Form S-1/A American Resources Corp
As filed with the U.S. Securities and Exchange Commission on
February 14, 2019
Registration No. 333-226042
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM S-1/A
(Amendment No.
8)
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------------------------
American Resources Corporation
(Exact
name of registrant as specified in its charter)
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Florida
|
1200
|
46-3914127
|
(State
or other jurisdiction of incorporation or
organization)
|
(Primary
Standard Industrial Classification Code Number)
|
(I.R.S.
Employer Identification Number)
|
-----------------------------------------
9002 Technology Lane
Fishers, IN 46038
Tel.: (317) 855-9926
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive
offices)
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Clifford J. Hunt
Law Office of Clifford J. Hunt, P.A.
8200 Seminole Boulevard
Seminole, Florida 33772
(727) 471-0444
(Name,
address, including zip code, and telephone number, including area
code, of agent for service)
-----------------------------------------
Copies
to:
Clifford
J. Hunt
Law
Office of Clifford J. Hunt, P.A.
8200
Seminole Boulevard
Seminole,
Florida 33772
(727)
471-0444
|
Mitchell
S. Nussbaum
Loeb
& Loeb LLP
345
Park Avenue
New
York, NY 10154
(212)
407-4000
|
----------------------------------------
Approximate date of commencement of proposed sale of the securities
to the public: As soon as practicable after the effective
date of this Registration Statement.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: ☑
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Securities Exchange Act of 1934.
Large
accelerated filer ☐
|
Accelerated
filer ☐
|
Non-accelerated
filer ☐
|
Smaller
reporting company ☑
|
Emerging
Growth Company ☑
|
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act. ☑
The
registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment that specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DRAFT DATED FEBRUARY 14, 2019
PRELIMINARY PROSPECTUS
1,000,000 Shares
American Resources Corporation
Class A Common Stock
______________________
This is a public offering of the Class A Common
stock (or also referred to as “common stock”) of
American Resources Corporation, a Florida corporation. Prior to
this offering, there has been limited public market for our common
stock on the OTC Markets under the ticker AREC. We are
selling up
to [
] shares
of common stock. There are no selling shareholders in this
offering.
Our
common stock is currently quoted on the OTC Market Group,
Inc.’s OTC Pink tier under the symbol “AREC”.
On February 13, 2019, the last reported sale price of our
common stock was $12.50 per share. We expect the public offering
price per share in this offering will be between $4.00 to $6.00. We
have applied to list our common stock on The NASDAQ Capital Market
under the symbol “AREC”. No assurance can be given that
our application will be approved.
We are an “emerging growth company” as
that term is used in the Jumpstart Our Business Startups Act
of 2012, and as such, we have
elected to take advantage of certain reduced public company
reporting requirements for this prospectus and future filings. See
“Risk Factors” and “Prospectus
Summary—Emerging Growth Company.”
Investing in our common stock involves risks. See “Risk
Factors” on page 7.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
______________________
|
Per
Share
|
Total
|
Public offering
price
|
$ 6.00
|
$ 6,000,000$
|
Underwriting
discount(1)
|
$ 0.42
|
$ 420,000
|
Proceeds before
expenses
|
$ 5.58
|
$ 5,580,000
|
———————
(1) In addition to the
underwriting discount, we have agreed to issue to the
representative of the underwriters warrants to purchase a number of
shares of common stock equal to 7% of the total number of shares
being sold in the offering, including the over-allotments, if any,
and to reimburse the underwriters for expenses incurred by them.
See “Underwriting” beginning on page 51 of this
prospectus for additional information regarding total underwriter
compensation.
We have
granted the underwriters the option for a period of 45 days to
purchase additional shares of common stock (up to 15.0% of the
number of shares of common stock sold in the primary offering)
solely to cover over-allotments, if any (the
“Over-Allotment”).
The
underwriters expect to deliver our shares to purchasers in the
offering on or about February 14, 2019, subject to customary
closing conditions.
MAXIM GROUP, LLC
Lead Bookrunning Manager
The date of this prospectus
is February
14, 2019
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
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4
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OTHER INFORMATION
|
4
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PROSPECTUS SUMMARY
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5
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RISK FACTORS
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8
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
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41
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USE OF PROCEEDS
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44
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CAPITALIZATION
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45
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INFORMATION WITH RESPECT TO THE REGISTRANT
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46
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DESCRIPTION OF PROPERTY
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65
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MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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65
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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66
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DIRECTORS AND EXECUTIVE OFFICERS
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87
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EXECUTIVE COMPENSATION
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91
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DESCRIPTION OF SECURITIES
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93
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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96
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, DIRECTOR
INDEPENDENCE
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97
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UNDERWRITING
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99
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DETERMINATION OF OFFERING PRICE
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102
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INTERESTS OF NAMED EXPERTS AND COUNSEL
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103
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WHERE YOU CAN FIND MORE INFORMATION
|
104
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DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
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104
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INDEX TO FINANCIAL STATEMENTS
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F-1
|
-----------------------------------------
You should rely only on the information contained in this
prospectus and any free writing prospectus prepared by us or on
behalf of us or the information to which we have referred you.
Neither we, nor the underwriters have authorized anyone to provide
you with information different from that contained in this
prospectus and any free writing prospectus. We take no
responsibility for, and can provide no assurance as to the
reliability of, any other information that others may give you. We
and the underwriters are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The information
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus
or any sale of the common stock. Our business, financial condition,
results of operations and prospects may have changed since that
date.
This prospectus contains forward-looking statements that are
subject to a number of risks and uncertainties, many of which are
beyond our control. See “Risk Factors” and
“Cautionary Statement Regarding Forward-Looking
Statements.”
3
Certain
Terms Used in this Prospectus
All
references in this prospectus to:
●
“American
Resources Corporation,” the “Company,”
“ARC”, “AREC”, “us,”
“we,” “our,” or “ours” or like
terms when used in the present tense or prospectively refer to
American Resources Corporation and its subsidiaries, including its
wholly-owned subsidiary, Quest Energy Inc. American Resources
Corporation is the issuer in this offering.
●
“Common
shares,” “common stock” or “Common
Stock” refers to the Class A common stock of the Company, par
value $0.0001, as defined in the Company’s Articles of
Incorporation, as amended. There is no other class of common shares
of the Company authorized or issued other than the Class A common
stock. The term “stock” and “shares” are
used interchangeably.
●
“Coal mining
permits” refers to permits from Kentucky Department of
Natural Resources or Indiana Department of Natural Resources (as
the case may be) and includes permits for coal extraction,
processing, rail loading, and storage of refuse and/or
slurry.
●
Tons refer to short
tons, unless otherwise indicated.
●
We have not
classified the coal we control as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7. Therefore, any
references to coal in this filing refers to an undetermined coal
deposit that has not been deemed proven or
probable.
You
should only rely on the information contained in this document or
to which we have referred you. We have not authorized anyone to
provide you with information otherwise. If anyone provides you with
different or inconsistent information, you should not rely on it.
We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
OTHER INFORMATION
Our
website address is www.americanresourcescorp.com. We expect to make
our periodic reports and other information filed with or furnished
to the Securities Exchange Commission (“SEC”),
available free of charge through a link on our website as soon as
reasonably practicable after those reports and other information
are electronically filed with or furnished to the SEC. Information
on our website or any other website is not incorporated by
reference into, and does not constitute a part of, this
prospectus.
4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. You should read the entire prospectus carefully,
including the information under the headings “Risk
Factors,” “Cautionary Statement Regarding
Forward-Looking Statements” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and the financial statements and the notes to
those financial statements appearing elsewhere in this prospectus.
The information presented in this prospectus assumes a public
offering price of $4.00 per common share.
About
Us
We are
a low-cost producer of primarily high-quality, metallurgical coal
in eastern Kentucky. We began our Company on October 2, 2013 and
changed our name from Natural Gas Fueling and Conversion Inc. to
NGFC Equities, Inc. on February 25, 2015, and then changed our name
from NGFC Equities, Inc. to American Resources Corporation on
February 17, 2017. On January 5, 2017, ARC executed a Share
Exchange Agreement between the Company and Quest Energy Inc., a
private company incorporated in the State of Indiana with offices
at 9002 Technology Lane, Fishers IN 46038, and due to the
fulfillment of various conditions precedent to closing of the
transaction, the control of the Company was transferred to the
Quest Energy shareholders on February 7, 2017 resulting in Quest
Energy becoming a wholly-owned subsidiary of ARC. Through its
wholly-owned subsidiary Quest Energy, which is an Indiana
corporation founded in June 2015, ARC was able to acquire coal
mining and coal processing operations, substantially all located in
eastern Kentucky. A majority of our domestic and international
target customer base includes blast furnace steel mills and coke
plants, as well as international metallurgical coal consumers,
domestic electricity generation utilities, and other industrial
customers.
We
achieved initial commercial production of metallurgical coal in
September 2016 from our McCoy Elkhorn Mine #15 and from our McCoy
Elkhorn Carnegie 1 Mine in March 2017. In October 2017 we achieved
commercial production of thermal coal from our Deane Mining Access
Energy Mine and from our Deane Mining Razorblade Surface Mine in
May 2018. We believe that we will be able to take advantage of
recent increases in U.S. and global benchmark metallurgical and
thermal coal prices and intend to opportunistically increase the
amount of our projected production that is directed to the export
market to capture favorable differentials between domestic and
global benchmark prices. The Company commenced operations of two
out of four of its internally owned preparation plants in July of
2016 (Bevins #1 and Bevins #2 Prep Plants at McCoy Elkhorn), with a
third preparation plant commencing operation in October 2017 (Mill
Creek Prep Plant at Deane Mining).Pursuant to the definitions in
Paragraph (a) (4) of the Securities and Exchange Commission's
Industry Guide 7, our company and its business activities are
deemed to be in the exploration stage until mineral reserves are
defined on our properties.
Current Projects
Quest
Energy has six coal mining and processing operating subsidiaries:
McCoy Elkhorn Coal LLC (doing business as McCoy Elkhorn Coal
Company, “McCoy Elkhorn”), Knott County Coal LLC
(“Knott County Coal”), Deane Mining LLC (“Deane
Mining”), ERC Mining Indiana Corporation (“ERC”),
Wyoming County Coal LLC (“Wyoming County Coal”), and
Quest Processing LLC (“Quest Processing”), all of which
are located in eastern Kentucky and West Virginia within the
Central Appalachian coal basin, with the exception of ERC Mining
Indiana Corporation, which is located in southwestern Indiana in
the Illinois coal basin. Below is an organizational and ownership
chart of our Company.
5
The
coal deposits under control by the Company generally comprise of
metallurgical coal (used for steel making), pulverized coal
injections (“PCI”, used in the steel making process)
and high-BTU, low sulfur, low moisture bituminous coal used for a
variety of uses within several industries, including industrial
customers, specialty products and thermal coal used for electricity
generation.
Emerging Growth Company
We are
an “emerging growth company” as defined in the
Jumpstart Our Business Startups Act (the “JOBS Act”).
For as long as we are an emerging growth company, unlike public
companies that are not emerging growth companies under the JOBS
Act, we will not be required to:
●
provide an
auditor’s attestation report on management’s assessment
of the effectiveness of our system of internal control over
financial reporting pursuant to Section 404(b) of the
Sarbanes-Oxley Act of 2002;
●
provide more than
two years of audited financial statements and related
management’s discussion and analysis of financial condition
and results of operations;
●
comply with any new
requirements adopted by the Public Company Accounting Oversight
Board (the “PCAOB”) requiring mandatory audit firm
rotation or a supplement to the auditor’s report in which the
auditor would be required to provide additional information about
the audit and the financial statements of the issuer;
●
provide certain
disclosure regarding executive compensation required of larger
public companies or hold stockholder advisory votes on the
executive compensation required by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank
Act”); or
●
obtain stockholder
approval of any golden parachute payments not previously
approved.
