) | (164,327 | ) | ||||||
| Net loss |
(19,214,548 | ) | (34,892,950 | ) | (25,764,363 | ) | ||||||
| Preferred stock dividend |
— | (130,188 | ) | (398,891 | ) | |||||||
| Preferred stock deemed dividend |
— | (593,563 | ) | (4,058,358 | ) | |||||||
| Net loss attributable to common shareholders |
$ | (19,214,548 | ) | $ | (35,616,701 | ) | $ | (30,221,612 | ) | |||
| Loss per common share from continuing operations - basic and diluted |
$ | (0.52 | ) | $ | (0.83 | ) | $ | (1.45 | ) | |||
| Loss per common share from discontinued operations - basic and diluted |
$ | (0.04 | ) | $ | (0.30 | ) | $ | (0.01 | ) | |||
| Loss per common share - basic and diluted |
$ | (0.56 | ) | $ | (1.13 | ) | $ | (1.46 | ) | |||
| Weighted average common shares outstanding |
34,004,575 | 31,525,271 | 20,680,015 | |||||||||
See Accompanying Notes to Consolidated Financial Statements.
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Condensed Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Operating Activities |
||||||||||||
| Net loss |
$ | (19,214,548 | ) | $ | (34,892,950 | ) | $ | (25,764,363 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||||||
| Loss from discontinued operations, net of tax |
1,485,157 | 9,385,238 | 164,327 | |||||||||
| Depreciation, depletion, amortization and accretion |
9,925,328 | 8,847,711 | 14,661,153 | |||||||||
| Amortization of deferred financing costs |
1,012,412 | 490,796 | 906,488 | |||||||||
| Amortization of debt discount |
680,824 | 735,728 | 621,220 | |||||||||
| Gain (loss) on disposal of assets |
159,431 | (108,427 | ) | (1,059,786 | ) | |||||||
| Loss on sale of Straight Creek properties |
— | 365,025 | — | |||||||||
| Loss on extinguishment of debt |
— | 1,676,202 | 50,720 | |||||||||
| Settlement of asset retirement obligations |
(134,618 | ) | (205,525 | ) | (430,655 | ) | ||||||
| Stock option expense |
1,379,893 | 1,313,948 | 1,436,996 | |||||||||
| Issuance of stock in lieu of payment for services |
— | — | 531,500 | |||||||||
| Changes in operating assets and liabilities: |
||||||||||||
| Accounts receivable |
107,671 | 1,741,883 | 1,310,523 | |||||||||
| Inventory |
1,164,099 | (725,497 | ) | 66,140 | ||||||||
| Prepaid and other current assets |
273,437 | 429,788 | 627,866 | |||||||||
| Other non - current assets |
744,805 | 18,605 | 96,811 | |||||||||
| Accounts payable and accrued expenses |
5,548,301 | (1,749,041 | ) | (2,884,636 | ) | |||||||
| Deferred revenue |
(1,545,495 | ) | 1,241,840 | 521,379 | ||||||||
| Other non - current liabilities |
(1,549,096 | ) | 1,883,469 | 55,337 | ||||||||
| Net cash flows used in operating activities from continuing operations |
37,601 | (9,551,207 | ) | (9,088,980 | ) | |||||||
| Net cash flows provided by (used in) operating activities from discontinued operations |
3,676,901 | 5,356,468 | (82,065 | ) | ||||||||
| Net cash flows provided by (used in) operating activities |
3,714,502 | (4,194,739 | ) | (9,171,045 | ) | |||||||
| Investing Activities |
||||||||||||
| Capital expenditures |
(5,833,661 | ) | (8,442,724 | ) | (4,359,850 | ) | ||||||
| Proceeds from sale of Straight Creek properties |
— | 10,638,570 | — | |||||||||
| Proceeds from sale of equipment and mine development, net |
— | — | 2,375,935 | |||||||||
| Decrease in restricted cash |
5,126,500 | 5,173,672 | 734,942 | |||||||||
| Additions to prepaid royalties |
(88,000 | ) | (493,819 | ) | (6,164 | ) | ||||||
| Net cash (used in) provided by investing activities from continuing operations |
(795,161 | ) | 6,875,699 | (1,255,137 | ) | |||||||
| Net cash used in investing activities from discontinued operations |
(2,153,052 | ) | (2,947,254 | ) | (69,530,391 | ) | ||||||
| Net cash (used in) provided by investing activities |
(2,948,213 | ) | 3,928,445 | (70,785,528 | ) | |||||||
| Financing Activities |
||||||||||||
| Proceeds from issuance of common and preferred stock |
— | 10,843,798 | 35,798,648 | |||||||||
| Proceeds from stock option exercises |
— | 1,037,125 | — | |||||||||
| Proceeds from issuance of notes |
— | — | 441,077 | |||||||||
| Proceeds under short-term line of credit |
5,000,000 | — | 2,000,000 | |||||||||
| Repayments of debt |
(4,842,867 | ) | (13,951,676 | ) | (5,518,091 | ) | ||||||
| Repayments of obligations under capital leases |
(2,029,010 | ) | (175,761 | ) | (740,608 | ) | ||||||
| Payments for deferred financing costs |
(793,305 | ) | (204,113 | ) | (109,333 | ) | ||||||
| Payment of deferred dividends |
— | (244,405 | ) | — | ||||||||
| Dividends paid |
— | — | (239,458 | ) | ||||||||
| Payment of cash to induce conversion of preferred stock |
— | — | (1,702,153 | ) | ||||||||
| Other |
— | 32,080 | — | |||||||||
| Net cash flows (used in) provided by financing activities from continuing operations |
(2,665,182 | ) | (2,662,952 | ) | 29,930,082 | |||||||
| Net cash flows (used in) provided by financing activities from discontinued operations |
(823,851 | ) | (1,985,301 | ) | 56,668,622 | |||||||
| Net cash flows (used in) provided by financing activities |
(3,489,033 | ) | (4,648,253 | ) | 86,598,704 | |||||||
| Net (decrease) increase in cash and cash equivalents |
(2,722,744 | ) | (4,914,547 | ) | 6,642,131 | |||||||
| Cash and cash equivalents at beginning of year |
3,908,469 | 8,823,016 | 2,180,885 | |||||||||
| Cash and cash equivalents at end of year |
$ | 1,185,725 | $ | 3,908,469 | $ | 8,823,016 | ||||||
| Supplemental Cash Flow Information |
||||||||||||
| Cash paid during the year for interest |
$ | 5,778,149 | $ | 14,142,123 | $ | 9,381,725 | ||||||
| Non-cash investing and financing activities from continued operations: |
||||||||||||
| Preferred stock effective dividends |
$ | — | $ | 593,563 | $ | — | ||||||
| 10.5% Senior Secured Notes exchanged for common stock |
— | 13,158,958 | — | |||||||||
| Financed equipment acquisitions |
77,700 | 3,574,173 | 4,914,339 | |||||||||
| Equipment acquired through obligations under capital leases |
336,000 | 3,325,500 | 248,900 | |||||||||
| Asset retirement obligations incurred, acquired or recosted |
695,120 | 2,067,097 | 2,671,909 | |||||||||
| Issuance of warrants |
— | — | 1,374,676 | |||||||||
| Common stock issued for mineral rights |
— | 5,000,000 | — | |||||||||
| Interest and fees paid in-kind or financed |
2,100,000 | — | — | |||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
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Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
| Preferred Stock | Common Stock | Additional | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-in Capital | Deficit | Total | |||||||||||||||||||
| Balance January 1, 2007 |
782.54 | $ | — | 16,340,744 | $ | 1,634 | $ | 42,049,703 | $ | (43,974,396 | ) | $ | (1,923,059 | ) | |||||||||||
| Issuance of warrants |
— | — | — | — | 1,374,676 | — | 1,374,676 | ||||||||||||||||||
| Conversion of preferred stock |
(426.10 | ) | — | 1,096,634 | 110 | (110 | ) | — | — | ||||||||||||||||
| Conversion of preferred dividends |
— | — | 27,487 | 3 | 162,001 | — | 162,004 | ||||||||||||||||||
| Common shares issued as inducement |
— | — | 431,258 | 44 | 1,367,987 | (1,368,031 | ) | — | |||||||||||||||||
| Cash inducement for preferred conversion |
— | — | — | — | — | (1,702,154 | ) | (1,702,154 | ) | ||||||||||||||||
| Beneficial contingent conversion |
— | — | — | — | 988,173 | (988,173 | ) | — | |||||||||||||||||
| Common stock issued for services |
— | — | 177,000 | 18 | 531,482 | — | 531,500 | ||||||||||||||||||
| Preferred stock dividends |
— | — | — | — | (398,891 | ) | — | (398,891 | ) | ||||||||||||||||
| Employee option expense |
— | — | — | — | 1,436,996 | — | 1,436,996 | ||||||||||||||||||
| Common stock issued for cash |
— | — | 9,625,669 | 961 | 35,797,686 | — | 35,798,647 | ||||||||||||||||||
| Net loss |
— | — | — | — | — | (25,764,363 | ) | (25,764,363 | ) | ||||||||||||||||
| Balance December 31, 2007 |
356.44 | — | 27,698,792 | 2,770 | 83,309,703 | (73,797,117 | ) | 9,515,356 | |||||||||||||||||
| Exercise of warrants |
— | — | 14,176 | 1 | (1 | ) | — | — | |||||||||||||||||
| Conversion of preferred stock |
(356.44 | ) | — | 923,420 | 93 | (93 | ) | — | — | ||||||||||||||||
| Common shares issued as inducement |
— | — | 154,573 | 15 | 593,548 | (593,563 | ) | — | |||||||||||||||||
| Common stock issued for mineral rights |
— | — | 756,430 | 76 | 4,999,924 | — | 5,000,000 | ||||||||||||||||||
| Conversion of notes to common stock |
— | — | 1,828,803 | 183 | 12,573,881 | — | 12,574,064 | ||||||||||||||||||
| Conversion of accrued interest to common stock |
— | — | 27,132 | 3 | 161,780 | — | 161,783 | ||||||||||||||||||
| Common stock issued for cash |
— | — | 2,277,000 | 227 | 10,587,823 | — | 10,588,050 | ||||||||||||||||||
| Common stock issued for cash to management |
— | — | 55,000 | 6 | 255,742 | — | 255,748 | ||||||||||||||||||
| Restricted stock issued to management |
— | — | 215,000 | 21 | 125,395 | — | 125,416 | ||||||||||||||||||
| Preferred stock dividends |
— | — | — | — | (130,188 | ) | — | (130,188 | ) | ||||||||||||||||
| Employee option exercise |
— | — | 211,750 | 21 | 1,037,104 | — | 1,037,125 | ||||||||||||||||||
| Employee option expense |
— | — | — | — | 1,224,251 | — | 1,224,251 | ||||||||||||||||||
| Other |
— | — | 22,748 | 2 | 32,078 | — | 32,080 | ||||||||||||||||||
| Net loss |
— | — | — | — | — | (34,892,950 | ) | (34,892,950 | ) | ||||||||||||||||
| Balance December 31, 2008 |
— | — | 34,184,824 | 3,418 | 114,770,947 | (109,283,630 | ) | 5,490,735 | |||||||||||||||||
| Exercise of warrants |
— | — | 24,615 | 2 | (2 | ) | — | — | |||||||||||||||||
| Restricted stock issued to management |
— | — | 170,450 | 17 | (17 | ) | — | — | |||||||||||||||||
| Restricted stock forfeited |
— | — | (60,000 | ) | (6 | ) | 6 | — | — | ||||||||||||||||
| Employee option expense |
— | — | 1,420,904 | — | 1,420,904 | ||||||||||||||||||||
| Net loss |
— | — | (19,214,548 | ) | (19,214,548 | ) | |||||||||||||||||||
| Balance December 31, 2009 |
— | $ | — | 34,319,889 | $ | 3,431 | $ | 116,191,838 | $ | (128,498,178 | ) | $ | (12,302,909 | ) | |||||||||||
See Accompanying Notes to Consolidated Financial Statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Business Overview |
National Coal Corp. (the “Company”) consists primarily of its two wholly-owned subsidiaries: (i) National Coal Corporation and (ii) NCC Corp. and until August 3, 2009, its wholly-owned subsidiary National Coal of Alabama, Inc (“NCA”). The Company principally engages in the business of mining high quality bituminous steam coal in East Tennessee, North Alabama until August 3, 2009, and Southeast Kentucky until March 31, 2008. Its customers are electric utilities and industrial concerns in the Southeastern US.
In Tennessee, the Company owns the coal mineral rights to approximately 65,000 acres of land and lease the rights to approximately 14,000 additional acres. As of December 31, 2009, the Company’s mining complexes included two active and three inactive underground mines, one active and two inactive surface mines, and one inactive highwall mine. In addition, it has two preparation plants and two unit train loading facilities in Tennessee served by the Norfolk Southern (“NS”) railroad. The Company holds five permits that allow it to open new or re-open existing mines in Tennessee close to its current operations. As of December 31, 2009, the Company controlled approximately 39.1 million estimated recoverable tons of coal reserves in Tennessee as defined by the SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted at the time of the reserve determination.
During the year ended December 31, 2009, the Company’s continuing operations generated total revenues of $88.0 million on the sale of approximately 1.2 million tons of coal. Revenues are derived primarily from the sale of coal to electric utility companies in the Southeastern United States pursuant to long-term contracts or open purchase order arrangements with long-time customers. Georgia Power Company represented approximately 95% of the Company’s continuing operations’ coal revenues for the year ended December 31, 2009.
The Company typically sells coal for a specified per ton amount and at a negotiated price pursuant to both short-term contracts and contracts of twelve months or greater. The weighted average selling price per ton in Tennessee is $79.62, $76.03, and $73.70 on 0.9 million, 0.8 million, and 0.5 million tons contracted for 2010, 2011, and 2012, respectively. Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term coal price volatility traditionally provided by such contracts. Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and further increase the Company’s negative gross margin, which could have a material adverse effect on the Company’s operating cash flows. Additionally, the Company’s customers may have the ability to delay the timing of their purchases, which could negatively impact operating cash flows. Finally, coal supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by the Company or its customers during the duration of specified events beyond the control of the affected party.
Management assumes the Company will meet its contract commitments through a combination of produced tons and purchased coal. Production can be negatively impacted by weather, labor shortages or equipment break-downs. Additionally, geological and mining conditions may not be fully identified by available exploration data or may differ from experience in current operations. Additionally, coal for purchase may not be available, or available only at unfavorable prices. The occurrence of such events can adversely affect production, the cost of sales or both, and could have a materially adverse effect on the Company’s operating cash flows.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
The Company invested approximately $6.2 million in equipment and mine development in its continuing operations during the year ended December 31, 2009. During 2010, management expects to incur approximately $3.6 million to maintain existing assets. In prior years, the Company experienced the unanticipated loss of the use of key equipment, which resulted in lost production and lost revenues. The Company may experience similar mechanical failures in the future, which could have a material adverse effect on its operating cash flows.
| 2. | Going Concern |
At December 31, 2009, the Company had cash and cash equivalents of approximately $1.2 million, negative working capital of approximately $54.8 million and a stockholders’ deficit of $12.3 million. The Company has a history of substantial net losses. In 2009 and 2008, the Company generated losses from continuing operations of $17.7 million and $25.5 million, respectively. Net cash flow provided by (used in) operating activities from continuing operations was approximately $38,000 and $(9.6) million in 2009 and 2008, respectively. At December 31, 2009, the Company had $2.0 million available under its short-term revolving credit facility.
The Company expects to use $0.5 million to $0.6 million of cash from operations per month during 2010 and expects that it will need additional short term financing to meet its operating and investing needs and to make principal payments of outstanding debt. Additionally, the Company has $42.0 million of long term debt that is due on December 15, 2010 and the Company’s $5.0 million short term line of credit, of which $3.0 million was outstanding at December 31, 2009, matures on December 15, 2010. The Company must raise additional equity and/or refinance its senior secured debt and short-term revolving credit facility before they mature on December 15, 2010.
During the first quarter of 2010, Georgia Power Company exercised its rights of force majeure under the Company’s coal supply contract due to freezing weather in the Southeast United States, which resulted in the suspension of the Company’s shipment of approximately 40,000 tons of coal. While Georgia Power Company is obligated under its contract to purchase this coal within twelve months after the end of the event, the suspension of these shipments resulted in an immediate reduction in cash receipts of approximately $3.0 million during January and February 2010. This cash shortfall has been financed primarily by the Company’s vendors, resulting in a significant increase in accounts payable since the beginning of the year.
During January 2010, the Company notified Centaurus Energy Master Fund, LP (Centaurus), the lender under its $5.0 million short-term revolving credit facility and the holder of $30.3 million (or 72.1%) of its 10.5% Notes due 2010, of the suspension of coal shipments and the resulting adverse effect on the Company’s cash flows. Following meetings with Centaurus, the Company was informed that Centaurus was of the view that the Company was unable to pay its debts as they became due and otherwise insolvent and therefore in default under its $5.0 million short-term revolving credit facility, and that Centaurus believed it had remedies under the credit agreement, including its right to issue a formal notice of default and accelerate all amounts due under the credit agreement. The Company disagreed with Centaurus’s assertion that it was unable to pay its obligations as they become due, and advised Centaurus that the Company remained solvent and was not in default under its credit agreement.
The Company is nonetheless in default under its $5 million short-term revolving credit agreement as of the date the Company’s annual report is filed with the SEC. Under the terms of the facility, the annual financial statements that the Company files with the SEC must be reported on without a “going concern” qualification from the Company’s independent certified public accountants. Because the accompanying auditors’ report for the year ended December 31, 2009, does contain a going concern explanatory paragraph, the Company is in default of this covenant as of as of the date the Company’s annual report is filed with the SEC. While the Company has not obtained an agreement from Centaurus to forbear from exercising its available remedies, Centaurus has indicated that it will not immediately seek to accelerate the amounts due under the revolving credit agreement so long as the Company continued to pursue a transaction that pays down this indebtedness in the near term. The default under the $5 million short-term credit agreement does not cause any of the Company’s other debt obligations to be in default.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
In 2009, the Company concluded that cash generated from operations would not be sufficient to pay interest or principal on its 10.5% Notes due 2010, and the Company began exploring strategic alternatives to improve its liquidity and reduce its debt obligations. The Company engaged the services of a financial advisory firm to evaluate possible strategic and financing transactions. Among these alternatives, the Company has been pursuing a restructuring of its debt, the issuance of common stock in exchange for the purchase and cancellation of its debt, the sale of a portion of the Company’s operating assets, transactions in which the Company would issue preferred or additional common stock for cash, and merger transactions with other coal producers.
Discussions with Centaurus and the Company’s default under the $5 million short-term credit agreement have caused the Company to accelerate its plans to address its short-term liquidity issues and pay off its secured debt, and pursue alternatives that can be consummated in the near term. The Company is presently negotiating with a third party to sell a portion of its assets to improve its working capital, including by reducing amounts due Centaurus under its $5.0 million short-term credit facility, which will address the Company’s default under the credit agreement and the immediate insolvency issues raised by Centaurus. The transaction presently being negotiated is not expected to result in the pay-down of any principal amount of its 10.5% Notes due 2010, and the Company will continue to pursue all possible transactions to pay off this debt prior to its maturity in December 2010. Centaurus is cooperating with the Company to allow them to consummate the transaction presently being negotiated, and has refrained from attempting to exercise any remedies under its credit facilities following a default. It is understood from Centaurus that its continued forbearance from exercising its remedies under the Company’s credit agreement requires that the Company consummate this transaction within the very near term.
If the Company is unable to consummate the transaction to sell a portion of its assets that is presently being negotiated on terms acceptable to them and within a time period acceptable to Centaurus, or if the Company’s financial position worsens due to the withdrawal of credit support from its vendors or other circumstances, or based on other facts and circumstances both known and unknown to the Company, the Company may determine that it is in its best interest to voluntarily seek protection under federal bankruptcy laws. Seeking relief under federal bankruptcy laws, even if it is able to emerge from bankruptcy protection, which is not certain, could have a material adverse effect on the relationships with the Company’s existing and potential customers, employees, vendors, and others. Further, if the Company is unable to successfully implement a plan of reorganization, it could be forced to liquidate its assets.
The Company’s liquidity needs during 2010 discussed above and the December 2010 maturity of $42.0 million of long-term debt and $3.0 million on the short term revolving credit facility raise substantial doubt about the Company’s ability to continue as a going concern and therefore, its ability to realize its assets and discharge its liabilities in the normal course of business.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
| 3. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements include the accounts of National Coal Corp. and those of its two wholly-owned operating subsidiaries, National Coal Corporation and NCC Corp. and their respective wholly-owned subsidiaries, NC Railroad, Inc., Jacksboro Coal Company, Inc. and, until August 3, 2009, National Coal of Alabama, Inc. National Coal of Alabama, Inc. is presented as discontinued operations. See Note 4 for further discussion. The results of operations include the operations of Straight Creek in Kentucky, which were sold on March 31, 2008, the date of sale and National Coal of Alabama, Inc. through August 3, 2009, the date of foreclosure.
All intercompany transactions and balances have been eliminated in consolidation. Any material subsequent events have been evaluated for disclosure through March 30, 2010, the date of the filing of this Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenues, and expenses at the date of the financial statements and for the periods then ended. On an on-going basis, management evaluates the estimates used, including those related to workers’ compensation, reclamation and mine closure obligations, coal reserve values, income taxes, and contingencies. Estimates are inherent in the disclosure of economically recoverable reserves and in the information developed by management to support its ability to remain in compliance with debt covenants and to have sufficient cash to remain a going concern. Estimates are based on historical experience, actuarial estimates, current conditions, and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost. Cash equivalents consist of highly liquid investments with maturities of three months or less when acquired.
The Company maintains cash or investment accounts at various banks. The accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 per legal ownership. At December 31, 2009, the Company had $1.2 million of non-restricted funds of which $0.6 million was in excess of this insurance limit and $6.2 million of restricted funds deposited with financial institutions and regulatory agencies in excess of this insurance limit.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Customers are primarily utilities and industrial companies. Balances are stated net of an allowance for doubtful accounts of $0 at December 31, 2009 and 2008.