We will
cease to be an emerging growth company upon the earliest
of:
●
the last day of the
fiscal year in which we have $1.0 billion or more in annual
revenues;
●
the date on which
we become a “large accelerated filer” (the fiscal
year-end on which the total market value of our common equity
securities held by non-affiliates is $700 million or more as of our
most recently completed second fiscal quarter);
●
the date on which
we issue more than $1.0 billion of non-convertible debt over a
three-year period; or
●
the last day of the
fiscal year following the fifth anniversary of our initial public
offering.
6
In
addition, Section 107 of the JOBS Act provides that an emerging
growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act of 1933, as
amended (the “Securities Act”), for complying with new
or revised accounting standards, but we intend to irrevocably opt
out of the extended transition period and, as a result, we will
adopt new or revised accounting standards on the relevant dates in
which adoption of such standards is required for other public
companies.
Total common stock offered by the Company
|
Up to 1,150,000 shares of Class A Common Stock, assuming the
underwriter’s Over-Allotment option is fully
exercised.
|
Use of proceeds
|
We expect to receive approximately $6,000,000
of gross proceeds, based upon the
offering price of $6.00 per share, and after deducting the underwriting
discount of $420,000,
we expect to receive approximately $5,580,000.
If the underwriters fully exercise their right to purchase
additional shares of common stock, we estimate that we will receive
gross proceeds of $6,900,000
from the sale of the common stock and net proceeds of
$4,278,000
after deducting $483,000
for underwriting discounts and commissions. The Company will use the proceeds of this offering
to fund organic and acquisitive growth and other uses as described
in the “Use of Proceeds” section. The Company will use
the proceeds, among other things, to initiate coal production on
certain permits the Company owns and act upon certain acquisition
opportunities, both those that are in close proximity to our
current operations and those that would create another
“hub” from which we can enhance business expansion. We
have not yet made final investment decisions with respect to any of
these potential projects and we cannot currently allocate specific
percentages of the net proceeds that we may use for the purposes
described above.
Please read “Use of Proceeds.”
|
Dividend policy
|
While we have not paid any dividends on our common stock since our
inception, our longer-term objective is to pay dividends in order
to enhance stockholder returns when the Board of Directors deems
such action as in the best interest of its shareholders. Please
read “Dividend Policy.”
|
Listing and trading symbol
|
Currently our stock is listed on the OTC Markets OTC Pink
tier under the ticker “AREC”. We have applied for a
listing on the NASDAQ Capital Market under the symbol
“AREC”.
|
Risk factors
|
You should carefully read and consider the information set forth
under the heading “Risk Factors” and all other
information set forth in this prospectus before deciding to invest
in our common stock.
|
The
information above does not include 4,000,000 shares of Class A
Common Stock reserved for issuance pursuant to the Employee
Incentive Stock Option Plan, 636,830 of which are issued as of the
date of this document.
7
RISK FACTORS
Investing in our common stock involves risks. You should carefully
consider the information in this prospectus, including the matters
addressed under “Cautionary Statement Regarding
Forward-Looking Statements,” and the following risks before
making an investment decision. The trading price of our common
stock could decline and our ability to pay dividends may be reduced
due to any of these risks, and you may lose all or part of your
investment.
Risks Associated with Small Company Size and Liquidity
Risks
As a start-up or development stage company, our business and
prospects are difficult to evaluate because we have a very limited
operating history and our business model is evolving, an investment
in us is considered a high-risk investment whereby you could lose
your entire investment.
We have
recently commenced operations and, therefore, we are considered a
“start-up” or “development stage” company.
We have had limited income from the sale of the coal from our
mining operations. We will incur significant expenses in order to
implement our business plan. As an investor, you should be aware of
the difficulties, delays and expenses normally encountered by an
enterprise in its development stage, many of which are beyond our
control, including unanticipated developmental expenses, and
advertising and marketing expenses. We cannot assure you that our
proposed business plan will materialize or prove successful, or
that we will ever be able to operate profitably. If we cannot
operate profitably, you could lose your entire
investment.
We have limited assets, have incurred operating losses and have
limited current sources of revenue.
We
have limited assets and limited revenues since our inception in
2015. Since our inception, we have incurred annual
operating losses. As of the end of the 9 months ending
on September 30, 2018, our unaudited net loss from operations was
$8,869,858. We have only recently started generating
revenue and such revenue is concentrated among a small number of
customers and a small number of operations. We can provide no
assurance that any of our current or future assets will produce any
material revenues for our stockholders, or that any such business
will operate on a profitable basis.
Our results of operations have not resulted in profitability and we
may not be able to achieve profitability going
forward.
We
have had net losses in each quarter since our inception. We expect
that we will continue to incur net losses for the foreseeable
future. We may incur significant losses in the future for a number
of reasons, including the other risks described in this prospectus,
and we may encounter unforeseen expenses, difficulties,
complications, delays and other unknown events. Accordingly, we may
not be able to achieve or maintain profitability. Our business is
early development stage, consisting of the development, marketing,
and sale of our coal. There is no assurance that even if we
successfully implement our business plan, that we will be able to
curtail our losses. Further, as we are a development
stage enterprise, we expect that net losses and the working capital
deficiency will continue. If we incur additional significant
operating losses, our stock price may decline, perhaps
significantly.
8
We have yet to achieve positive cash flow and, given our projected
funding needs, our ability to generate positive cash flow is
uncertain.
We
have had unaudited negative cash flow from operating activities of
$4,076,157 for the 9 months ending on September 30, 2018. We
anticipate that we will continue to have negative cash flow from
operating and investing activities for the foreseeable future as we
expect to incur increased coal mining development expenses and make
significant capital expenditures in our efforts to commence mining
operations at our various permit sites. Our business also will at
times require significant amounts of working capital to support our
growth, particularly as we acquire infrastructure and equipment to
support our new mining operations. An inability to generate
positive cash flow for the foreseeable future may adversely affect
our ability to raise needed capital for our business on reasonable
terms, diminish supplier or customer willingness to enter into
transactions with us, and have other adverse effects that may
decrease our long-term viability. There can be no assurance we will
achieve positive cash flow in the foreseeable future.
We may need access to additional financing, which may not be
available to us on acceptable terms or at all, and there is a
substantial doubt about our ability to continue as a going concern.
If we cannot access additional financing when we need it and on
acceptable terms, our business, prospects, financial condition,
operating results and ability to continue as a going concern could
be adversely affected.
Our
growth-oriented business plan to mine and sell coal from our
various permits and facilities will require significant continued
capital investment. Our independent registered public accounting
firm for the fiscal year ended December 31, 2016 and December 31,
2017, has included an explanatory paragraph in their opinion that
accompanies our audited consolidated financial statements as of and
for those years indicating that our current liquidity position
raises substantial doubt about our ability to continue as a going
concern. If we are unable to improve our liquidity position, we may
not be able to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments
that might result if we are unable to continue as a going concern
and, therefore, be required to realize our assets and discharge our
liabilities other than in the normal course of business which could
cause investors to suffer the loss of all or a substantial portion
of their investment. We cannot be certain that additional financing
will be available to us on favorable terms when required, or at
all, particularly given that we do not now have a committed credit
facility with any government or financial institution. If we cannot
obtain additional financing when we need it and on terms acceptable
to us, our business, prospects, financial condition, operating
results and ability to continue as a going concern could be
adversely affected.
We do not have any existing bank credit facilities. Our ability to
obtain such financing may be limited and if we are unable to secure
such financing, our profitability may be adversely
affected.
We
do not have any existing bank credit facilities. Our ability to
obtain such financing may be limited as banks and other financial
institutions may be reluctant to extend credit to businesses they
perceive as lacking prolonged operating histories, an industry that
may be politically undesirable, and limited information relating to
revenues and costs upon which they can evaluate the merits and
risks of any such credit extension. Our inability to secure bank
credit facilities (or some other form of cash/liquid injection) may
have an adverse effect on our results of operations. Due to our
limited operating history and limited assets, and the lag often
existing between commencing business operations and profitability,
in the absence of such bank financing, we may be forced to rely
solely on revenues generated from our business operations in order
to support our company, which revenues may not be sufficient to
meet our operating and administrative expenses. If we do not have
sufficient cash to meet our expenses, whether from revenues or bank
credit, we may have to curtail or cease business
operations.
9
We have identified several material weaknesses in our internal
control over financial reporting. If our remediation of these
material weaknesses is not effective, or if we experience
additional material weaknesses in the future or otherwise fail to
maintain an effective system of internal control over financial
reporting in the future, we may not be able to accurately or timely
report our financial condition or results of operations, which may
adversely affect investor confidence in us and, as a result, the
value of our securities.
In
connection with the audit of our financial statements beginning on
page F-1, the Company identified several material weaknesses in its
internal control over financial reporting. A material weakness is
defined as a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the
Company’s financial statements will not be prevented or
detected on a timely basis. Below are the material weakness
identified:
●
Insufficient number
of staff performing the accounting and financial reporting
functions; and
●
Lack of timely
reconciliations;
Neither
we nor our independent registered public accounting firm has
performed an evaluation of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
In light of the material weaknesses that were identified, we
believe that it is possible that additional material weaknesses and
control deficiencies may have been identified if such an evaluation
had been performed.
The
Company is working to remediate the material weaknesses, has taken
steps to enhance the internal control environment, and plans to
take additional steps to remediate the material weaknesses.
Specifically, we are:
●
seeking technically
competent staff with appropriate experience;
●
designing
additional controls around identification, documentation and
application of technical accounting guidance regarding
reconciliation of account discrepancies.
The
actions that we are taking are subject to ongoing senior management
review as well as audit committee oversight. Although we plan to
complete this remediation process as quickly as possible, we cannot
at this time estimate how long it will take, and our efforts may
not be successful in remediating these material weaknesses. In
addition, we will incur additional costs in improving our internal
control over financial reporting. If we are unable to successfully
remediate these material weaknesses or if we identify additional
material weaknesses, we may not detect errors on a timely basis.
This could harm our operating results, cause us to fail to meet our
SEC reporting obligations or NASDAQ Capital Market listing
requirements on a timely basis, adversely affect our reputation,
cause our stock price to decline or result in inaccurate financial
reporting or material misstatements in our annual or interim
financial statements.
In
addition to the remediation efforts related to the material
weaknesses described above, we are in the process of designing and
implementing the internal control over financial reporting required
to comply with Section 404 of the Sarbanes Oxley Act. This process
will be time consuming, costly and complicated. If during the
evaluation and testing process, we identify one or more other
material weaknesses in our internal control over financial
reporting, our management will be unable to assert that our
internal control over financial reporting is effective. Even if our
management concludes that our internal control over financial
reporting is effective, our independent registered public
accounting firm may conclude that there are material weaknesses
with respect to our internal controls or the level at which our
internal controls are documented, designed, implemented or
reviewed. If we are unable to assert that our internal control over
financial reporting is effective, or when required in the future,
if our independent registered public accounting firm is unable to
express an opinion as to the effectiveness of our internal control
over financial reporting, investors may lose confidence in the
accuracy and completeness of our financial reports and the market
price of our securities could be adversely affected, and we could
become subject to investigations by the stock exchange on which our
securities are listed, the SEC, or other regulatory authorities,
which could require additional financial and management
resources.