Inventory
Inventory includes mined coal, purchased coal and tires. Mined coal is classified as inventory at the point it is extracted, and is valued at the lower of average cost or net realizable value. At December 31, 2009 and 2008, the Company reduced the carrying value of its inventories by $39,814 and $1,170,221,
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
respectively, to state mined coal inventories at net realizable value. Mined coal inventory costs include labor, fuel, equipment costs, and operating overhead. Purchased coal inventory is valued at the lower of cost or net realizable value. Tires are classified as inventory when purchased.
Property, Plant, Equipment and Mine Development
Property and equipment are stated at cost. Maintenance and repairs that do not improve efficiency or extend economic life are expensed as incurred. Plant and equipment are depreciated using the straight-line method over the estimated useful lives of assets which generally range from seven to thirty years for building and plant and one to seven years for equipment. Upon sale or retirement, asset cost and related accumulated depreciation are removed from the accounts and any related gain or loss is reflected in the statement of operations.
Leasing is used for certain capital additions when considered cost effective relative to other capital sources, and is classified as either capital or operating as appropriate. Leased equipment meeting the capital lease criteria of Statement of Financial Accounting Standards No. 13 (ASC 840), Accounting for Leases are capitalized and the present value of the related lease minimum payments are recorded as a corresponding asset and liability. Amortization of capitalized leased assets is computed using the straight-line method over the shorter of the estimated useful life or the initial lease term.
Mineral rights represent tangible assets that are recorded at fair value when acquired, including amounts associated with any value beyond proven and probable reserves. Mine development costs are recorded at cost as incurred. The Company’s coal reserves are controlled either through direct ownership or through leasing arrangements which generally last until the recoverable reserves are depleted. Depletion of reserves and amortization of mine development costs is computed using the units-of-production method over the estimated proven and probable recoverable tons.
The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If impairment indicators are present and the future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value.
Deferred Financing Costs
Deferred financing costs represent capitalized expenses associated with the issuance of debt. Deferred financing costs are amortized by the interest method over the life of the associated debt.
Restricted Cash
Restricted cash includes accrued interest and consists principally of money market accounts securing letters of credit, certificates of deposit and surety bonds in favor of the various federal and state mining commissions. The current portion of restricted cash includes; (i) short-term deposits for which statutory restrictions will be released within one year and (ii) an estimate of performance bond amounts associated with those permits for which the reclamation work has been completed and the release has been requested from the appropriate mining commission prior to the reporting date.
Prepaid Mining Royalties
Certain coal leases require minimum or advance payments which are deferred and charged to cost of sales as coal is extracted and sold. The Company had prepaid royalties of approximately $469,000 and $382,000 at December 31, 2009, and 2008, respectively, included in other non-current assets in the accompanying balance sheets.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
Reclamation and Asset Retirement Obligations
The Surface Mining Control and Reclamation Act of 1977 and similar state statutes require mine properties to be restored in accordance with specified standards. Statement of Financial Accounting Standards No. 143 (ASC 410) requires recognition of an asset retirement obligation (“ARO”) for eventual reclamation of disturbed acreage remaining after mining has been completed. The Company records its reclamation obligations on a permit-by-permit basis using requirements as determined by the Office of Surface Mining of the U.S. Department of the Interior (“OSM”). The liability is calculated based upon the reclamation activities remaining after coal removal ceases, assuming that reclamation activities have been contemporaneous within state and federal guidelines during mining. A liability is recorded for the estimated future cost that a third party would incur to perform the required reclamation and mine closure discounted at the Company’s credit-adjusted risk-free rate. A corresponding increase in the asset carrying value of mineral rights is also recorded. The ARO asset is amortized on the units-of-production method over the proven and probable reserves associated with that permit, and the ARO liability is accreted to the expected reclamation date at the Company’s credit-adjusted risk-free rate. These expenses are included in depreciation, depletion, amortization, and accretion in the operating expenses section of the income statement.
Stock-based Compensation
The Company’s 2004 Option Plan (the “Plan”) was authorized by the Board of Directors of the Company in March 2004, and amended in January 2005. Under the terms of the Plan, stock options may be granted to officers, directors, employees, and others. At December 31, 2009, 4,450,000 shares of common stock were authorized for issuance under the Plan. Shares subject to awards that expire unexercised or are otherwise terminated, again become available for awards. Upon exercise, stock is issued from unissued or treasury shares. The grant price of an option under the Plan generally may not be less than the fair market value of the common stock subject to such option on the date of grant. Options have a maximum life of ten years and generally vest 25% per year over a four year period. Currently, all stock options issued under the plan are non-statutory.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123, Share-Based Payment (ASC 718) using the modified-prospective transition method. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. Under the modified-prospective transition method, the Company recognizes compensation expense for the unvested portion of all share-based payments granted on or prior to December 31, 2005 over the remaining service period based on the grant date fair value estimated in accordance with ASC 718 and recognizes compensation cost for all share-based payments granted on or subsequent to January 1, 2006 over the service period based on grant date fair value estimated in accordance with ASC 718.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
Workers’ Compensation
The Company provides for income replacement and medical treatment for work related injury and occupational disease resulting from coal workers’ pneumoconiosis (Black Lung Disease), as required by federal and state law, through insurance policies with high deductibles.
Revenue Recognition
The Company recognizes revenue when title or risk of loss passes to the common carrier or customer. This generally occurs when coal is loaded onto trains, barges or trucks at one of our loading facilities or at third party facilities. In most cases, the Company negotiates a specific sales contract with each customer, which specifies a fixed price per ton, premiums and penalties for quality variances, a delivery schedule, and payment terms. Contracts range in duration from one to three years. In 2008, the Company entered into a supply contract with a broker and received advance payment for product that was delivered in January 2009. This payment was recorded as deferred revenue in the accompanying balance sheet at December 31, 2008.
Revenue is also earned from contract mining services, from tippling fees charged other coal producers to use the Company’s loading facilities and from royalties based on coal mined by lessees.
Freight Revenue and Costs
Shipping and handling costs paid to third-party carriers and invoiced to coal customers are included in coal sales and cost of sales, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases in accordance with FASB Statement of Financial Accounting Standards No. 109 (ASC 740), Accounting for Income Taxes. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. 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 income in the period that includes the enactment date of such change.
Comprehensive Loss
The Company’s comprehensive losses as defined by SFAS No. 130 (ASC 220), Reporting Comprehensive Income, are the same as the net losses reported.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51” (ASC 810). ASC 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). ASC 810 would have an impact on the presentation and disclosure of the non-controlling interests of any non wholly-owned businesses acquired in the future. ASC 810 will be effective for fiscal years beginning after December 15, 2008; earlier adoption is prohibited. The adoption of ASC 810 did not have a material impact on the Company’s financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (ASC 815) which changes the disclosure requirements for derivative instruments and hedging activities. ASC 815 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 (ASC 815), “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of ASC 815 did not have a material impact on the Company’s financial position or results of operations.
In April 2009, the FASB issued ASC 320, “Recognition and Presentation of Other-Than-Temporary Impairments”. It amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. It was effective for interim and annual reporting periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued ASC 820, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. It provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly. It does not change the definition of fair value under ASC 820. The FSP was effective for interim and annual reporting periods ending after June 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the Codification). The Codification became the single official source of authoritative, non-governmental U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
| 4. | Discontinued Operations |
Mann Steel Acquisition and Divestiture
On October 19, 2007, NCC Corp. acquired all of the outstanding stock of Mann Steel Products, Inc. (“Mann Steel”) for an aggregate purchase price of $55.0 million less; (i) $1.9 million placed in escrow for payment to certain key employees of Mann Steel (or otherwise returned to sellers), and (ii) $7,406,745 for repayment of certain indebtedness of Mann Steel that existed at the closing date. Simultaneously, the Company completed (i) $60.0 million in debt private placements with detachable warrants to purchase 250,000 shares of National Coal Corp. common stock at a per share price of $4.00, and (ii) $11.6 million in equity private placements through the issuance of 3,866,968 shares of common stock at a per share price of $3.00 (see Notes 10 and 13). The Company used the proceeds of the private placements to capitalize NCC Corp. which was then used to pay a portion of the purchase price to the sellers of Mann Steel. Mann Steel became a wholly-owned subsidiary of NCC Corp. and changed its name to National Coal of Alabama, Inc. (“NCA”).
On December 19, 2007, the Company paid $3,281,313 to the sellers, pursuant to a working capital adjustment clause contained in the purchase agreement, bringing the total consideration paid to $58,660,706 which includes acquisition costs of $379,393.
The following table summarizes the final purchase price allocation based on the fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Description |
Amount | |||
| Cash |
$ | 16,089 | ||
| Restricted cash |
1,900,000 | |||
| Accounts receivable |
7,451,177 | |||
| Inventory |
36,684 | |||
| Other current assets |
447,115 | |||
| Property, plant and equipment |
21,816,394 | |||
| Mineral rights |
37,552,948 | |||
| Other long-term assets |
748,760 | |||
| Accounts payable |
(3,616,470 | ) | ||
| Reclamation obligations |
(2,720,249 | ) | ||
| Deferred tax liability, net |
(3,071,742 | ) | ||
| Other liabilities |
(1,900,000 | ) | ||
| Total fair value of assets acquired and liabilities assumed |
$ | 58,660,706 | ||
The allocation of the purchase price to the fair values of the assets acquired and liabilities assumed of Mann Steel resulted in negative goodwill of $6,314,096. In accordance with Statement of Financial Accounting Standards No. 141, Accounting for Business Combinations, the excess goodwill was allocated as a pro rata reduction of the amounts assigned to the assets acquired excluding financial assets, deferred taxes and all other current assets. This resulted in the following allocation of excess goodwill:
| Description |
Amount | |||
| Property, plant and equipment |
$ | (2,320,235 | ) | |
| Mineral rights |
(3,993,861 | ) | ||
| Excess goodwill |
$ | (6,314,096 | ) | |
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
The following summarized unaudited consolidated pro forma results of operations, assuming the Mann Steel acquisition occurred on January 1, 2007, are as follows (in $000’s, except for per share amounts):
| 2007 | ||||
| Revenues |
$ | 146,573 | ||
| Operating loss |
(9,797 | ) | ||
| Net loss |
(18,434 | ) | ||
| Net loss available to common stockholders |
(22,891 | ) | ||
| Basic earnings per share |
$ | (1.11 | ) | |
| Diluted earnings per share |
$ | (1.11 | ) | |
On June 26, 2009, NCA was obligated to pay to its debt holders approximately $1.9 million of accrued interest on its 12% Notes. The date for making the interest payment was extended by the holders of the 12% Notes to July 17, 2009, and on July 21, 2009, NCA defaulted on the 12% Notes as the interest payment had not been made. Additionally, the credit agreement provided that upon the acceleration of the entire unpaid balance of the indebtedness, the holders of the 12% Notes were entitled to receive the Make-Whole Amount, which was approximately $19.8 million and was accrued for by NCA. On August 3, 2009, the holders of the 12% Notes foreclosed on the outstanding capital stock of NCA, the collateral for the 12% Notes, in satisfaction of the 12% Notes. As a result of the foreclosure, NCA is no longer a subsidiary effective August 3, 2009. As a result of the transaction, the Company recorded a gain on disposal of discontinued operations for the year ended December 31, 2009 of approximately $23.5 million.
The results of operations and the gain on disposal of NCA are presented net of income taxes in the accompanying consolidated financial statements as discontinued operations in accordance with SFAS No. 144 (ASC 360) Accounting for the Impairment or Disposal of Long Lived Assets. The accompanying consolidated financial statements have been reclassified to conform to this presentation for all periods presented. The required reclassifications did not impact total assets, liabilities, stockholders’ equity (deficit), net loss or cash flows.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
There were no assets or liabilities associated with the Company’s discontinued operations recorded on the balance sheet at December 31, 2009. The major categories of assets and liabilities associated with the Company’s discontinued operations recorded in the balance sheet as of December 31, 2008 are as follows:
| December 31, 2008 | |||
| Assets |
|||
| Current Assets: |
|||
| Cash and cash equivalents |
$ | 716,042 | |
| Restricted cash |
2,771,445 | ||
| Accounts receivable, net |
5,263,786 | ||
| Inventory |
732,508 | ||
| Prepaid and other current assets |
268,096 | ||
| Total current assets |
9,751,877 | ||
| Property, plant, equipment and mine development, net |
58,771,938 | ||
| Deferred financing costs |
3,541,172 | ||
| Restricted cash |
8,578,183 | ||
| Other non-current assets |
728,733 | ||
| Total long-term assets |
71,620,026 | ||
| Total assets |
$ | 81,371,903 | |
| Liabilities |
|||
| Current Liabilities: |
|||
| Accounts payable |
$ | 7,594,786 | |
| Accrued expenses |
1,705,680 | ||
| Current maturities of long-term debt |
1,280,147 | ||
| Current installments of obligations under capital leases |
57,717 | ||
| Current portion of asset retirement obligations |
114,325 | ||
| Deferred revenue |
983,040 | ||
| Total current liabilities |
11,735,695 | ||
| Long term debt, less current maturities, net of discount |
61,607,254 | ||
| Obligations under capital leases, less current installments |
104,911 | ||
| Asset retirement obligations, less current portion |
3,386,371 | ||
| Deferred tax liability |
2,393,527 | ||
| Total long-term liabilities |
67,492,063 | ||
| Total liabilities |
$ | 79,227,758 | |
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
Revenues and net losses attributable to discontinued operations for the years ended December 31, 2009, 2008 and 2007 are as follows:
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Revenues: |
||||||||||||
| Coal sales |
$ | 31,308,684 | $ | 67,549,487 | $ | 12,904,229 | ||||||
| Other revenues |
182,310 | 48,379 | — | |||||||||
| Total revenues of discontinued operations |
31,490,994 | 67,597,866 | 12,904,229 | |||||||||
| Operating expenses: |
||||||||||||
| Cost of coal sales (exclusive of depreciation, depletion, amortization and accretion) |
26,552,576 | 60,374,017 | 9,501,701 | |||||||||
| Depreciation, depletion, amortization and accretion |
4,539,236 | 6,073,002 | 1,864,430 | |||||||||
| General and administrative |
1,327,193 | 1,099,015 | 66,592 | |||||||||
| Total operating expenses of discontinued operations |
32,419,005 | 67,546,034 | 11,432,723 | |||||||||
| (Loss) income from operations from discontinued operations |
(928,011 | ) | 51,832 | 1,471,506 | ||||||||
| Other income (expense): |
||||||||||||
| Interest expense |
(26,316,924 | ) | (10,957,056 | ) | (1,774,898 | ) | ||||||
| Interest income |
26,337 | 222,082 | 118,286 | |||||||||
| Income from joint venture |
173,007 | 462,076 | (41,977 | ) | ||||||||
| Other |
(51,381 | ) | 157,614 | 62,756 | ||||||||
| Other income (expense), net from discontinued operations |
(26,168,961 | ) | (10,115,284 | ) | (1,635,833 | ) | ||||||
| Loss from discontinued operations before income taxes |
(27,096,972 | ) | (10,063,452 | ) | (164,327 | ) | ||||||
| Income tax benefit |
2,071,386 | 678,214 | — | |||||||||
| Loss from discontinued operations, net of taxes |
(25,025,586 | ) | $ | (9,385,238 | ) | (164,327 | ) | |||||
| Gain on disposal of discontinued operations, net of taxes of $0 |
23,540,429 | — | — | |||||||||
| Loss from discontinued operations, net of taxes |
$ | (1,485,157 | ) | $ | (9,385,238 | ) | $ | (164,327 | ) | |||
| 5. | Divestiture |
Straight Creek Divestiture
On March 31, 2008, the Company’s wholly-owned subsidiary, National Coal Corporation, completed the sale of the real and personal property assets that comprised its Straight Creek mining operations in Bell, Leslie and Harlan Counties, Kentucky to Xinergy Corp. for $11.0 million in cash in accordance with the terms and conditions of a Purchase Agreement entered into among the parties on February 8, 2008 (the “Purchase Agreement”). In addition to the receipt of the purchase price for the assets, the transaction also resulted in the return of approximately $7.4 million in cash that was previously pledged to secure reclamation bonds and other liabilities associated with the Straight Creek operation, and relieved the Company of approximately $3.6 million in reclamation liabilities, and approximately $2.6 million of equipment related debt assumed by Xinergy Corp. in the transaction. The Company recorded a loss of $365,025 as a result of the transaction.
The Company used a portion of the sale proceeds to repay the $10.0 million senior secured credit agreement entered into in October 2006 with Guggenheim Corporate Funding, LLC, as administrative agent, which indebtedness otherwise would have matured in December 2008.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
Revenues and net losses attributable to the Straight Creek operations were $2.1 million and $(0.3) million, $6.3 million and $(2.4) million, and $35.4 million and $(3.6) million in 2009, 2008 and 2007, respectively.
At the time of the sale the Company concluded that the disposition did not qualify for discontinued operations treatment because the Company had significant continuing involvement in the operations of the disposed component due to the Company providing contract mining and services to Xinergy Corp. As of December 31, 2008 and through the first three quarters of 2009, the Company continued to have significant continuing involvement in the disposed component. In November 2009, the Company and Xinergy Corp. terminated its contract mining and services agreement and all continuing involvement in the disposed component ended. Because the Company’s significant continuing involvement extended more than one year after the date of the sale, at December 31, 2009, the Company concluded that the disposition did not qualify for discontinued operations treatment.
| 6. | Inventory |
Inventory at December 31 is as follows:
| 2009 | 2008 | |||||
| Coal inventory |
$ | 1,357,632 | $ | 2,854,674 | ||
| Tire inventory |
46,340 | 102,980 | ||||
| Total Inventory |
$ | 1,403,972 | $ | 2,957,654 | ||
| 7. | Property, Plant, Equipment, and Mine Development |
Property, plant, equipment and mine development at December 31 are as follows:
| 2009 | 2008 | |||||||
| Mining equipment and vehicles |
$ | 57,138,852 | $ | 51,020,642 | ||||
| Land and buildings |
5,297,155 | 5,071,544 | ||||||
| Furniture and office equipment |
323,656 | 303,577 | ||||||
| Mineral rights |
11,125,319 | 11,125,319 | ||||||
| Mine development |
8,116,033 | 7,299,798 | ||||||
| Construction in progress |
628,623 | 3,484,666 | ||||||
| 82,629,638 | 78,305,546 | |||||||
| Less accumulated depreciation, depletion and amortization |
(42,331,188 | ) | (34,630,788 | ) | ||||
| Total property, plant, equipment and mine development, net |
$ | 40,298,450 | $ | 43,674,758 | ||||
Mining equipment includes approximately $3,729,350 and $3,658,650 of gross assets under capital leases at December 31, 2009 and 2008, respectively.
Depreciation, depletion, amortization and accretion expense for the years ended December 31, 2009, 2008 and 2007 was primarily related to the cost of coal sales for the years then ended. Depreciation expense, which includes amortization of assets under capital leases, was $7,749,723, $7,682,596, and $11,955,875 for the years ended December 31, 2009, 2008, and 2007, respectively. Depletion expense related to mineral rights and amortization of mine development costs was $1,104,628, $986,683, and $1,857,112 for the years ended December 31, 2009, 2008, and 2007, respectively.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
On November 12, 2007, the Company received $2.0 million from the sale of certain real property and mineral leases at Pine Mountain, an idle mining complex located in Kentucky, and an additional $1.0 million from the sale to the same purchaser of an option entitling it to purchase for $10.00 the remaining, additional properties at Pine Mountain. The Company recognized a gain of approximately $745,000 on the sale of the certain real property and mineral leases at Pine Mountain and deferred recognition of the $1.0 million proceeds on the remaining additional properties until the option is exercised and the additional properties are sold. As of December 31, 2009, the option has not been exercised.
On September 18, 2006, the Company entered into a sale-leaseback transaction with First National Capital Corporation’s assignee, GATX Financial Corporation, involving the Company’s highwall miner initially purchased in February 2006. The Company sold the highwall miner for approximately $6.4 million and recorded a deferred gain of approximately $875,000 which was being recognized over the forty-two month term of the operating lease. The lease was a “net” lease and required that the Company maintain and insure the equipment as well as pay rental payments of $166,568 per month. As a condition of the lease, the Company provided two standby letters of credit totaling $1,288,883 in lieu of security deposits which were 100% collateralized with cash on deposit at two financial institutions. Pursuant to the sale of its Straight Creek operation, the Company subleased the highwall miner to Xinergy Corp. for $166,568 per month and held a $1.4 million deposit in escrow, which was classified in the non-current portion of restricted cash at December 31, 2008. During November 2009, the Company sold the highwall miner to Xinergy Corp. and was relieved of its financial obligation with GATX Financial Corporation.
| 8. | Other Noncurrent Assets |
Other noncurrent assets at December 31 are as follows:
| 2009 | 2008 | |||||
| Prepaid mining royalties |
$ | 469,506 | $ | 381,506 | ||
| Long-term portion of prepaid assets |
130,718 | 332,147 | ||||
| Deposits |
— | 589,248 | ||||
| Franchise tax receivable |
305,873 | 260,000 | ||||
| Total other noncurrent assets |
$ | 906,097 | $ | 1,562,901 | ||
| 9. | Accrued Expenses |
Accrued expenses at December 31 are as follows:
| 2009 | 2008 | |||||
| Legal settlement reserve |
$ | — | $ | 250,000 | ||
| Accrued interest |
196,000 | 183,750 | ||||
| Accrued payroll and related taxes |
204,140 | 154,766 | ||||
| Accrued federal, state and local taxes |
318,431 | 81,251 | ||||
| Accrued other |
346,784 | 210,865 | ||||
| Total accrued expenses |
$ | 1,065,355 | $ | 880,632 | ||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
In March 2009, the Company settled a legal case for $250,000.