10
We have never declared or paid a cash dividend on our common shares
nor will we in the foreseeable future.
You
will not receive dividend income from an investment in the shares
and as a result, the purchase of the shares should only be made by
an investor who does not expect a dividend return on the
investment.
Our Series B
preferred stock, however, received an 8.0% annual dividend, of
which an accrued amount is recorded of $104,157, as of September
30, 2018, and continued to accrue to the Series B preferred stock
holder at the same rate until all Series B preferred stock was
converted to common stock on November 7, 2018. On November 8, 2018,
we filed an amendment to the company’s Articles of
Incorporation that eliminated the Series B preferred stock and
created a new Series C preferred stock. The Series C preferred
stock accrues a 10.0% annual dividend, compounded annually, of
which no amount has been recorded yet as being
accrued.
With
the potential exception of the Series C preferred stock dividend
referenced above, we currently intend to retain future earnings, if
any, to finance the operation and expansion of our business.
Accordingly, investors who anticipate the need for immediate income
from their investments by way of cash dividends should refrain from
purchasing any of our securities. As we do not intend to declare
dividends in the future, you may never see a return on your
investment and you indeed may lose your entire
investment.
We will incur professional fees in connection with being a
reporting company under the Securities Exchange Act of 1934, as
amended.
Our
Company is subject to the reporting requirements of the 1934 Act
and as such, we are required to file 10-Ks, 10-Qs and 8-Ks and
other reports with the Securities and Exchange Commission. We will
incur professional fees (i.e., attorney, auditors and filing
agents) in connection with the preparation and filing of such
reports and we currently anticipate such costs to range from
$25,000 to $50,000 per year. If we are unable to file such reports,
we will be delinquent in our filings which could adversely affect
the marketability of the Shares.
The failure to comply with the internal control evaluation and
certification requirements of Section 404 of Sarbanes-Oxley Act
could harm our operations and our ability to comply with our
periodic reporting obligations.
As a
reporting company under the 1934 Act, we are required to comply
with the internal control evaluation and certification requirements
of Section 404 of the Sarbanes-Oxley Act of 2002. We are in the
process of determining whether our existing internal controls over
financial reporting systems are compliant with Section 404. This
process may divert internal resources and will take a significant
amount of time, effort and expense to complete. If it is determined
that we are not in compliance with Section 404, we may be required
to implement new internal control procedures and reevaluate our
financial reporting. We may experience higher than anticipated
operating expenses as well as outside auditor fees during the
implementation of these changes and thereafter. Further, we may
need to hire additional qualified personnel in order for us to be
compliant with Section 404. If we are unable to implement these
changes effectively or efficiently, it could harm our operations,
financial reporting or financial results and could result in our
being unable to obtain an unqualified report on internal controls
from our independent auditors, which could adversely affect our
ability to comply with our periodic reporting obligations under the
1934 Act.
11
Future sales of restricted shares could decrease the price a
willing buyer would pay for shares of our common stock, could cause
our price to decline and could impair our ability to raise
capital.
Future
sales of common stock by existing shareholders or a new issuance by
the Company under exemptions from registration or through a
subsequent registered offering could materially adversely affect
the market price of our common stock and could materially impair
our future ability to raise capital through an offering of equity
securities. We are unable to predict the effect, if any, that
market sales of these shares, or the availability of these shares
for future sale, will have on the prevailing market price of our
common stock at any given time.
You may not be able to resell any shares you
purchased.
There
is an extremely limited trading market for our common stock at
present. There is no assurance that any trading market will be
present. This means that it may be hard or impossible for you to
find a willing buyer for your shares should you decide to sell them
in the future.
Risks Related to Our Business
The majority of our properties have not yet been developed into
producing coal mines and, if we experience any development delays
or cost increases, our business, financial condition, and results
of operations could be adversely affected.
We have
not yet completed our development plan and do not expect to have
full annual production from all of our properties until sometime in
the future. We expect to incur significant capital expenditures
until we have completed the development of our properties. In
addition, the development of our properties involves numerous
regulatory, environmental, political and legal uncertainties that
are beyond our control and that may cause delays in, or increase
the costs associated with, their completion. Accordingly, we may
not be able to complete the development of the properties on
schedule, at the budgeted cost or at all, and any delays beyond the
expected development periods or increased costs above those
expected to be incurred could have a material adverse effect on our
business, financial condition, results of operations, cash flows
and ability to pay dividends to our common
stockholders.
In
connection with the development of our properties, we may encounter
unexpected difficulties, including the following:
●
shortages of
materials or delays in delivery of materials;
●
unexpected
operational events;
●
facility or
equipment malfunctions or breakdowns;
●
unusual or
unexpected adverse geological conditions;
●
cost
overruns;
●
failure to obtain,
or delays in obtaining, all necessary governmental and third-party
rights-of-way, easements, permits, licenses and approvals for the
development, construction and operation of one or more of our
properties;
●
weather conditions
and other catastrophes, such as explosions, fires, floods and
accidents;
●
difficulties in
attracting a sufficient skilled and unskilled workforce, increases
in the level of labor costs and the existence of any labor
disputes; and
●
local and general
economic and infrastructure conditions.
If we
are unable to complete or are substantially delayed in completing
the development of any of our properties, our business, financial
condition, results of operations cash flows and ability to pay
dividends to our common stockholders could be adversely
affected.
Because we have limited operating history and have not yet
generated significant revenues or operating cash flows, you may
have difficulty evaluating our ability to successfully implement
our business strategy.
Because
of our limited operating history, the operating performance of our
properties and our business strategy have not yet been proven. As a
result, our historical financial statements do not provide a
meaningful basis to evaluate our operations or our ability to
achieve our business strategy. Therefore, it may be difficult for
you to evaluate our business and results of operations to date and
assess our future prospects.
In
addition, we may encounter risks and difficulties experienced by
companies whose performance is dependent upon newly-constructed or
newly-acquired assets, such as any one of our properties failing to
perform as expected, having higher than expected operating costs,
having lower than expected customer revenues, or suffering
equipment breakdown, failures or operational errors. We may be less
successful in achieving a consistent operating level capable of
generating cash flows from our operations as compared to a company
whose major assets have had longer operating histories. In
addition, we may be less equipped to identify and address operating
risks and hazards in the conduct of our business than those
companies whose major assets have had longer operating
histories.
12
We have limited operating history and our future performance is
uncertain.
We are
an early stage enterprise and will continue to be so until
commencement of substantial production from our coal properties. We
have only recently commenced limited production at one of our
properties. We have generated substantial net losses and negative
cash flows from operating activities since our inception and expect
to continue to incur substantial net losses as we continue our mine
development program. We face challenges and uncertainties in
financial planning as a result of the unavailability of historical
data and uncertainties regarding the nature, scope and results of
our future activities. New companies must develop successful
business relationships, establish operating procedures, hire staff,
install management information and other systems, establish
facilities and obtain licenses, as well as take other measures
necessary to conduct their intended business activities. We may not
be successful in implementing our business strategies or in
completing the development of the infrastructure necessary to
conduct our business as planned. In the event that one or more of
our mine development programs are not completed or are delayed or
terminated, our operating results will be adversely affected and
our operations will differ materially from the activities described
in this prospectus. As a result of industry factors or factors
relating specifically to us, we may have to change our methods of
conducting business, which may cause a material adverse effect on
our results of operations, financial condition and ability to pay
dividends to our common stockholders.
13
We will likely depend on a limited number of customers for a
significant portion of our revenues.
We will
likely depend on a limited number of customers for a significant
portion of our revenues. The failure to obtain additional customers
or the loss of all or a portion of the revenues attributable to any
customer as a result of competition, creditworthiness, inability to
negotiate extensions or replacement of contracts or otherwise,
could have a material adverse effect on our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
We expect that our customer base will be highly dependent on a
small number of customers.
The
majority of all of the coal that we produce, or plan to produce, is
sold to steel producers. Therefore, demand for our coal will be
highly correlated to the steel industry. The steel industry’s
demand for metallurgical coal is affected by a number of factors
including the cyclical nature of that industry’s business,
technological developments in the steel-making process and the
availability of substitutes for steel such as aluminum, composites
and plastics. A significant reduction in the demand for steel
products would reduce the demand for metallurgical coal, which
would have a material adverse effect upon our business, cash flows
and results of operations. Similarly, if less expensive ingredients
could be used in substitution for metallurgical coal in the
integrated steel mill process, the demand for metallurgical coal
would materially decrease, which would also materially adversely
affect demand for our metallurgical coal.
We do not expect to enter into long-term sales contracts for our
coal and as a result we will be exposed to fluctuations in market
pricing.
Sales
commitments for our coal typically are not long-term in nature and
are generally no longer than one year in duration. Many coal
transactions in the U.S. are done on a calendar year basis, where
both prices and volumes are fixed in the third and fourth quarter
for the following calendar year. Globally the market is evolving to
shorter term pricing. Some annual contracts have shifted to
quarterly contracts and growing volumes are being sold on an
indexed basis, where prices are determined by averaging the leading
spot indexes reported in the market. As a result, once we commence
operations and enter into agreements with customers, we will be
subject to fluctuations in market pricing. We will not be protected
from oversupply or market conditions where we cannot sell our coal
at economic prices. Metallurgical coal has been an extremely
volatile commodity over the past ten years and prices may become
volatile again in the future given the recent rapid increase. There
can be no assurances we will be able to mitigate such conditions as
they arise. Any sustained failure to be able to market our coal
during such periods would have a material adverse effect on our
business, results of operations, cash flows and ability to pay
dividends to our common stockholders.
Product alternatives may reduce demand for our
products.
The
majority of our coal production in the near term will be comprised
of metallurgical coal or pulverized coal injection (PCI), both
which typically command a price premium over the majority of other
forms of coal because of its use in blast furnaces for steel
production. Metallurgical coal has specific physical and chemical
properties, which are necessary for efficient blast furnace
operation. Steel producers are continually investigating
alternative steel production technologies with a view to reducing
production costs. The steel industry has increased utilization of
electric arc furnaces or pulverized coal injection processes, which
reduce or eliminate the use of furnace coke, an intermediate
product produced from metallurgical coal and, in turn, generally
decreases the demand for metallurgical coal. Many alternative
technologies are designed to use lower quality coals or other
sources of carbon instead of higher cost high-quality metallurgical
coal. While conventional blast furnace technology has been the most
economic large-scale steel production technology for a number of
years, and emergent technologies typically take many years to
commercialize, there can be no assurance that over the longer term
competitive technologies not reliant on metallurgical coal could
emerge which could reduce the demand and price premiums for
metallurgical coal.
Moreover, we may
produce and market other coal products, such as thermal coal, which
are also subject to alternative competition. Alternative
technologies are continually being investigated and developed in
order to reduce production costs or minimize environmental or
social impact. If competitive technologies emerge that use other
materials in place of our products, demand and price for our
products might fall.
We face uncertainties in estimating our economically recoverable
coal deposits, and inaccuracies in our estimates could result in
lower than expected revenues, higher than expected costs and
decreased profitability.
Coal is
economically recoverable when the price at which coal can be sold
exceeds the costs and expenses of mining and selling the coal.