| 10. | Debt and Financing Arrangements |
Long term debt obligations of the Company, excluding capital leases, consist of the following as of December 31:
| 2009 | 2008 | |||||||
| 10.5% Senior Secured Notes, due 2010 |
$ | 42,000,000 | $ | 42,000,000 | ||||
| Equipment loans and installment purchase obligations |
1,284,210 | 3,137,897 | ||||||
| Insurance premium financing |
65,000 | 477,749 | ||||||
| 43,349,210 | 45,615,646 | |||||||
| Unamortized discounts |
(705,986 | ) | (1,386,810 | ) | ||||
| Less current portion of long term debt |
(42,372,933 | ) | (2,336,191 | ) | ||||
| Total long-term debt |
$ | 270,291 | $ | 41,892,645 | ||||
Maturities of long term debt for the next five years and thereafter follow:
| 2010 |
$ | 43,078,919 | ||
| 2011 |
267,012 | |||
| 2012 |
3,279 | |||
| 2013 |
— | |||
| 2014 |
— | |||
| Thereafter |
— | |||
| 43,349,210 | ||||
| Less unamortized discounts |
(705,986 | ) | ||
| 42,643,224 | ||||
| Less current portion of long term debt |
(42,372,933 | ) | ||
| Long term debt |
$ | 270,291 | ||
Deferred financing costs totaled $890,048 and $1,238,267 at December 31, 2009 and 2008, respectively. The Company recorded $1,012,412 and $490,796 of amortization related to deferred financing costs in 2009 and 2008, respectively. Additionally, the Company wrote off deferred financing charges of $1.6 million in 2008 associated with the extinguishment of debt. This amount is included in other expense in the accompanying statement of operations.
10.5% Senior Secured Notes Due 2010
On December 29, 2005, the Company issued $55.0 million of 10.5% Senior Secured Notes due 2010 and warrants to purchase a total of 1,732,632 shares of the Company’s common stock. The issue consisted of 55,000 units, with each unit comprised of one $1,000 principal amount note due 2010 and one warrant, which entitles the holder to purchase 31.5024 shares of the Company’s common stock at an exercise price of $8.50 per share, subject to adjustment. The warrants are subject to mandatory conversion if the price
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
of the Company’s common stock remains above $12.75 for more than nineteen days out of a consecutive thirty day trading period. The warrants will be exercisable at any time on or after their first anniversary date and will expire on December 15, 2010. Net proceeds from this sale were approximately $52.1 million. The Company immediately used approximately $22.1 million of the proceeds to repay existing indebtedness. During 2006, the Company used approximately $2.0 million to purchase a forty-two mile rail line in Tennessee, approximately $8.3 million as collateral to support reclamation bonds, and $19.7 million to purchase other equipment, refurbish preparation facilities and rail load-outs, and provide working capital.
The indenture allows the Company to incur additional indebtedness in the form of a Term Loan Credit Facility in the amount of $10.0 million, but limits further indebtedness unless certain fixed charge coverage ratios are maintained on a pro forma basis. The fixed charge coverage ratio is defined as the ratio of net income (loss) plus (i) fixed charges, (ii) depreciation, depletion and amortization, (iii) taxes, (iv) extraordinary losses, and (v) other non-cash income and expenses to fixed charges defined to include 25% of capital expenditures made by the Company and its subsidiaries. To incur additional indebtedness, the Company must maintain a fixed charge coverage ratio of 2.5 to 1 for the remaining term of the Notes. The indenture also restricts payment of dividends on the Company’s common stock. Notes issued under the indenture are guaranteed fully and unconditionally as well as jointly and severally by the Company, which has no independent assets or operations, and each of its wholly-owned subsidiaries.
The 10.5% Notes due 2010 and the related guarantees are secured by a lien on substantially all of the Company’s and the guarantors’ property and assets, including a pledge of 100% of the capital stock or other equity interests of the Company’s domestic subsidiaries. The 10.5% Notes due 2010 were subordinated to the $10.0 million Term Loan Credit Facility with Guggenheim Corporate Funding, LLC, which held a first priority secured lien senior to the 10.5% Notes due 2010, and was senior to our existing and future subordinated debt. The Term Loan Credit Facility with Guggenheim was fully repaid with proceeds from the sale of Straight Creek in March and April of 2008.
In connection with the December 29, 2005 issuance of notes, the Company entered into a separate registration rights agreement with the purchasers. Pursuant to the separate registration rights agreement, the Company agreed to file an exchange offer registration statement registering the resale by the purchasers of all of the notes and attached warrants. Pursuant to the separate registration rights agreement, the Company filed two registration statements with the Securities and Exchange Commission in May 2006, which were declared effective on July 28, 2006. On September 5, 2006, the Company exchanged $51.0 million of the total $55.0 million 10.5% Senior Secured Notes due 2010 for $51.0 million in new Notes, dated August 31, 2006, which are registered for resale with the Securities and Exchange Commission. The new Notes are issued under substantially the same terms as the old Notes.
During 2008, the Company exchanged notes in the aggregate principal amount of $13.0 million and accrued interest of $161,783 for 1,855,935 shares of common stock and recorded a loss on extinguishment of debt of $504,392.
The 10.5% Notes due 2010 reach maturity on December 15, 2010 and are classified as a current obligation on the accompanying balance sheet at December 31, 2009.
Short Term Line of Credit
On April 9, 2009 the Company entered into a Term Note Credit Agreement with Next View Partners, LLC, (“Next View”) as administrative agent and collateral agent for certain lenders. This credit facility provided for borrowings of up to $10.0 million, and was permitted indebtedness under the indenture for
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
the Company’s 10.5% Notes due 2010. The agreement allowed the Company the right to borrow up to an aggregate of $5.0 million on or before June 30, 2009 and an aggregate of $10.0 million after June 30, 2009. All amounts under the revolving loans became due and payable on December 15, 2009, unless the Company obtained the consent of a super majority of holders of its 10.5% Notes, defined by two thirds ownership of the 10.5% Notes due 2010, to extend the maturity date until April 9, 2010.
On December 10, 2009, Centaurus Energy Master Fund, LP (“Centaurus”) assumed and modified the Term Note Credit Agreement with Next View. Centaurus is a super majority of holders of the Company’s 10.5% Notes due 2010. The loan modification agreement reduced the face amount of the note issued from $10.0 million to $5.0 million, extended the maturity date of the loan from December 15, 2009 to December 15, 2010 and amended the minimum coal production and shipment amounts.
Interest under this facility is payable at an annual rate of 15% and is payable monthly in arrears. The Company’s obligations under this credit facility are secured by a lien on substantially all the assets of National Coal Corp. and its subsidiaries. The credit facility contains several performance covenants, including minimum production and shipment amounts of coal and limitations on additional indebtedness. The facility includes customary default provisions, and all outstanding obligations may become immediately due and payable in the event of the Company’s default. As of December 31, 2009, the Company was in compliance with all relevant debt covenants and the outstanding balance on the line of credit was $3.0 million. As of the date of this filing, the Company was in default under this line of credit and the outstanding balance on this line of credit was $4.5 million.
Installment Purchase Obligations and Equipment Notes
During 2009, the Company entered in a new equipment note pursuant to which we purchased a vehicle with an aggregate principal value of $34,852. The note requires payment over 36 months with a fixed interest rate of 8.69%. The obligation under the note is secured by the vehicle purchased.
During 2008, the Company financed equipment and vehicles with an aggregate principal value of approximately $3.6 million. The notes require payments over 36 to 55 months with fixed interest rates ranging from of 4.02% to 8.69%. The obligations under the notes are secured by the purchased assets.
During 2007, the Company financed equipment and vehicles with an aggregate principal value of approximately $4.9 million. These installment sale contracts require payments over 36 to 60 months at fixed interest rates ranging from 5.97% to 7.99%. The obligations under the installment sale contracts are secured by the equipment purchased.
During 2007, the Company refinanced equipment with an aggregate principal value of approximately $0.7 million formerly acquired under various capital leases. These installment sale contracts require payments over 36 months at fixed interest rates ranging from 5.29% to 8.75%. The obligations under the installment sale contracts are secured by the equipment purchased.
Approximately $2.6 million of equipment related debt was assumed by Xinergy Corp. on March 31, 2008, as a result of the sale of the Company’s Straight Creek, Kentucky properties.
| 11. | Leases |
The Company leases mining and certain other equipment under noncancelable lease agreements with terms up to five years. Rental expense for equipment under operating lease agreements with initial lease terms of one year or greater was approximately $1,595,279, $2,034,529 and $2,102,694 for the years ended December 31, 2009, 2008, and 2007, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
The Company entered into capital lease agreements with various equipment suppliers for mining equipment totaling $336,000, $3,144,450 and $248,900 during 2009, 2008 and 2007, respectively. The leasing periods for these arrangements range from 24 to 36 months.
Future minimum lease payments for noncancelable leases with initial terms of one year or greater at December 31, 2009 are as follows:
| Capital Leases |
Operating Leases | ||||||
| 2010 |
$ | 1,473,309 | $ | 17,554 | |||
| 2011 |
154,000 | 3,249 | |||||
| 2012 |
— | 2,388 | |||||
| 2013 |
— | 1,791 | |||||
| 2014 |
— | — | |||||
| Thereafter |
— | — | |||||
| Total minimum lease payments |
1,627,309 | $ | 24,982 | ||||
| Less interest |
(248,993 | ) | |||||
| Present value of minimum lease payments |
1,378,316 | ||||||
| Less current portion |
(1,237,358 | ) | |||||
| Long-term obligations |
$ | 140,958 | |||||
| 12. | Asset Retirement Obligations |
The following table summarizes the activity with respect to the Company’s asset retirement obligations for the years ended December 31:
| 2009 | 2008 | |||||||
| Obligation at January 1 |
$ | 3,909,002 | $ | 7,588,325 | ||||
| Accretion expense |
485,036 | 237,295 | ||||||
| Obligations acquired, incurred or recosted |
(370,680 | ) | (101,835 | ) | ||||
| Obligations disposed from Straight Creek Sale |
— | (3,609,258 | ) | |||||
| Obligations settled |
(134,618 | ) | (205,525 | ) | ||||
| Obligation at December 31 |
3,888,740 | 3,909,002 | ||||||
| Current portion |
(98,528 | ) | (145,282 | ) | ||||
| Long-term liability |
$ | 3,790,212 | $ | 3,763,720 | ||||
| 13. | Stockholders’ Equity (Deficit) |
Series A Cumulative, Convertible Preferred Stock
During 2008 and 2007, the holders of 356.44 and 426.10 shares of Series A preferred stock, with liquidation preferences totaling $5,346,600 and $6,391,500, plus accrued dividends of $131,712, and $159,152 converted their shares into 946,168 and 1,124,121 shares of the Company’s common stock,
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
respectively. During 2008, the Company offered an additional 154,573 common shares as an inducement to convert Series A preferred stock into common stock. During 2007, the Company offered $1,702,154 as a cash inducement and an additional 431,258 common shares as an inducement to convert Series A preferred stock into common stock. EITF Topic D-42, The effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock (ASC 260-10-S55) requires that if convertible preferred stock is converted to other securities pursuant to an inducement offer, the Company should record the excess of (1) the fair value of all securities and other consideration transferred to the holders of the convertible preferred stock over (2) the fair value of securities issuable pursuant to the original conversion terms as an increase to net loss to arrive at net loss attributable to common shareholders. Accordingly, the Company recorded deemed dividends of $593,563 and $3,070,185 as a result of the aforementioned inducements in 2008 and 2007, respectively. Additionally, during 2007, the Company sold common stock in a private placement that triggered a reduction in the preferred stock conversion rate; in accordance with Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, the Company recorded a deemed dividend of $988,173 associated with the resolution of this beneficial conversion contingency.
As of December 31, 2008, all remaining Series A preferred stock had been converted to common stock.
National Coal Corp. Common Stock
During May 2009, the holder of (i) a common stock purchase warrant dated March 10, 2005 to purchase 159,342 shares of the Company’s common stock at a current exercise price of $3.00 per share and (ii) 2,000 warrants dated December 29, 2005 to purchase 63,005 shares of the Company’s common stock at a current exercise price of $8.50 per share exchanged their respective warrants for 24,615 shares of the Company’s common stock.
During 2008, the Company purchased a 1,000 acre mineral and surface tract in eastern Tennessee that includes approximately 2.3 million tons of high quality coal. The purchase price was $7.0 million of which $2.0 million was paid in cash and $5.0 million in the issuance of 756,430 shares of the Company’s common stock.
During 2008, the Company completed the sale of 2,332,000 shares of common stock in a private placement at a price of $4.65 per share for gross proceeds of $10,843,798.
During 2007, the Company completed the sale of 9,625,669 shares of common stock in private placements at prices ranging between $3.00 to $4.65 per share, for gross proceeds of $35,797,686, including 3,866,968 shares sold in connection with the Mann Steel Acquisition (see Note 3). All common shares have been subsequently registered pursuant to registration rights agreements.
Outstanding Stock Purchase Warrants
At December 31, 2009, the following warrants for the purchase of National Coal Corp. common stock were outstanding:
| Title |
Number of Shares |
Strike Price* | Earliest Exercise Date |
Expiration Date | |||||
| Crestview Warrants |
237,278 | $ | 3.00 | March 10, 2005 | March 10, 2010 | ||||
| Bond Warrants |
1,575,120 | $ | 8.50 | December 29, 2006 | December 15, 2010 | ||||
| Alabama Warrant |
250,000 | $ | 4.00 | October 19, 2007 | December 31, 2010 | ||||
| Refinance Fee Warrants |
750,000 | $ | 3.00 | December 31, 2007 | December 31, 2011 | ||||
| * Crestview Warrants have been adjusted per the anti-dilution provision in the warrant agreement | |||||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
The Crestview warrants and the Bond warrants are subject to mandatory conversion if the price of the Company’s common stock remains above $12.50 for more than thirty days.
The Crestview Warrants are subject to price and share adjustment on: a) a weighted average basis when the Company issues common stock at a price below $6.60 per share or b) a full adjustment basis when the Company issues warrants below the current strike price. Based upon the December 31, 2007 warrant issuance discussed below, the warrants adjusted to 396,620 shares at a price of $3.00 per share.
During May 2009, the holder of (i) Crestview warrants to purchase 159,342 shares of the Company’s common stock at a current exercise price of $3.00 per share and (ii) 2,000 Bond warrants to purchase 63,005 shares of the Company’s common stock at a current exercise price of $8.50 per share exchanged their respective warrants for 24,615 shares of the Company’s common stock.
During 2008, 3,000 of the Bond Warrants were converted into 14,176 shares of the Company’s common stock.
On October 19, 2007, as part of capitalizing its newly formed subsidiary, NCC Corp., the Company issued warrants to purchase 250,000 shares of National Coal Corp. common stock at a per share price of $4.00 and a term expiring on December 31, 2010 (the “Alabama Warrant”). NCC Corp. assigned this warrant to National Coal of Alabama, Inc., which further assigned the warrant to the holders of the 12% Notes Payable. These warrants were valued at $263,067 using the Black-Scholes Option Pricing Model and recorded in the equity section of the accompanying balance sheet. Pursuant to a registration rights agreement, these warrant shares were subsequently registered.
On December 31, 2007, the Company issued the Refinance Fee Warrant to three parties which provided the right to purchase up to 750,000 shares of National Coal Corp. common stock at a price per share of $3.00 through December 31, 2011.
| 14. | Fair Value of Financial Instruments |
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at December 31, 2009, and 2008:
Cash and accounts receivable: The carrying amount approximates fair value because of the short term nature of these instruments.
Debt: The fair value of the Company’s long term debt is estimated based on the quoted market prices for similar issues or on the estimated current rate of incremental borrowing available to the Company for similar liabilities.
The estimated fair values of the Company’s financial instruments at December 31 are as follows:
| 2009 | 2008 | |||||||||||
| Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value | |||||||||
| Financial Assets: |
||||||||||||
| Cash and cash equivalents |
$ | 1,185,725 | $ | 1,185,725 | $ | 3,908,469 | $ | 3,908,469 | ||||
| Accounts receivable |
366,680 | 366,680 | 474,351 | 474,351 | ||||||||
| Restricted cash |
6,211,637 | 6,211,637 | 11,338,137 | 11,338,137 | ||||||||
| Financial liabilities: |
||||||||||||
| Debt |
45,643,225 | 28,843,225 | 44,228,836 | 35,828,836 | ||||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
| 15. | Concentrations of Credit Risk and Major Customers |
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. Accounts receivable are from brokers or purchasers of the Company’s coal with payment terms that typically do not exceed 20 days. The Company routinely performs credit evaluations of customers purchasing on account and generally does not require collateral.
Georgia Power Company represented approximately 95%, 69% and 21% of the Company’s continuing operation’s coal revenue for the years ended December 31, 2009, 2008 and 2007.
| 16. | Income Taxes |
For tax purposes as of December 31, 2009, the Company has federal net operating loss (“NOL”) carryovers available to offset future taxable income of $106.7 million that expire from 2015 to 2029, and state NOL carryovers available to offset future taxable income of $99.6 million that expire from 2018 to 2028.
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. Significant components of the Company’s deferred income taxes are as follows as of December 31:
| 2009 | 2008 | |||||||
| Deferred tax liabilities: |
||||||||
| Property, plant and equipment |
$ | — | $ | 1,737,010 | ||||
| Inventories |
— | 171,979 | ||||||
| Equity method basis |
— | 127,084 | ||||||
| Accrued expenses |
2,527 | — | ||||||
| Stock options |
— | — | ||||||
| Mineral properties |
— | 13,449,000 | ||||||
| Total deferred tax liabilities |
2,527 | 15,485,073 | ||||||
| Deferred tax assets: |
||||||||
| Allowance for doubtful accounts |
— | 164,647 | ||||||
| Inventories |
33,969 | — | ||||||
| Property, plant and equipment |
1,474,608 | — | ||||||
| Deferred revenues |
382,900 | 499,169 | ||||||
| Intangibles |
33,063 | 33,063 | ||||||
| Charitable contribution carryovers |
104,033 | 101,030 | ||||||
| Reclamation expenditures |
865,514 | 1,248,300 | ||||||
| Debt |
— | 712,919 | ||||||
| Stock options |
1,515,624 | 1,000,940 | ||||||
| Accrued expenses |
— | 95,261 | ||||||
| Tax credit carryovers |
32,112 | — | ||||||
| Net operating loss carryovers |
40,541,683 | 32,692,992 | ||||||
| Total deferred tax assets |
44,983,506 | 36,548,321 | ||||||
| Valuation allowance for deferred tax assets |
(44,980,979 | ) | (23,456,775 | ) | ||||
| Net deferred tax assets |
2,527 | 13,091,546 | ||||||
| Net deferred tax liabilities |
$ | — | $ | 2,393,527 | ||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
The December 31, 2008 net deferred tax liabilities of $2,393,527 are recorded within long-term liabilities of discontinued operations. In connection with the sale of NCA during 2009, net deferred tax liabilities of $322,141 were written off against the related loss and federal NOL carryovers of $1,205,146 were transferred to the acquiring entity.
The use of deferred tax assets, including NOL carryovers, is limited to future taxable earnings. Based on an analysis of future taxable income, management believes there is not sufficient evidence as of December 31, 2009, to indicate that results of operations will generate sufficient taxable income to realize the deferred tax assets in future years. As a result, a valuation allowance has been provided for the entire net deferred tax assets related to future years, including NOL carryovers. The valuation allowance increased by $21,524,204 in 2009 and $15,450,912 in 2008.
The provision for income taxes for continuing operations differs from the amount computed by applying the statutory federal income tax rate to loss before income taxes as follows:
| 2009 | 2008 | 2007 | ||||||||||
| Tax at U.S. statutory rates |
$ | (6,027,993 | ) | $ | (8,672,622 | ) | $ | (8,704,012 | ) | |||
| State income tax benefit |
(760,591 | ) | (1,094,281 | ) | (1,098,242 | ) | ||||||
| Permanent differences |
906,183 | 106,938 | 51,339 | |||||||||
| Change in valuation allowance |
5,882,401 | 9,659,965 | 9,750,915 | |||||||||
| Deferred state income tax benefit |
$ | — | $ | — | $ | — | ||||||
Also as of December 31, 2009, the Company has state tax credit carryovers of $340,873 available to offset future state taxes. These state tax credit carryovers expire from 2020 to 2024. Since these tax credit carryovers will be used to offset future state franchise taxes, they have been recorded as a deferred state franchise tax benefit in the accompanying financial statements.
The Company has no material unrecognized tax benefits or any known material tax contingencies as of December 31, 2009.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no such amounts recognized in 2009, 2008 or 2007.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. There are no income tax examinations currently in process. With few exceptions, the Company is no longer subject to U.S. federal examinations or state and local income tax examinations by tax authorities for years before 2004.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
| 17. | Earnings per Share |
Basic earnings or loss per share are computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed similarly to basic earnings per share except that they reflect the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted earnings or loss per share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the potentially dilutive instruments were converted into common stock at the beginning of the year or upon issuance. Stock options with exercise prices greater than the average fair market price for a period, which are defined as anti-dilutive, are not included in the diluted loss per share calculations because of their anti-dilutive effect. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.
For the years ended December 31, 2009, 2008, and 2007, 4,933,349, 5,005,620 and 4,694,877, respectively, potentially dilutive shares of the Company from warrants, convertible preferred stock and stock options were not included in the computation of diluted loss per share because to do so would be anti-dilutive.