Forecasts of our future performance are based on, among other
things, estimates of our recoverable coal deposits. We base our
coal deposit information on geologic data, coal ownership
information and current and proposed mine plans. We have not
independently verified any of the coal deposit information,
including coal qualities within the coal deposit areas, coal
heights, and deposit boundaries, and our information comes
primarily from previously prepared reports by prior management and
other third parties. Coal deposit estimates are periodically
updated to reflect past coal production, if any, new drilling
information, other geologic or mining data, and changes to coal
price expectations or the cost of production and sale. There are
numerous uncertainties inherent in estimating quantities and
qualities of coal and costs to mine coal, including many factors
beyond our control. As a result, estimates of economically
recoverable coal deposits are by their nature uncertain. Some of
the factors and assumptions that can impact economically
recoverable coal deposits estimates include:
14
●
geologic and mining
conditions;
●
historical
production from the area compared with production from other
producing areas;
●
the assumed effects
of environmental and other regulations and taxes by governmental
agencies;
●
our ability to
obtain, maintain and renew all required permits;
●
future improvements
in mining technology;
●
assumptions related
to future prices; and
●
future operating
costs, including the cost of materials, and capital
expenditures.
Each of
the factors that impacts coal deposit estimation may vary
considerably from the assumptions used in estimating such deposits.
For these reasons, estimates of coal deposits may vary
substantially. Actual production, revenues and expenditures with
respect to our future coal deposits will vary from estimates, and
these variances may be material. As a result, our estimates may not
accurately reflect our actual future coal deposits.
Our inability to acquire additional coal deposits that are
economically recoverable may have a material adverse effect on our
future profitability.
Our
profitability depends substantially on our ability to mine, in a
cost-effective manner, coal deposits that possess the quality
characteristics that prospective customers desire. Because our coal
deposits will decline as we mine our coal, our future profitability
depends upon our ability to acquire additional coal deposits that
are economically recoverable to replace the coal deposits we will
produce. If we fail to acquire or develop sufficient additional
coal deposits over the long term to replace the coal deposits
depleted by our production, our existing deposits could eventually
be exhausted.
The status of our idled mines, our lack of operating history and
multiple coal quality levels and inability to send test shipments
to our prospective customers may negatively impact our ability to
develop our initial customer base.
As a
company with limited operating history and several idled,
non-producing mines, our potential customer base is also uncertain.
Our ability to commence operations and begin shipments to customers
will be impacted by any potential mine rehabilitation work or
start-up timing and costs.
Deterioration in the global economic conditions in any of the
industries in which prospective customers operate, a worldwide
financial downturn, such as the 2008-2009 financial crisis, or
negative credit market conditions could have a material adverse
effect on our business, financial condition, results of operations,
cash flows and ability to pay dividends to our common
stockholders.
Economic conditions
in the industries in which most of our prospective customers
operate, such as steelmaking and electric power generation,
substantially deteriorated in recent years and reduced the demand
for coal. According to the US Energy Information Agency
(“EIA”), total thermal and metallurgical coal
production in the Central Appalachian Basin is expected to
gradually decline. A deterioration of economic conditions in our
prospective customers’ industries could cause a decline in
demand for and production of metallurgical coal. Renewed or
continued weakness in the economic conditions of any of the
industries served by prospective customers could have a material
adverse effect on our business, financial condition, results of
operations, cash flows and ability to pay dividends to our common
stockholders. For example:
●
demand for
metallurgical coal depends on domestic and foreign steel demand,
which if weakened would negatively impact our revenues, margins and
profitability;
●
the tightening of
credit or lack of credit availability to prospective customers
could adversely affect our ability to collect our trade
receivables; and
●
our ability to
access the capital markets may be restricted at a time when we
intend to raise capital for our business, including for capital
improvements and exploration and/or development of coal
deposits.
Prices for coal are volatile and can fluctuate widely based upon a
number of factors beyond our control, including oversupply relative
to the demand available for our coal and weather. A substantial or
extended decline in the prices we receive for our coal could
adversely affect our business, results of operations, financial
condition, cash flows and ability to pay dividends to our common
stockholders.
Our
financial results will be significantly affected by the prices we
receive for our coal and depend, in part, on the margins that we
will receive on sales of our coal. Our margins will reflect the
price we receive for our coal over our cost of producing and
transporting our coal. Prices and quantities under U.S. domestic
metallurgical coal sales contracts are generally based on
expectations of the next year’s coal prices at the time the
contract is entered into, renewed, extended or re-opened, Pricing
in the global seaborne market is typically negotiated quarterly,
however, increasingly the market is moving towards shorter term
pricing models. The expectation of future prices for coal depends
upon many factors beyond our control, including the
following:
15
●
the market price
for coal;
●
overall domestic
and global economic conditions, including the supply of and demand
for domestic and foreign coal, coke and steel;
●
the consumption
pattern of industrial consumers, electricity generators and
residential users;
●
weather conditions
in our markets that affect the demand for thermal coal or that
affect the ability to produce metallurgical coal;
●
competition from
other coal suppliers;
●
technological
advances affecting energy consumption;
●
the costs,
availability and capacity of transportation
infrastructure;
●
the impact of
domestic and foreign governmental laws and regulations, including
environmental and climate change regulations and regulations
affecting the coal mining industry, and delays in the receipt of,
failure to receive, failure to maintain or revocation of necessary
governmental permits; and
●
increased
utilization by the steel industry of electric arc furnaces or
pulverized coal injection processes, which reduce or eliminate the
use of furnace coke, an intermediate product produced from
metallurgical coal, and generally decrease the demand for
metallurgical coal.
Metallurgical coal
has been an extremely volatile commodity over the past 10 years, as
steel production growth in Asia underpinned demand growth, while
the market experienced two supply shocks from flooding events in
Australia’s Queensland and a third in 2016 caused by a
reduction in Chinese domestic production. The first severe flooding
sent global metallurgical coal prices from $98 per MT in 2007 to
$305 per MT in 2008. A second round of flooding disrupted the
Australian supply chain in 2011, and prices jumped from $129 per MT
to $330 per MT. The temporary supply disruptions caused major price
spikes, which, while short-lived, resulted in a period of elevated
prices, before declining once supply normalized, and production
growth that high prices incentivized eventually came online. The
slow decline in global prices since 2011 forced high-cost U.S.
suppliers who could not compete in the export market to reduce
output. Any decline in the prices of and demand for coal could have
a material adverse effect on our business, financial condition,
results of operations, cash flows and ability to pay dividends to
our common stockholders.
Increased competition or a loss of our competitive position could
adversely affect sales of, or prices for, our coal, which could
impair our profitability. In addition, foreign currency
fluctuations could adversely affect the competitiveness of our coal
abroad.
We will
compete with other producers primarily on the basis of coal
quality, delivered costs to the customer and reliability of supply.
We expect to compete primarily with U.S. coal producers and with
some Canadian coal producers for sales of metallurgical coal to
domestic steel producers and, to a lesser extent, thermal coal to
electric power generators. We also expect to compete with both
domestic and foreign coal producers for sales of metallurgical coal
in international markets. Certain of these coal producers may have
greater financial resources and larger coal deposit bases than we
do. We expect to sell coal to the seaborne metallurgical coal
market, which is significantly affected by international demand and
competition.
We
cannot assure you that competition from other producers will not
adversely affect us in the future. The coal industry has
experienced consolidation over the past 10 years, including
consolidation among some of our major competitors. We cannot assure
you that the result of current or further consolidation in the coal
industry, or the reorganization through bankruptcy of competitors
with large legacy liabilities, will not adversely affect us. A
number of our competitors have idled production over the last year
in light of lower metallurgical coal prices in 2015 and the first
half of 2016. The recent increase in coal prices in 2017 and 2018
could encourage existing producers to expand capacity or could
encourage new producers to enter the market.
16
In
addition, we face competition from foreign producers that sell
their coal in the export market. Potential changes to international
trade agreements, trade concessions, foreign currency fluctuations
or other political and economic arrangements may benefit coal
producers operating in countries other than the United States.
Additionally, North American steel producers face competition from
foreign steel producers, which could adversely impact the financial
condition and business of our prospective customers. We cannot
assure you that we will be able to compete on the basis of price or
other factors with companies that in the future may benefit from
favorable foreign trade policies or other arrangements. Coal is
sold internationally in U.S. dollars and, as a result, general
economic conditions in foreign markets and changes in foreign
currency exchange rates may provide our foreign competitors with a
competitive advantage. If our competitors’ currencies decline
against the U.S. dollar or against our prospective foreign
customers’ local currencies, those competitors may be able to
offer lower prices for coal to prospective customers. Furthermore,
if the currencies of our prospective overseas customers were to
significantly decline in value in comparison to the U.S. dollar,
those prospective customers may seek decreased prices for the coal
we sell to them. Consequently, currency fluctuations could
adversely affect the competitiveness of our coal in international
markets, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Our business involves many hazards and operating risks, some of
which may not be fully covered by insurance. The occurrence of a
significant accident or other event that is not fully insured could
adversely affect our business, results of operations, financial
condition, cash flows and ability to pay dividends to our common
stockholders.
Our
mining operations, including our preparation and transportation
infrastructure, are subject to many hazards and operating risks. In
particular, underground mining and related processing activities
present inherent risks of injury to persons and damage to property
and equipment. Our mines are subject to a number of operating risks
that could disrupt operations, decrease production and increase the
cost of mining for varying lengths of time, thereby adversely
affecting our operating results. In addition, if coal production
declines, we may not be able to produce sufficient amounts of coal
to deliver under future sales contracts. Our inability to satisfy
contractual obligations could result in prospective customers
initiating claims against us. The operating risks that may have a
significant impact on our future coal operations
include:
●
variations in
thickness of the layer, or seam, of coal;
●
adverse geologic
conditions, including amounts of rock and other natural materials
intruding into the coal seam, that could affect the stability of
the roof and the side walls of the mine;
●
environmental
hazards;
●
mining and
processing equipment failures and unexpected maintenance
problems;
●
fires or
explosions, including as a result of methane, coal, coal dust or
other explosive materials, or other accidents;
●
inclement or
hazardous weather conditions and natural disasters or other force
majeure events;
●
seismic activities,
ground failures, rock bursts or structural cave-ins or
slides;
●
delays in moving
our mining equipment;
●
railroad delays or
derailments;
●
security breaches
or terroristic acts; and
●
other hazards or
occurrences that could also result in personal injury and loss of
life, pollution and suspension of operations.
Any of
these risks could adversely affect our ability to conduct
operations or result in substantial loss to us as a result of
claims for:
●
personal injury or
loss of life;
●
damage to and
destruction of property, natural resources and equipment, including
our coal properties and our coal production or transportation
facilities;
●
pollution,
contamination and other environmental damage to our properties or
the properties of others;
●
potential legal
liability and monetary losses;
●
regulatory
investigations, actions and penalties;
●
suspension of our
operations; and
●
repair and
remediation costs.
17
In
addition, the total cost of coal sold, and overall coal production
may be adversely affected by various factors.
Although we
maintain insurance for a number of risks and hazards, we may not be
insured or fully insured against the losses or liabilities that
could arise from a significant accident in our future coal
operations. We may elect not to obtain insurance for any or all of
these risks if we believe that the cost of available insurance is
excessive relative to the risks presented. In addition, pollution,
contamination and environmental risks generally are not fully
insurable. Moreover, a significant mine accident or regulatory
infraction could potentially cause a mine shutdown. The occurrence
of an event that is not fully covered by insurance could have a
material adverse effect on our business, financial condition,
results of operations, cash flows and ability to pay dividends to
our common stockholders.
In
addition, if any of the foregoing changes, conditions or events
occurs and is not determined to be a force majeure event, any
resulting failure on our part to deliver coal to the purchaser
under contract could result in economic penalties, suspension or
cancellation of shipments or ultimately termination of the
agreement, any of which could have a material adverse effect on our
business, financial condition, results of operations, cash flows
and ability to pay dividends to our common
stockholders.