The computations for basic and diluted loss per share from continuing operations for the period ending December 31 are as follows:
| 2009 | 2008 | 2007 | ||||||||||
| Numerator: |
||||||||||||
| Net loss |
$ | (17,729,391 | ) | $ | (25,507,712 | ) | $ | (25,600,036 | ) | |||
| Preferred dividends |
— | (130,188 | ) | (398,891 | ) | |||||||
| Preferred stock deemed dividends |
— | (593,563 | ) | (4,058,358 | ) | |||||||
| Numerator for basic and diluted |
$ | (17,729,391 | ) | $ | (26,231,463 | ) | $ | (30,057,285 | ) | |||
| Denominator: |
||||||||||||
| Weighted average shares - basic |
34,004,575 | 31,525,271 | 20,680,015 | |||||||||
| Net loss per share - basic |
$ | (0.52 | ) | $ | (0.83 | ) | $ | (1.45 | ) | |||
| Net loss per share - diluted |
$ | (0.52 | ) | $ | (0.83 | ) | $ | (1.45 | ) | |||
| 18. | Stock-based Compensation Plans |
The Company’s 2004 Option Plan (the “Plan”) was authorized by the Board of Directors of the Company in March 2004, and amended in January 2005. Under the terms of the Plan, stock options may be granted to officers, directors, employees, and others. At December 31, 2009, 4,450,000 shares of common stock were authorized for issuance under the Plan. Shares subject to awards that expire unexercised or are otherwise terminated, again become available for awards. Upon exercise, stock is issued from unissued or treasury shares. The grant price of an option under the Plan may not be less than the fair market value of the common stock subject to such option on the date of grant. Options have a maximum life of ten years and generally vest 25% per year over a four year period.
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During the years ended December 31, 2009, 2008 and 2007, the Company recognized stock based compensation expense, exclusive of restricted stock expense, in its continuing operations of $960,768, $1,188,532 and $1,436,996, respectively, related to stock options.
The fair value of each option was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| Year Ended December 31, | |||||||||
| 2009 | 2008 | 2007 | |||||||
| Expected term (years) |
6.00 | 6.25 | 6.25 | ||||||
| Risk-free interest rates |
2.36% - 3.32 | % | 3.02% - 3.52 | % | 3.61% - 4.69 | % | |||
| Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | |||
| Expected volatility |
87.97 - 94.74 | % | 54.47% - 69.24 | % | 50.2% - 53.1 | % | |||
| Weighted-average volatility |
93.29 | % | 66.2 | % | 51.2 | % | |||
The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies until December 31, 2007, as the Company’s trading history was limited. Effective January 1, 2008, the Company began using its own historical volatility. The expected term is determined using the simplified method as accepted under Securities and Exchange Commission Staff Accounting Bulletin No. 107 assuming a ten-year original contract term and graded vesting over four years. The weighted-average grant-date fair value of options issued during the years ended December 31, 2009, 2008, and 2007 were $0.80, $3.43 and $1.92, respectively. The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $0, $555,398 and $0, respectively. There were no options exercised during 2009 or 2007.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
The following table summarizes activity under the Plan for the years ended December 31, 2009, 2008 and 2007:
| Options Outstanding |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value | ||||||||
| Outstanding at December 31, 2006 |
1,323,625 | $ | 6.90 | 8.81 | $ | 505,825 | |||||
| Granted |
390,000 | 3.53 | |||||||||
| Exercised |
— | — | |||||||||
| Forfeited |
(145,500 | ) | 5.19 | ||||||||
| Expirations |
(2,500 | ) | 6.95 | ||||||||
| Outstanding at December 31, 2007 |
1,565,625 | $ | 6.22 | 8.19 | $ | 1,053,320 | |||||
| Granted |
516,500 | 5.49 | |||||||||
| Exercised |
(211,750 | ) | 4.86 | ||||||||
| Forfeited |
(114,500 | ) | 4.99 | ||||||||
| Expirations |
— | — | |||||||||
| Outstanding at December 31, 2008 |
1,755,875 | $ | 6.24 | 6.24 | $ | — | |||||
| Granted |
631,138 | 1.04 | |||||||||
| Exercised |
— | — | |||||||||
| Forfeited |
(235,212 | ) | 3.83 | ||||||||
| Expirations |
(96,875 | ) | 2.76 | ||||||||
| Outstanding at December 31, 2009 |
2,054,926 | $ | 4.97 | 7.40 | $ | 750 | |||||
| Vested or expected to vest |
3,231,605 | $ | 4.32 | ||||||||
| Exercisable |
1,083,875 | $ | 6.59 | ||||||||
As of December 31, 2009, there was $504,693 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. That cost is expected to be recognized over a weighted average period of 3.84 years. The weighted average remaining contractual term of exercisable options at December 31, 2009 was 2.87 years. The total fair value of shares vested during the years ended December 31, 2009, 2008, and 2007, was $1,752,348, $2,549,387, and $1,143,942, respectively.
The Company from time to time issues restricted stock awards to key employees and directors. During the years ended December 31, 2009, 2008 and 2007 the Company granted 104,450, 215,000 and 0 restricted shares, and recognized $419,125, $125,416, and $0 respectively, in stock-based compensation expense.
| 19. | Commitments and Contingencies |
The Company is made a party to legal actions, claims, arbitration and administrative proceedings from time to time in the ordinary course of business. Management is not aware, except as noted below, of any pending or threatened proceedings that might have a material impact on its cash flows, results of operations or financial condition.
The Company is a defendant in a lawsuit in the Circuit Court of Anderson County, Tennessee, alleging that National Coal Corporation was negligent in the case of a vehicular accident which resulted in the death of an independent contract truck driver. The plaintiffs are seeking $7.0 million in compensable damages and $10.0 million in punitive damages. The Company believes it has meritorious defenses to all
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
of the claims asserted in this action and will continue to vigorously defend its position; however, the Company cannot predict the outcome of this proceeding at this time, and cannot predict whether the outcome will have a material adverse effect on its financial condition.
| 20. | Related Party Transactions |
On October 20, 2008, the Company executed employee retention contracts with two executive officers of the Company. These agreements in the aggregate, provide for cash payments of $350,000 upon execution and an additional $100,000 payable on January 31, 2012. These amounts are being expensed over the terms of the agreements. In addition, the agreements granted a total of 200,000 restricted shares of the Company’s common stock as well as the option to purchase 75,000 additional shares under a three year vesting schedule. On December 31, 2009, the Chief Financial Officer of the Company resigned and forfeited 66,000 shares of the unvested restricted stock issued in accordance with the retention agreement.
On May 7, 2008, the Company completed the sale of 2,332,000 shares of common stock at a price of $4.65 per share in a private placement for gross proceeds of $10,843,798. Three executive officers participated in the offering and acquired an aggregate of 55,000 of the shares.
On March 31, 2008, the Company’s wholly-owned subsidiary, National Coal Corporation, completed the sale of the real and personal property assets that comprised its Straight Creek mining operations in Bell, Leslie and Harlan Counties, Kentucky to Xinergy Corp. for $11.0 million in cash in accordance with the terms and conditions of a Purchase Agreement entered into among the parties on February 8, 2008 (the “Purchase Agreement”). In addition to the receipt of the purchase price for the assets, the transaction also resulted in the return of approximately $7.4 million in cash that was previously pledged to secure reclamation bonds and other liabilities associated with the Straight Creek operation, and relieved the Company of approximately $3.6 million in reclamation liabilities and approximately $2.6 million of equipment related debt which were assumed by Xinergy Corp. in the transaction.
Xinergy Corp. was founded and is controlled by Jon Nix, who is a founder, significant stockholder, and former officer and director of National Coal. Mr. Nix served as a director of National Coal Corp. from January 2003 until July 2007, and as Chairman of the Board from March 2004 until July 2007. Mr. Nix also served as President and Chief Executive Officer from January 2003 until August 2006.
On October 19, 2007, the CEO and President of the Company purchased 200,000 shares of the Company’s common stock at a price of $3.00 per share from common stock authorized under the 2004 Stock Option Plan.
On October 19, 2007, Jon Nix, the former Chairman of the Company’s Board of Directors, who is also the former President and CEO, received a commission of $100,000 related to the completion of the acquisition of Mann Steel Products, Inc.
In March 2007, the then-Chairman of the Company’s Board of Directors, who is also the former President and CEO, sold to the current President and CEO for $10.00 the fully vested option to purchase 400,000 shares of National Coal Corp. common stock at $7.00 per share until December 31, 2008. The transaction resulted in $434,493 of additional compensation expense to the Company in the year ended December 31, 2007.
On February 28, 2007, the Company sold an additional 200,000 shares to the Company’s President and CEO for a total price of $930,000.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
| 21. | Events Subsequent to December 31, 2009 |
On January 8, 2010, the Board of Directors authorized the amendment of certain stock option agreements previously issued to the Company’s current employees, officers and members of the Board of Directors pursuant to the Company’s Amended and Restated 2004 National Coal Corp. Option Plan. All of the Company’s outstanding options for current employees, officers, and members of the Board of Directors, as well as the Company’s form of stock option agreement for future grants were amended to provide acceleration of vesting upon change of control of the Company. Additionally, all options granted to current employees, officers and directors prior to January 1, 2009 were amended to reduce the exercise price to $1.14, $0.10 higher than the closing price of the Company’s stock on January 8, 2010.
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NATIONAL COAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — Continued
| 22. | Summary Quarterly Financial Information (Unaudited) |
Quarterly financial data for 2009 and 2008 follows:
| 2009 | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Total revenues |
$ | 20,026,667 | $ | 22,578,771 | $ | 22,120,799 | $ | 23,309,246 | ||||||||
| Operating loss from continuing operations |
(4,522,871 | ) | (1,409,528 | ) | (2,730,694 | ) | (2,512,371 | ) | ||||||||
| Net loss attributable to common shareholders |
(7,890,415 | ) | (6,345,569 | ) | (663,950 | ) | (4,314,614 | ) | ||||||||
| Loss per common share from continuing operations: |
||||||||||||||||
| Basic |
$ | (0.17 | ) | $ | (0.09 | ) | $ | (0.13 | ) | $ | (0.13 | ) | ||||
| Diluted |
$ | (0.17 | ) | $ | (0.09 | ) | $ | (0.13 | ) | $ | (0.13 | ) | ||||
| Loss per common share from discontinued operations: |
||||||||||||||||
| Basic |
$ | (0.07 | ) | $ | (0.09 | ) | $ | 0.11 | $ | — | ||||||
| Diluted |
$ | (0.07 | ) | $ | (0.09 | ) | $ | 0.11 | $ | — | ||||||
| Note: | National Coal of Alabama Inc. was foreclosed upon on August 3, 2009. The results of operations and the gain on disposal are presented net of income taxes in the accompanying consolidated financial statements as discontinued operations in accordance with SFAS No. 144 (ASC 360) Accounting for the Impairment or Disposal of Long Lived Assets. For all periods presented, the consolidated financial statements have been reclassified to conform to this presentation. (Note 4) |
| 2008 | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Total revenues |
$ | 16,142,538 | $ | 16,701,165 | $ | 18,581,340 | $ | 13,626,202 | ||||||||
| Operating loss from continuing operations |
(6,988,543 | ) | (2,390,435 | ) | (3,135,632 | ) | (4,574,126 | ) | ||||||||
| Net loss attributable to common shareholders |
(10,142,794 | ) | (9,110,094 | ) | (8,430,201 | ) | (7,933,612 | ) | ||||||||
| Loss per common share from continuing operations: |
||||||||||||||||
| Basic |
$ | (0.34 | ) | $ | (0.17 | ) | $ | (0.14 | ) | $ | (0.20 | ) | ||||
| Diluted |
$ | (0.34 | ) | $ | (0.17 | ) | $ | (0.14 | ) | $ | (0.20 | ) | ||||
| Loss per common share from discontinued operations: |
||||||||||||||||
| Basic |
$ | (0.01 | ) | $ | (0.13 | ) | $ | (0.12 | ) | $ | (0.04 | ) | ||||
| Diluted |
$ | (0.01 | ) | $ | (0.13 | ) | $ | (0.12 | ) | $ | (0.04 | ) | ||||
| Note: | Straight Creek mining operations were sold on March 31, 2008. The results of operations are included in the accompanying financial statements as continuing operations. (Note 5) |
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| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None
| Item 9A(T). | Controls and Procedures. |
Controls and Procedures
Members of our management, including our President and Chief Executive Officer, Daniel A. Roling, and Acting Chief Financial Officer, Les H. Wagner, have evaluated the effectiveness of our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of December 31, 2009, the end of the period covered by this report. Based upon that evaluation, Messrs. Roling and Wagner concluded that our disclosure controls and procedures were effective as of December 31, 2009.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, we have concluded that our internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
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Changes In Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
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PART III
| Item 10. | Directors, Executive Officers, and Corporate Governance. |
The information required by this item is incorporated by reference to National Coal’s Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2009.
| Item 11. | Executive Compensation. |
The information required by this item is incorporated by reference to National Coal’s Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2009.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item is incorporated by reference to National Coal’s Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2009.
| Item 13. | Certain Relationships, Related Transactions, and Director Independence |
The information required by this item is incorporated by reference to National Coal’s Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2009.
| Item 14. | Principal Accounting Fees and Services. |
The information required by this item is incorporated by reference to National Coal’s Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2009.
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PART IV
| Item 15. | Exhibits, Financial Statement Schedules. |
(a) The following documents are filed as part of this report:
| 1. | Consolidated Financial Statements |
See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.
| 2. | Financial Statement Schedules |
All financial schedules are not required under the related instructions, or are inapplicable and therefore have been omitted.
| 3. | Exhibits. See Item 15(b) below. |
(b) Exhibits. We have filed, or incorporated into this Form 10-K by reference, the exhibits listed on the accompanying Index to Exhibits immediately following the signature page of this Form 10-K.
(c) Financial Statement Schedule. See Item 15(a) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| NATIONAL COAL CORP. | ||||
| Date: March 31, 2010 | /s/ Les H. Wagner | |||
| By: | Les H. Wagner | |||
| Its: | Acting Chief Financial Officer | |||
POWER OF ATTORNEY
The undersigned directors and officers of National Coal Corp. do hereby constitute and appoint Daniel A. Roling and Les H. Wagner, and each of them, with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto, and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Name |
Title |
Date | ||
| /s/ Daniel A. Roling |
Chief Executive Officer, President, and Director (Principal Executive Officer) |
March 31, 2010 | ||
| Daniel A. Roling | ||||
| /s/ Les H. Wagner |
Acting Chief Financial Officer (Principal Financial and Accounting officer) | March 31, 2010 | ||
| Les H. Wagner | ||||
| /s/ Kenneth Scott |
Chairman of the Board | March 31, 2010 | ||
| Kenneth Scott | ||||
| /s/ Robert Heinlein |
Director | March 31, 2010 | ||
| Robert Heinlein | ||||
| /s/ Gerald Malys |
Director | March 31, 2010 | ||
| Gerald Malys | ||||
| /s/ Marc Solochek |
Director | March 31, 2010 | ||
| Marc Solochek | ||||
Table of Contents
INDEX TO EXHIBITS
| Exhibit |
Exhibit Title | |
| 2.1 | Asset Purchase Agreement, dated February 8, 2008, between National Coal Corporation and Xinergy Corp. (2) | |
| 2.2 | Letter Agreement from Neuberger Berman, LLC to National Coal Corporation regarding the Exchange of Notes for Common Stock, dated May 20, 2008. (11) | |
| 2.3 | Amendment, dated June 3, 2008, to Letter Agreement, from Neuberger Berman, LLC to National Coal Corporation regarding the Exchange of Notes for Common Stock, dated May 20, 2008. (14) | |
| 3.1 | Articles of Incorporation of National Coal Corp. dated August 8, 1995. (3) | |
| 3.1.1 | Articles of Amendment to the Articles of Incorporation of National Coal Corp. dated August 10, 1995. (3) | |
| 3.1.2 | Articles of Amendment to the Articles of Incorporation of National Coal Corp. dated January 4, 1996. (3) | |
| 3.1.3 | Articles of Amendment to the Articles of Incorporation of National Coal Corp. dated July 17, 2003, filed August 4, 2003. (4) | |
| 3.1.4 | Articles of Amendment to the Articles of Incorporation of National Coal Corp. dated August 27, 2004, filed August 31, 2004. (5) | |
| 3.1.5 | Articles of Amendment to the Articles of Incorporation of National Coal Corp. dated January 10, 2005, filed January 12, 2005. (5) | |
| 3.2 | Amended and Restated Bylaws of National Coal Corp. (5) | |
| 4.1 | Amended and Restated 2004 National Coal Corp. Option Plan. (6) | |
| 4.2 | Indenture dated as of December 29, 2005 among National Coal Corp., its subsidiaries, and Wells Fargo Bank, National Association, a national banking association, as trustee. (7) | |
| 4.3 | Security Agreement dated as of December 29, 2005, by and among National Coal Corp., its subsidiaries, in favor of Wells Fargo Bank National Association, in its capacity as trustee under the Indenture dated December 29, 2005. (7) | |
| 4.4 | Warrant Agreement dated as of December 29, 2005 between National Coal Corp., and Wells Fargo Bank, National Association as warrant agent. (7) | |
| 4.5 | Intellectual Property Security Agreement dated as of December 29, 2005 by and among National Coal Corp., its subsidiaries, in favor of Wells Fargo Bank, N.A. as collateral agent. (7) | |
| 4.6 | Registration Rights Agreement, dated October 19, 2007, between National Coal Corp. and the Holders named therein. (1) | |
| 4.7 | Warrant Agreement, dated as of October 19, 2007, between National Coal Corp. and the Holders. (1) | |
| 4.8 | Warrant Agreement, dated December 31, 2007, between National Coal Corp., Steelhead Offshore Capital, LP, Big Bend 38 Investments L.P. and J-K Navigator Fund, L.P. (8) | |
| 4.9 | Registration Rights Agreement, dated May 12, 2008, between National Coal Corp. and the investors identified therein. (15) | |
Table of Contents
| Exhibit |
Exhibit Title | |
| 10.1 | Form of Indemnification Agreement of Registrant. (5)* | |
| 10.2 | Separation Agreement, dated as of July 15, 2008, between Charles Kite and National Coal Corp and all of its subsidiaries. (12)* | |
| 10.3 | Amended Employment Agreement by and between National Coal Corporation and William R. Snodgrass dated October 1, 2004. (5)* | |
| 10.4 | Employment Agreement, dated May 25, 2006, by and among National Coal Corporation, National Coal Corp., and Daniel A. Roling. (10)* | |
| 10.5 | Employment Offer Letter, dated November 28, 2007, between Michael Castle and National Coal Corp. (9)* | |
| 10.6 | Employee Retention Agreement dated October 20, 2008 by and among National Coal Corp., National Coal Corporation and Michael R. Castle. (13)* | |
| 10.7 | Employee Retention Agreement dated October 20, 2008 by and among National Coal Corp., National Coal Corporation and William R. Snodgrass. (13)* | |
| 10.8 | Form of Subscription Agreement, dated May 8, 2008, between National Coal Corp. and each of the GR Fund Investors and the Steelhead Investors. (15) | |
| 10.9 | Form of Subscription Agreement, dated May 8, 2008, between National Coal Corp. and each of Daniel Roling, Michael Castle and William Snodgrass. (15) | |
| 10.10 | Employment Offer Letter, dated January 23, 2009, between Scott A. Deppe and National Coal of Alabama, Inc. (16)* | |
| 10.11 | Credit Agreement, dated April 9, 2009, among National Coal Corporation, National Coal Corp., Subsidiary Grantors and NextView Partners, LLC. (17) | |
| 10.12 | Security and Guarantee Agreement, dated April 9, 2009, among National Corporation, National Coal Corp., Subsidiary Grantors and NextView Partners, LLC. (17) | |
| 10.13 | Intercreditor Agreement, dated as of April 9, 2009, by and between NextView Partners, LLC, and Wells Fargo Bank, N.A., and acknowledged and agreed to by National Coal Corporation, National Coal Corp., and Guarantors. (17) | |
| 10.14 | Loan Modification Agreement, dated December 10, 2009 by and among Centaurus Energy Master Fund, LP, National Coal Corporation, National Coal Corp., Jacksboro Coal Company, Inc., and NC Railroad, Inc. (18) | |
| 10.15 | Employment Offer Letter, dated December 29, 2009, between Les H. Wagner and National Coal Corp. (19)* | |
| 21.1 | Subsidiaries of National Coal Corp. | |
| 23.1 | Consent of Ernst & Young LLP. | |
| 31.1 | Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
Table of Contents
| Exhibit |
Exhibit Title | |
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 99.1 | Map showing the locations of National Coal’s properties. | |
| * | Indicates a management contract or compensatory plan. |
| (1) | Incorporated by reference to our Current Report on Form 8-K, filed on October 25, 2007. |
| (2) | Incorporated by reference to our Current Report on Form 8-K, filed February 12, 2008. |
| (3) | Incorporated by reference to our Registration Statement on Form 10-SB filed June 25, 1999. |
| (4) | Incorporated by reference to our Current Report on Form 8-K, filed August 7, 2003. |
| (5) | Incorporated by reference to our Registration Statement on Form SB-2 (File No. 333-120146). |
| (6) | Incorporated by reference to our Current Report on Form 8-K filed on July 27, 2007. |
| (7) | Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. |
| (8) | Incorporated by reference to our Current Report on Form 8-K, filed January 3, 2008. |
| (9) | Incorporated by reference to our Current Report on Form 8-K, filed December 3, 2007. |
| (10) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006. |
| (11) | Incorporated by reference to our Current Report on Form 8-K, filed May 29, 2008. |
| (12) | Incorporated by reference to our Current Report on Form 8-K, filed July 21, 2008. |
| (13) | Incorporated by reference to our Current Report on Form 8-K, filed October 24, 2008. |
| (14) | Incorporated by reference to our Current Report on Form 8-K, filed July 9, 2008. |
| (15) | Incorporated by reference to our Current Report on Form 8-K, filed May 13, 2008. |
| (16) | Incorporated by reference to our Current Report on Form 8-K, filed January 30, 2009. |
| (17) | Incorporated by reference to our Current Report on Form 8-K, filed April 14, 2009. |
| (18) | Incorporated by reference to our Current Report on Form 8-K, filed on December 11, 2009. |
| (19) | Incorporated by reference to our Current Report on Form 8-K, filed on December 30, 2009. |