Depending on future acquisitions, our operations could be
exclusively located in a single geographic region, making us
vulnerable to risks associated with operating in a single
geographic area.
Initially,
substantially all of our operations will be conducted in a single
geographic region in the eastern United States in the Commonwealth
of Kentucky. The geographic concentration of our operations may
disproportionately expose us to disruptions in our operations if
the region experiences severe weather, transportation capacity
constraints, constraints on the availability of required equipment,
facilities, personnel or services, significant governmental
regulation or natural disasters. If any of these factors were to
impact the region in which we operate more than other coal
producing regions, our business, financial condition, results of
operations and cash flows will be adversely affected relative to
other mining companies that have a more geographically diversified
asset portfolio.
In
addition, some scientists have warned that increasing
concentrations of greenhouse gases (“GHGs”) in the
Earth’s atmosphere may produce climate changes that have
significant physical effects, such as increased frequency and
severity of storms, droughts and floods and other climatic events.
If these warnings are correct, and if any such effects were to
occur in areas where we or our customers operate, they could have
an adverse effect on our assets and operations.
The availability and reliability of transportation facilities and
fluctuations in transportation costs could affect the demand for
our coal or impair our ability to supply coal to prospective
customers.
Transportation
logistics will play an important role in allowing us to supply coal
to prospective customers. Any significant delays, interruptions or
other limitations on the ability to transport our coal could
negatively affect our operations. Delays and interruptions of rail
services because of accidents, failure to complete construction of
rail infrastructure, infrastructure damage, lack of rail or port
capacity, weather-related problems, governmental regulation,
terrorism, strikes, lock-outs, third-party actions or other events
could impair our ability to supply coal to customers and adversely
affect our profitability. In addition, transportation costs
represent a significant portion of the delivered cost of coal and,
as a result, the cost of delivery is a critical factor in a
customer’s purchasing decision. Increases in transportation
costs, including increases resulting from emission control
requirements and fluctuations in the price of locomotive diesel
fuel and demurrage, could make our coal less competitive, which
could have a material adverse effect on our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
18
Any significant downtime of our major pieces of mining equipment,
including any preparation plant, could impair our ability to supply
coal to prospective customers and materially and adversely affect
our results of operations.
We
currently and in the future, will depend on several major pieces of
mining equipment to produce and transport our coal, including, but
not limited to, underground continuous mining units and coal
conveying systems, surface mining equipment such as augers,
highwall miners, front-end loaders and coal over burden haul
trucks, preparation plant and related facilities, conveyors and
transloading facilities. If any of these pieces of equipment or
facilities suffered major damage or were destroyed by fire,
abnormal wear, flooding, incorrect operation or otherwise, we may
be unable to replace or repair them in a timely manner or at a
reasonable cost, which would impact our ability to produce and
transport coal and materially and adversely affect our business,
results of operations, financial condition and cash flows.
Moreover, the Mine Safety and Health Administration
(“MSHA”) and other regulatory agencies sometimes make
changes with regards to requirements for pieces of equipment. For
example, in 2015, MSHA promulgated a new regulation requiring the
implementation of proximity detection devices on all continuous
mining machines. Such changes could cause delays if manufacturers
and suppliers are unable to make the required changes in compliance
with mandated deadlines.
If
either our preparation plants, or train loadout facilities, or
those of a third-party processing or loading our coal, suffer
extended downtime, including major damage, or is destroyed, our
ability to process and deliver coal to prospective customers would
be materially impacted, which would materially adversely affect our
business, results of operations, financial condition and cash flows
and our ability to pay dividends to our common
stockholders.
If customers do not enter into, extend or honor contracts with us,
our profitability could be adversely affected.
We have
entered into a limited number of contracts for the sale of our
coal. Coal mined from our operations is subject to testing by our
prospective customers for the ability to meet various
specifications and to work successfully test our coals or enter
into contracts for the sale of our coal, our ability to achieve
profitability would be materially adversely affected. Once we enter
into contracts, if a substantial portion of our sales contracts are
modified or terminated and we are unable to replace the contracts
(or if new contracts are priced at lower levels), our results of
operations would be adversely affected, perhaps materially. In
addition, if customers refuse to accept shipments of our coal for
which they have a contractual obligation, our revenues could be
substantially affected and we may have to reduce production at our
mines until our customer’s contractual obligations are
honored.
Certain provisions in typical long-term sales contracts provide
limited protection during adverse economic conditions, which may
eventually result in economic penalties to us or permit the
customer to terminate the contract. Furthermore, our ability to
collect payments from prospective customers could be impaired if
their creditworthiness declines or if they fail to honor their
contracts with us.
Price
adjustment, “price reopener” and other similar
provisions in typical long-term sales contracts may reduce
protection from short-term coal price volatility traditionally
provided by such contracts. Price reopener provisions may be
included in our future sales contracts. These price reopener
provisions may automatically set a new price based on prevailing
market price or, in some instances, require the parties to agree on
a new price, sometimes within a specified range of prices. Any
adjustment or renegotiations leading to a significantly lower
contract price could adversely affect our profitability. Some
annual metallurgical coal contracts have shifted to quarterly
contracts and growing volumes are being sold on an indexed basis,
where prices are determined by averaging the leading spot indexes
reported in the market, exposing us further to risks related to
pricing volatility.
Our
ability to receive payment for coal sold and delivered depends on
the continued solvency and creditworthiness of prospective
customers. The number of domestic steel producers is small, and
they compete globally for steel production. If their business or
creditworthiness suffers, we may bear an increased risk with
respect to payment default. In addition, some prospective customers
have been adversely affected by the recent economic downturn, which
may impact their ability to fulfill their contractual obligations.
Competition with other coal suppliers could force us to extend
credit to customers and on terms that could increase the risk we
bear with respect to payment default. We could also enter into
agreements to supply coal to energy trading and brokering customers
under which a customer sells coal to end-users. If the
creditworthiness of any prospective energy trading and brokering
customer declines, we may not be able to collect payment for all
coal sold and delivered to or on behalf of this customer. In
addition, if customers refuse to accept shipments of our coal that
they have a contractual obligation to purchase, our revenues will
decrease, and we may have to reduce production at our mines until
prospective customers’ contractual obligations are honored.
Our inability to collect payment from counterparties to our sales
contracts may materially adversely affect our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
19
Decreases in demand for electricity and changes in coal consumption
patterns of U.S. electric power generators could adversely affect
our business.
While
our initial coal production consists primarily of metallurgical and
PCI coal, which is not closely linked to domestic demand for
electricity, we anticipate initiating production and sales of
thermal coal in the future. In such case, any changes in coal
consumption by electric power generators in the United States would
likely impact our business over the long term. According to the
EIA, in 2015, the domestic electric power sector accounts for more
than 90% of total U.S. coal consumption. The amount of coal
consumed by the electric power generation industry is affected by,
among other things:
●
general economic
conditions, particularly those affecting industrial electric power
demand, such as a downturn in the U.S. economy and financial
markets;
●
overall demand for
electricity;
●
competition from
alternative fuel sources for power generation, including natural
gas, fuel oil, nuclear, and renewable sources such as
hydroelectric, wind and solar power, and the location,
availability, quality and price of those alternative fuel
sources;
●
environmental and
other governmental regulations, including those impacting
coal-fired power plants; and
●
energy conservation
efforts and related governmental policies.
For
example, the low price of natural gas in recent years has resulted,
in some instances, in domestic electric generators increasing
natural gas consumption while decreasing coal consumption. Federal
and state mandates for increased use of electricity derived from
renewable energy sources, such as the Clean Power Plan
(“CPP”), could also affect demand for our coal. Such
mandates, combined with other incentives to use renewable energy
sources, such as tax credits, could make renewable fuel sources
more competitive with coal. A decrease in coal consumption by the
electric power generation industry could adversely affect the price
of coal, which could have a material adverse effect on our
business, financial condition, results of operations, cash flows
and ability to pay dividends to our common
stockholders.
According to the
EIA, although electricity demand fell in only three years between
1950 and 2007, it declined in six of the eight years between 2008
and 2015. The decline in electricity demand is due to several
primary factors, including the steep economic downturn from late
2007 through 2009, the shift from an energy-intensive manufacturing
economy to a service economy and an overall improvement in energy
efficiency. Other factors, such as efficiency improvements
associated with new appliance standards in the buildings sectors,
overall improvement in the efficiency of technologies powered by
electricity, and future conservation efforts based on
implementation of the new CPP, have slowed or may slow electricity
demand growth and may contribute to slower growth in the future,
even if the U.S. economy continues its recovery. Further decreases
in the demand for electricity, such as decreases that could be
caused by a worsening of current economic conditions, a prolonged
economic recession or other similar events, could have a material
adverse effect on the demand for coal and on our business over the
long term.
Changes
in the coal industry that affect our prospective customers, such as
those caused by decreased electricity demand and increased
competition, could also adversely affect our business. Indirect
competition from natural gas-fired plants that are relatively less
expensive to construct and less difficult to permit has the most
potential to displace a significant amount of coal-fired electric
power generation in the near term, particularly older, less
efficient coal-fired powered generators. In addition, uncertainty
caused by federal and state regulations could cause thermal coal
customers to be uncertain of their coal requirements in future
years, which could adversely affect our ability to sell coal to
such prospective customers under multi-year sales
contracts.
20
We may be unsuccessful in integrating the operations of any future
acquisitions, including acquisitions involving new lines of
business, with our existing operations, and in realizing all or any
part of the anticipated benefits of any such
acquisitions.
From
time to time, we may evaluate and acquire assets and businesses
that we believe complement our existing assets and business, and we
may use a portion of the proceeds from this offering for
acquisitions. The assets and businesses we acquire may be
dissimilar from our initial lines of business. Acquisitions may
require substantial capital or the incurrence of substantial
indebtedness. Our capitalization and results of operations may
change significantly as a result of future acquisitions. We may
also add new lines of business to our existing operations.
Acquisitions and business expansions involve numerous risks,
including the following:
●
difficulties in the
integration of the assets and operations of the acquired businesses
or lines of business;
●
inefficiencies and
difficulties that arise because of unfamiliarity with new assets
and the businesses associated with them and new geographic
areas;
●
the possibility
that we have insufficient expertise to engage in such activities
profitably or without incurring inappropriate amounts of risk;
and
●
the diversion of
management’s attention from other operations.
Further, unexpected
costs and challenges may arise whenever businesses with different
operations or management are combined, and we may experience
unanticipated delays in realizing the benefits of an acquisition.
Entry into certain lines of business may subject us to new laws and
regulations with which we are not familiar and may lead to
increased litigation and regulatory risk. Also, following an
acquisition, we may discover previously unknown liabilities
associated with the acquired business or assets for which we have
no recourse under applicable indemnification provisions. If an
acquired business or new line of business generates insufficient
revenue or if we are unable to efficiently manage our expanded
operations, our results of operations may be materially adversely
affected. Additionally, we can offer no assurance that the planned
marketing, brokerage and trading company will be able to attract
third-party coal producers as customers or make any significant
contribution to our financial results.
To maintain and grow our business, we will be required to make
substantial capital expenditures. If we are unable to obtain needed
capital or financing on satisfactory terms, we may have to curtail
our operations and delay our construction and growth plans, which
may materially adversely affect our business, financial condition,
results of operations, cash flows and ability to pay dividends to
our common stockholders.
In
order to maintain and grow our business, we will need to make
substantial capital expenditures associated with our mines and the
construction of coal preparation facilities, which have not yet
been constructed. Constructing, maintaining and expanding mines and
infrastructure, including coal preparation and loading facilities,
is capital intensive. Specifically, the exploration, permitting and
development of coal deposits, and the maintenance of machinery,
equipment and facilities, and compliance with applicable laws and
regulations require substantial capital expenditures. We must
continue to invest capital to maintain or to increase our
production and to develop any future acquired properties. Decisions
to increase our production levels could also affect our capital
needs. We cannot assure you that we will be able to maintain our
production levels or generate sufficient cash flow, or that we will
have access to sufficient financing to continue our production,
exploration, permitting and development activities, and we may be
required to defer all or a portion of our capital
expenditures.
If we
do not make sufficient or effective capital expenditures, we will
be unable to develop and grow our business. To fund our projected
capital expenditures, we will be required to use cash from our
operations, incur debt or issue additional common stock or other
equity securities. Using cash from our operations will reduce cash
available for maintaining or increasing our operating activities
and paying dividends to our common stockholders. Our ability to
obtain bank financing or our ability to access the capital markets
for future equity or debt offerings may be limited by our financial
condition at the time of any such financing or offering and the
covenants in our future debt agreements, as well as by general
economic conditions, contingencies and uncertainties that are
beyond our control.
In
addition, incurring additional debt may significantly increase our
interest expense and financial leverage, and issuing additional
equity securities may result in significant stockholder
dilution.
We may not be able to obtain equipment, parts and supplies in a
timely manner, in sufficient quantities or at reasonable costs to
support our coal mining and transportation operations.
Coal
mining consumes large quantities of commodities including steel,
copper, rubber products and liquid fuels and requires the use of
capital equipment. Some commodities, such as steel, are needed to
comply with roof control plans required by regulation. The prices
we pay for commodities and capital equipment are strongly impacted
by the global market. A rapid or significant increase in the costs
of commodities or capital equipment we use in our operations could
impact our mining operations costs because we may have a limited
ability to negotiate lower prices and, in some cases, may not have
a ready substitute.
21
We will
use equipment in our coal mining and transportation operations such
as continuous mining units, conveyors, shuttle cars, rail cars,
locomotives, and roof bolters. We procure this equipment from a
concentrated group of suppliers, and obtaining this equipment often
involves long lead times. Occasionally, but not currently, demand
for such equipment by mining companies can be high and some types
of equipment may be in short supply. Delays in receiving or
shortages of this equipment, as well as the raw materials used in
the manufacturing of supplies and mining equipment, which, in some
cases, do not have ready substitutes, or the cancellation of any
future supply contracts under which we obtain equipment and other
consumables, could limit our ability to obtain these supplies or
equipment. In addition, if any of our suppliers experiences an
adverse event, or decides to no longer do business with us, we may
be unable to obtain sufficient equipment and raw materials in a
timely manner or at a reasonable price to allow us to meet our
production goals and our revenues may be adversely impacted. We use
considerable quantities of steel in the mining process. If the
price of steel or other materials increases substantially or if the
value of the U.S. dollar declines relative to foreign currencies
with respect to certain imported supplies or other products, our
operating expenses could increase. Any of the foregoing events
could materially and adversely impact our business, financial
condition, results of operations, cash flows and ability to pay
dividends to our common stockholders.
The
decline in coal prices since 2011 has incentivized producers to
retain their used, idle equipment. The availability of used
equipment is a key assumption in our business plan, and we may find
it difficult to procure mining equipment at a suitable cost, in
particular deep mining equipment. To the extent we are unable to
procure suitable mining equipment in line with our projected cost
profile, our projected results may not be realized, and our results
of operations may be negatively affected.
We are a holding company and we depend on the ability of our
subsidiaries to distribute funds to us in order to satisfy our
financial obligations and to make dividend payments.
We are
a holding company and our subsidiaries conduct all of our
operations and own all of our operating assets. We have no
significant assets other than the equity interests in our
subsidiaries. As a result, our ability to pay our obligations and
to make dividend payments depends entirely on our subsidiaries and
their ability to distribute funds to us. The ability of a
subsidiary to make these distributions could be affected by a claim
or other action by a third party, including a creditor, or by the
law of their respective jurisdictions of formation which regulates
the payment of dividends. If we are unable to obtain funds from our
subsidiaries, our board of directors may exercise its discretion
not to declare or pay dividends.
Debt we incur in the future may limit our flexibility to obtain
financing and to pursue other business opportunities. Our future
level of debt could have important consequences to us, including
the following:
●
our ability to
obtain additional financing, if necessary, for working capital,
capital expenditures or other purposes may be impaired, or such
financing may not be available on favorable terms;
●
our funds available
for operations and future business opportunities will be reduced by
that portion of our cash flow required to make interest payments on
our debt;
●
our ability to pay
dividends if an event of default occurs and is continuing or would
occur as a result of paying such dividend;
●
we may be more
vulnerable to competitive pressures or a downturn in our business
or the economy generally; and
●
our flexibility in
responding to changing business and economic conditions may be
limited.
Our
ability to service our debt will depend upon, among other things,
our future financial and operating performance, which will be
affected by prevailing economic conditions and financial, business,
regulatory and other factors, some of which are beyond our control.
If our operating results are not sufficient to service any future
indebtedness, we will be forced to take actions such as reducing or
delaying our business activities, investments or capital
expenditures, selling assets or issuing equity. We may not be able
to effect any of these actions on satisfactory terms or at
all.
22
Our operations could be adversely affected if we are unable to
obtain required financial assurance, or if the costs of financial
assurance increase too much.
Federal
and state laws require financial assurance to secure our permit
obligations including to reclaim lands used for mining, to pay
federal and state workers’ compensation and black lung
benefits, and to satisfy other miscellaneous obligations. The
changes in the market for coal used to generate electricity in
recent years have led to bankruptcies involving prominent coal
producers. Several of these companies relied on self-bonding to
guarantee their responsibilities under the Surface Mining Control
and Reclamation Act of 1977 (“SMCRA”) permits including
for reclamation. In response to these bankruptcies, the Office of
Surface Mining Reclamation and Enforcement (“OSMRE”)
issued a Policy Advisory in August 2016 to state agencies that are
authorized under the SMCRA to implement the act in their states.
Certain states, including Virginia, had previously announced that
it would no longer accept self-bonding to secure reclamation
obligations under the state mining laws. This Policy Advisory is
intended to discourage authorized states from approving
self-bonding arrangements and may lead to increased demand for
other forms of financial assurance, which may strain capacity for
those instruments and increase our costs of obtaining and
maintaining the amounts of financial assurance needed for our
operations.
In
addition, OSMRE announced in August 2016 that it would initiate a
rulemaking under SMCRA to revise the requirements for self-bonding
in light of changes in the coal-mining industry and the market.
Individually and collectively, revised various financial assurance
requirements may increase the amounts of needed financial assurance
and limit the types of acceptable instruments and strain the
capacity of the surety markets to meet demand, which may delay the
timing for and increase the costs of obtaining this financial
assurance. We use surety bonds, trusts and letters of credit to
provide financial assurance for certain transactions and business
activities. Our reclamation surety bonding program does not
currently require us to post collateral, however, insurance
companies may elect not to provide surety bonds without collateral.
Indeed, sureties typically require coal producers to post
collateral, often having a value equal to 40% or more of the face
amount of the bond. As a result, we may be required to provide
collateral, letters of credit or other assurances of payment in
order to obtain the necessary types and amounts of financial
assurance. We currently have outstanding surety bonds at all of our
mining operations totaling approximately $26.62 million. Using
letters of credit in lieu of surety bonds can be significantly
costlier to us than surety bonds. Moreover, the need to obtain
letters of credit may also reduce amounts that we can borrow under
any senior secured credit facility for other purposes. If, in the
future, we are unable to secure surety bonds for these obligations
and are forced to secure letters of credit indefinitely or obtain
some other form of financial assurance at too high of a cost, our
profitability may be negatively affected.
Our mines could be located in areas containing oil and natural gas
operations, which may require us to coordinate our operations with
those of oil and natural gas drillers.
Our
coal deposits may be in areas containing developed or undeveloped
oil and natural gas deposits and reservoirs, such as the Marcellus
Shale in eastern Kentucky, which are currently the subject of
substantial oil and natural gas exploration and production
activities, including by horizontal drilling. If we have received a
permit for our mining activities, then, while we will have to
coordinate our mining with such oil and natural gas drillers, our
mining activities are expected to have priority over any oil and
natural gas drillers with respect to the land covered by our
permit. For coal deposits outside of our permits, we expect to
engage in discussions with drilling companies on potential areas on
which they can drill that may have a minimal effect on our mine
plan. Depending on priority of interests, our operations may have
to avoid existing oil and gas wells or expend sums to plug oil and
gas wells.
If a
well is in the path of our mining for coal on land that has not yet
been permitted for our mining activities, we may not be able to
mine through the well unless we purchase it. The cost of purchasing
a producing horizontal or vertical well could be substantial.
Horizontal wells with multiple laterals extending from the well pad
may access larger oil and natural gas deposits than a vertical
well, which would typically result in a higher cost to acquire. The
cost associated with purchasing oil and natural gas wells that are
in the path of our coal mining activities may make mining through
those wells uneconomical, thereby effectively causing a loss of
significant portions of our coal reserves, which could materially
and adversely affect our business, financial condition, results of
operations, cash flows and ability to pay dividends to our common
stockholders.
23
Defects in title or loss of any leasehold interests in our
properties could limit our ability to conduct mining operations on
these properties or result in significant unanticipated
costs.
We
expect to conduct all of our mining operations on properties that
we lease. A title defect or the loss of any lease upon expiration
of its term, upon a default or otherwise, could adversely affect
our ability to mine the associated coal and/or process the coal we
mine. Title to most of our leased properties and mineral rights is
not usually verified until we make a commitment to develop a
property, which may not occur until after we have obtained
necessary permits and completed exploration of the property. In
many cases, we rely on title information or representations and
warranties provided by our lessors or grantors. Our right to mine
some of our coal deposits may be adversely affected if defects in
title or boundaries exist or if a lease expires. Any challenge to
our title or leasehold interests could delay the exploration and
development of the property and could ultimately result in the loss
of some or all of our interest in the property and, accordingly,
require us to reduce our estimated coal deposits. Mining operations
from time to time may rely on an expired lease that we are unable
to renew. If we were to be in default with respect to leases for
properties on which we have mining operations, we may have to close
down or significantly alter the sequence of such mining operations,
which may adversely affect our future coal production and future
revenues. If we mine on property that we do not own or lease, we
could incur liability for such mining.
Also,
in any such case, the investigation and resolution of title issues
would divert management’s time from our business and our
results of operations could be adversely affected. Additionally, if
we lose any leasehold interests relating to any preparation plants,
we may need to find an alternative location to process our coal and
load it for delivery to customers, which could result in
significant unanticipated costs.
In
order to obtain leases or mining contracts to conduct our mining
operations on property where these defects exist, we may in the
future have to incur unanticipated costs. In addition, we may not
be able to successfully negotiate new leases or mining contracts
for properties containing additional coal deposits or maintain our
leasehold interests in properties where we have not commenced
mining operations during the term of the lease. Some leases have
minimum production requirements. Failure to meet those requirements
could result in losses of prepaid royalties and, in some rare
cases, could result in a loss of the lease itself.
Some of our mining properties are leased from Land Resources &
Royalties LLC, a company owned and controlled by certain members of
our management, and conflicts of interest may arise in the future
as a result.
Some of
our properties are leased or subleased to our subsidiaries from
Land Resources & Royalties, which is a related party and an
entity that is owned and controlled by some of our management team,
with financial and economic benefit of such leases going directly
to those members of the management team. Given some of the common
ownership and control between Land Resources & Royalties LLC
and us and the complex contractual obligations under these
arrangements, conflicts could arise between us and Land Resources
& Royalties LLC that could adversely affect the interests of
our stockholders, including, without limitation, conflicts
involving compliance with payment and performance obligations under
existing leases, and negotiation of the terms of and performance
under additional leases we may enter into with Land Resources &
Royalties LLC in the future.
While none of our employees who conduct mining operations are
currently members of unions, our business could be adversely
affected by union activities.
We are
not subject to any collective bargaining or union agreement with
respect to other properties we currently control. However, it is
possible that future employees, or those of our contract miners,
who conduct mining operations may join or seek recognition to form
a labor union or may be required to become a labor agreement
signatory. If some or all of the employees who conduct mining
operations were to become unionized, it could adversely affect
productivity, increase labor costs and increase the risk of work
stoppages at our mines. If a work stoppage were to occur, it could
interfere with operations and have a material adverse effect on our
business, financial condition, results of operations, cash flows
and our ability to pay dividends to our common
stockholders.
24
A shortage of skilled labor in the mining industry could pose a
risk to achieving improved labor productivity and competitive
costs, which could adversely affect our profitability.
Efficient coal
mining using modern techniques and equipment requires skilled
laborers, preferably with at least a year of experience and
proficiency in multiple mining tasks. In the event there is a
shortage of experienced labor, it could have an adverse impact on
our labor productivity and costs and our ability to expand
production in the event there is an increase in the demand for our
coal.
Our ability to operate effectively could be impaired if we fail to
attract and retain key personnel.
The
loss of our senior executives could have a material adverse effect
on our business. There may be a limited number of persons with the
requisite experience and skills to serve in our senior management
positions. We may not be able to locate or employ qualified
executives on acceptable terms. In addition, as our business
develops and expands, we believe that our future success will
depend greatly on our continued ability to attract and retain
highly skilled personnel with coal industry experience. We may not
be able to continue to employ key personnel or attract and retain
qualified personnel in the future. Our failure to retain or attract
key personnel could have a material adverse effect on our ability
to effectively operate our business. There is nothing at this time
on which to base an assumption that our business will prove
successful, and there is no assurance that we will be able to
operate profitably if or when operations commence. You may lose
your entire investment do to our lack of experience.
Terrorist attacks or cyber-incidents could result in information
theft, data corruption, operational disruption and/or financial
loss.
Like
most companies, we have become increasingly dependent upon digital
technologies, including information systems, infrastructure and
cloud applications and services, to operate our businesses, to
process and record financial and operating data, communicate with
our business partners, analyze mine and mining information,
estimate quantities of coal deposits, as well as other activities
related to our businesses. Strategic targets, such as
energy-related assets, may be at greater risk of future terrorist
or cyber-attacks than other targets in the United States.
Deliberate attacks on, or security breaches in, our systems or
infrastructure, or the systems or infrastructure of third parties,
or cloud-based applications could lead to corruption or loss of our
proprietary data and potentially sensitive data, delays in
production or delivery, difficulty in completing and settling
transactions, challenges in maintaining our books and records,
environmental damage, communication interruptions, other
operational disruptions and third-party liability. Our insurance
may not protect us against such occurrences. Consequently, it is
possible that any of these occurrences, or a combination of them,
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Further, as cyber
incidents continue to evolve, we may be required to expend
additional resources to continue to modify or enhance our
protective measures or to investigate and remediate any
vulnerability to cyber incidents.
We may face restricted access to international markets in the
future.
Access
to international markets may be subject to ongoing interruptions
and trade barriers due to policies and tariffs of individual
countries, and the actions of certain interest groups to restrict
the import or export of certain commodities. Although there are
currently no significant trade barriers existing or impending of
which we are aware that do, or could, materially affect our access
to certain markets, there can be no assurance that our access to
these markets will not be restricted in the future. An inability
for U.S. metallurgical thermal, and other specialty coal suppliers
to access international markets would likely result in an
oversupply of such respective coals in the domestic market,
resulting in a decrease in prices.
On
August 14, 2017, the President of the United States issued a
memorandum instructing the U.S. Trade Representative
(“USTR”) to determine whether to investigate under
section 301 of the U.S. Trade Act of 1974 (Trade Act), laws,
policies, practices, or actions of the PRC government that may be
unreasonable or discriminatory and that may be harming U.S.
intellectual property rights, innovation, or technology
development. Based on information gathered in that investigation,
the USTR published a report on March 22, 2018 on the acts, policies
and practices of the PRC government supporting findings that such
are unreasonable or discriminatory and burden or restrict U.S.
commerce.
25
On
March 8, 2018, the President exercised his authority to issue the
imposition of significant tariffs on imports of steel and aluminum
from a number of countries, including the PRC. Subsequently, the
USTR announced an initial proposed list of 1,300 goods imported
from the PRC that could be subject to additional tariffs and
initiated a dispute with the World Trade Organization against the
PRC for alleged unfair trade practices. The President has indicated
that his two primary concerns to be addressed by the PRC are (i) a
mandatory $100 billion reduction in the PRC/U.S. trade deficit and
(ii) limiting the planned $300 billion PRC government support for
advanced technology industries including artificial intelligence,
semiconductors, electric cars and commercial aircraft. On June 15,
2018, the President announced that the U.S. would go ahead with
tariffs on $50 billion worth of Chinese goods, including
agriculture and industrial machinery, which prompted the PRC
government to consider imposing tariffs on $50 billion worth of
goods from the U.S., including beef, poultry, tobacco and cars. In
response to the PRC’s proposed retaliatory measures, the
President announced on June 19, 2018 that the U.S. would compile a
list of $200 billion in China goods for levies should the PRC move
forward with their proposed tariffs. On August 7, 2018, the U.S.
announced a tariff of 25% on approximately $16 billion worth of
mostly industrial goods from China, including tractors, plastic
tubes and antennas, which went into effect on August 23, 2018. In
response, on August 8, 2018, China announced a 25% tariff on $16
billion worth of US goods, including large passenger cars,
motorcycles, chemical items and diesel fuel, which also went into
effect on August 23, 2018. On September 7, 2018, the President
warned that he was prepared to impose tariffs on another $267
billion of Chinese goods, which in addition to the other previously
announced tariffs, would cover virtually all of China’s
imports into the U.S. Despite a September 12, 2018 invitation by
the U.S. to China to restart trade talks, which China has welcomed,
the President has instructed his administration to proceed with a
10% tariff on Chinese goods worth $200 billion, which China intends
to match with tariffs on $60 billion of US goods.
In
addition to the proposed retaliatory tariffs, the President has
also directed the U.S. Secretary of the Treasury to develop new
restrictions on PRC investments in the U.S. aimed at preventing
PRC-controlled companies and funds from acquiring U.S. firms with
sensitive technologies. Congress is currently considering new
legislation, the Foreign Investment Risk Review Modernization Act,
to modernize the restrictive powers imposed by the Committee on
Foreign Investment in the United States.
This
evolving policy dispute between the PRC and the U.S. is likely to
have significant impact on the industries in which we participate,
directly and indirectly, and no assurance can be given that any
individual customer, or significant groups of companies or a
particular industry, will not be adversely affected by any
governmental actions taken by either the PRC or the U.S., perhaps
materially. In view of the positions of the respective trade
representatives, it is not possible to predict with any certainty
the outcome of this dispute or whether it will involve other
agencies or entities brought in to resolve the policy differences
of the two countries.
Risks Related to Environmental, Health, Safety and Other
Regulations
Laws and regulations restricting greenhouse gas emissions as well
as uncertainty concerning such regulations could adversely impact
the market for coal, increase our operating costs, and reduce the
value of our coal assets.
Climate
change continues to attract considerable public and scientific
attention. There is widespread concern about the contributions of
human activity to such changes, especially through the emission of
GHGs. There are three primary sources of GHGs associated with the
coal industry. First, the end use of our coal by our customers in
electricity generation, coke plants, and steelmaking is a source of
GHGs. Second, combustion of fuel by equipment used in coal
production and to transport our coal to our customers is a source
of GHGs. Third, coal mining itself can release methane, which is
considered to be a more potent GHG than CO2, directly into
the atmosphere. These emissions from coal consumption,
transportation and production are subject to pending and proposed
regulation as part of initiatives to address global climate
change.
26
As a
result, numerous proposals have been made and are likely to
continue to be made at the international, national, regional and
state levels of government to monitor and limit emissions of GHGs.
Collectively, these initiatives could result in higher electric
costs to our customers or lower the demand for coal used in
electric generation, which could in turn adversely impact our
business. They could also result in direct regulation of the GHGs
produced by our operations.
At
present, we are principally focused on metallurgical coal
production and other industrial uses, which is not used in
connection with the production of power generation. However, we may
seek to sell greater amounts of our coal into the power-generation
market in the future. The market for our coal may be adversely
impacted if comprehensive legislation or regulations focusing on
GHG emission reductions are adopted, or if our customers are unable
to obtain financing for their operations. The uncertainty over the
outcome of litigation challenging the CPP and the extent of future
regulation of GHG emissions may inhibit utilities from investing in
the building of new coal-fired plants to replace older plants or
investing in the upgrading of existing coal-fired plants. Any
reduction in the amount of coal consumed by electric power
generators as a result of actual or potential regulation of GHG
emissions could decrease demand for our coal, thereby reducing our
revenues and materially and adversely affecting our business and
results of operations. We or prospective customers may also have to
invest in CO2 capture and storage technologies in order to burn
coal and comply with future GHG emission standards.
Finally, there have
been attempts to encourage greater regulation of coalbed methane
because methane has a greater GHG effect than CO2. Methane from
coal mines can give rise to safety concerns and can require various
measures be taken to mitigate those risks. If new laws or
regulations were introduced to reduce coalbed methane emissions,
those rules could adversely affect our costs of operations by
requiring installation of air pollution controls, higher taxes, or
additional costs incurred to purchase credits that permit us to
continue operations. New laws or regulations could also potentially
require that we curtail coal production.
Current and future government laws, regulations and other legal
requirements relating to protection of the environment and natural
resources may increase our costs of doing business and may restrict
our coal operations.
We and
our potential customers are subject to stringent and complex laws,
regulations and other legal requirements enacted by federal, state
and local authorities relating to protection of the environment and
natural resources. These include those legal requirements that
govern discharges or emissions of materials into the environment,
the management and disposal of substances and wastes, including
hazardous wastes, the cleanup of contaminated sites, threatened and
endangered plant and wildlife protection, reclamation and
restoration of mining properties after mining is completed,
mitigation and restoration of streams or other waters, the
protection of drinking water, assessment of the environmental
impacts of mining, monitoring and reporting requirements, the
installation of various safety equipment in our mines, remediation
of impacts of surface subsidence from underground mining, and work
practices related to employee health and safety. Examples include
laws and regulations relating to:
●
employee health and
safety;
●
emissions to air
and discharges to water;
●
plant and wildlife
protection, including endangered species protections;
●
the reclamation and
restoration of properties after mining or other activity has been
completed;
●
limitations on land
use;
●
mine permitting and
licensing requirements;
●
the storage,
treatment and disposal of wastes;
●
air quality
standards;
●
water
pollution;
27
●
protection of human
health, plant-life and wildlife, including endangered and
threatened species;
●
protection of
wetlands;
●
the discharge of
materials into the environment;
●
remediation of
contaminated soil, surface and groundwater; and
●
the effects of
operations on surface water and groundwater quality and
availability.
Complying with
these environmental and employee health and safety requirements,
including the terms of our permits, has had, and will continue to
have, a significant effect on our costs of operations. In addition,
there is the possibility that we could incur substantial costs as a
result of violations of environmental laws, judicial
interpretations of or rulings on environmental laws or permits, or
in connection with the investigation and remediation of
environmental contamination. For example, the EPA and several of
the states where we operate have, or intend to, propose revised
recommended criteria for discharges of selenium regulated under the
Clean Water Act (“CWA”), which may be more stringent
than current criteria. Any additional laws, regulations and other
legal requirements enacted or adopted by federal, state and local
authorities, or new interpretations of existing legal requirements
by regulatory bodies relating to the protection of the environment,
including those related to discharges of selenium, could further
affect our costs or limit our operations.
Our operations may impact the environment or cause exposure to
hazardous substances, and our properties may have environmental
contamination, which could expose us to significant costs and
liabilities.
Our
operations currently use hazardous materials and generate limited
quantities of hazardous wastes from time to time. Drainage flowing
from or caused by mining activities can be acidic with elevated
levels of dissolved metals, a condition referred to as “acid
mine drainage,” or may include other pollutants requiring
treatment. We could become subject to claims for toxic torts,
natural resource damages and other damages as well as for the
investigation and clean-up of soil, surface water, groundwater, and
other media. Such claims may arise, for example, out of conditions
at sites that we currently own or operate, as well as at sites that
we previously owned or operated, or may acquire. Our liability for
such claims may be joint and several, so that we may be held
responsible for more than our share of the contamination or other
damages, or for the entire share.
We will
maintain coal refuse areas and slurry impoundments as necessary.
Such areas and impoundments are subject to extensive regulation.
Structural failure of a slurry impoundment or coal refuse area
could result in extensive damage to the environment and natural
resources, such as bodies of water that the coal slurry reaches, as
well as liability for related personal injuries and property
damages, and injuries to wildlife. If an impoundment were to fail,
we could be subject to claims for the resulting environmental
contamination and associated liability, as well as for fines and
penalties. Our coal refuse areas and slurry impoundments will be
designed, constructed, and inspected by our company and by
regulatory authorities according to stringent environmental and
safety standards.
We must obtain, maintain, and renew governmental permits and
approvals for mining operations, which can be a costly and
time-consuming process and result in restrictions on our
operations.
Numerous
governmental permits and approvals are required for mining
operations. Our operations are principally regulated under permits
issued pursuant to SMCRA and the federal CWA. State and federal
regulatory authorities exercise considerable discretion in the
timing and scope of permit issuance. Requirements imposed by these
authorities may be costly and time consuming and may result in
delays in the commencement or continuation of exploration or
production operations. In addition, we may be required to prepare
and present to permitting or other regulatory authorities data
pertaining to the effect or impact that proposed exploration for or
production of coal might have on the environment.
Our
coal production will be dependent upon our ability to obtain
various federal and state permits and approvals to mine our coal
deposits. The permitting rules, and the interpretations of these
rules, are complex, change frequently, and are often subject to
discretionary interpretations by regulators, all of which may make
compliance more difficult or impractical, and which may possibly
preclude the continuance of ongoing mine development or operations
or the development of future mining operations. The EPA also has
the authority to veto permits issued by the U.S. Army Corps of
Engineers (the “Corps”) under the CWA’s
Section 404 program that prohibits the discharge of dredged or
fill material into regulated waters without a permit. The pace with
which the government issues permits needed for new operations and
for ongoing operations to continue mining, particularly CWA
permits, can be time-consuming and subject to delays and denials.
These delays or denials of environmental permits needed for mining
could reduce our production and materially adversely impact our
cash flow and results of operations.
28
For
example, prior to placing fill material in waters of the United
States, such as with the construction of a valley fill, coal mining
companies are required to obtain a permit from the Corps under
Section 404 of the CWA. The permit can be either a Nation-Wide
Permit (“NWP”), normally NWP 21, 49 or 50 for coal
mining activities, or a more complicated individual permit. NWPs
are designed to allow for an expedited permitting process, while
individual permits involve a longer and more detailed review
process. The EPA also has the authority to veto permits issued by
the Corps under the CWA’s Section 404 program that
prohibits the discharge of dredged or fill material into regulated
waters without a permit.
Prior
to discharging any pollutants to waters of the United States, coal
mining companies must obtain a National Pollutant Discharge
Elimination System (“NPDES”) permit from the
appropriate state or federal permitting authority. NPDES permits
include effluent limitations for discharged pollutants and other
terms and conditions, including required monitoring of discharges.
Changes and proposed changes in state and federally recommended
water quality standards may result in the issuance or modification
of permits with new or more stringent effluent limits or terms and
conditions. Further, on June 29, 2015, the EPA and the Corps
published a new, more expansive, definition of “waters of the
United States” that became effective on August 28, 2015
(the “2015 Rule”). This rule was stayed nationwide by
the U.S. Court of Appeals for the Sixth Circuit pending the outcome
of litigation concerning the rule. On January 22, 2018, the Supreme
Court held that the courts of appeals do not have original
jurisdiction to review challenges to the 2015 Rule. With this final
rule, the agencies intend to maintain the status quo by adding an
applicability date to the 2015 Rule and thus providing continuity
and regulatory certainty for regulated entities, the States and
Tribes, and the public while the agencies continue to consider
possible revisions to the 2015 Rule. In light of this holding, in
February 2018 the agencies published a final rule adding an
applicability date to the 2015 Rule of February 6,
2020.
Further, the public
has certain statutory rights to comment on and submit objections to
requested permits and environmental impact statements prepared in
connection with applicable regulatory processes, and otherwise
engage in the permitting process, including bringing
citizens’ claims to challenge the issuance or renewal of
permits, the validity of environmental impact statements or
performance of mining activities. As a result of such potential
challenges, the permits we need may not be issued or renewed in a
timely fashion or issued or renewed at all, or permits issued or
renewed may not be maintained, may be challenged or may be
conditioned in a manner that may restrict our ability to
efficiently and economically conduct our mining activities, any of
which would materially reduce our production, cash flow, and
profitability.
Permitting rules
may also require, under certain circumstances, that we obtain
surface owner consent if the surface estate has been severed from
the mineral estate. This could require us to negotiate with third
parties for surface access that overlies coal we acquired or intend
to acquire. These negotiations can be costly and time-consuming,
lasting years in some instances, which can create additional delays
in the permitting process. If we cannot successfully negotiate for
land access, we could be denied a permit to mine coal we already
own.
We and our owners and controllers are subject to the Applicant
Violator System.
Under
SMCRA and its state law counterparts, all coal mining applications
must include mandatory “ownership and control”
information, which generally includes listing the names of our
officers and directors, and our principal stockholders owning 10
percent or more of our voting shares, among others. Ownership and
control reporting requirements are designed to allow regulatory
review of any entities or persons deemed to have ownership or
control of a coal mine and bars the granting of a coal mining
permit to any such entity or person (including any “owner and
controller”) who has had a mining permit revoked or
suspended, or a bond or similar security forfeited within the
five-year period preceding a permit application or application for
a permit revision. Regulatory agencies also block the issuance of
permits to an applicant who, or whose owner and controller, has
permit violations outstanding that have not been timely
abated.
29
A
federal database, known as the Applicant Violator System
(“AVS”), is maintained for this purpose. Certain
relationships are presumed to constitute ownership or control,
including the following: being an officer or director of an entity;
being the operator of the coal mining operation; having the ability
to commit the financial or real property assets or working
resources of the permittee or operator; based on the instruments of
ownership or the voting securities of a corporate entity, owning of
record 10% or more of the mining operator, among others. This
presumption, in most cases, can be rebutted where the person or
entity can demonstrate that it in fact does not or did not have
authority directly or indirectly to determine the manner in which
the relevant coal mining operation is conducted. An ownership and
control notice must be filed by us each time an entity obtains a
10% or greater interest in us. If we have unabated violations of
SMCRA or its state law counterparts, have a coal mining permit
suspended or revoked, or forfeit a reclamation bond, we and our
“owners and controllers,” as discussed above, may be
prohibited from obtaining new coal mining permits, or amendments to
existing permits, until such violations of law are corrected. This
is known as being “permit-blocked.” Additionally,
Thomas M. Sauve and Mark C. Jensen are currently, or may be in the
future, deemed an “owner or controller” of a number of
other mining companies, as such, we could be permit-blocked based
upon the violations of or permit-blocked status of an “owner
or controller” of us.
We may be subject to additional limitations on our ability to
conduct mining operations due to federal jurisdiction.
We may
conduct some underground mining activities on properties that are
within the designated boundary of federally protected lands or
national forests where the above-mentioned restrictions within the
meaning of SMCRA could apply. Federal court decisions could pose a
potential restriction on underground mining within 100 feet of a
public road as well as other restrictions. If these SMCRA
restrictions ultimately apply to underground mining, considerable
uncertainty would exist about the nature and extent of this
restriction. While it could remain possible to obtain permits for
underground mining operations in these areas even where this
100-foot restriction was applied, the time and expense of that
permitting process would be likely to increase significantly, and
the restrictions placed on the mining of those properties could
adversely affect our costs.
Our prospective customers are subject to extensive existing and
future government laws, regulations and other legal requirements
relating to protection of the environment, which could negatively
impact our business and the market for our products.
Coal
contains impurities, including sulfur, mercury, chlorine and other
elements or compounds, many of which are released into the air when
coal is burned. Complying with regulations to address these
emissions can be costly for our customers. For example, in order to
meet the CAA limits for sulfur dioxide emissions from electric
power plants, coal users must install costly pollution control
devices, use sulfur dioxide emission allowances (some of which they
may purchase), or switch to other fuels. Recent EPA rulemakings
requiring additional reductions in permissible emission levels for
coal-fired plants will likely make it costlier to operate
coal-fired electric power plants and may make coal a less
attractive fuel for electric power generation in the future. For
example, the EPA’s Cross-State Air Pollution Rule
(“CSAPR”) is one of a number of significant regulations
that the EPA has issued or expects to issue that will impose more
stringent requirements relating to air, water and waste controls on
electric generating units. These rules also include the EPA’s
new requirements for coal combustion residues management, which
were finalized in December 2014 and further regulate the handling
of wastes from the combustion of coal. In addition, the EPA has
formally adopted a revised final rule to reduce emissions of toxic
air pollutants from power plants. More costly and stringent
environmental regulations could adversely impact the operations of
our customers, which could in turn adversely impact our business. A
number of coal-fired power plants, particularly smaller and older
plants, already have retired or announced that they will retire
rather than retrofit to meet the obligations of these rules.
Additional retirements of coal-fired power plants by prospective
customers could further decrease demand for thermal coal and reduce
our revenues and adversely affect our business and results of
operations.
In
addition, considerable uncertainty is associated with air emissions
initiatives. New regulations are in the process of being developed,
and many existing and potential regulatory initiatives are subject
to review by federal or state agencies or the courts. More
stringent air emissions limitations are either in place or are
likely to be imposed in the short to medium term, and these
limitations will likely require significant emissions control
expenditures for many coal-fired power plants. As a result, some of
our prospective customers may switch to other fuels that generate
fewer of these emissions or may install more effective pollution
control equipment that reduces the need for low-sulfur coal. Any
further switching of fuel sources away from coal, closure of
existing coal-fired power plants, or reduced construction of new
coal-fired power plants could have a material adverse effect on
demand for, and prices received for, our coal. In addition, our
coke plant and steelmaking customers may face increased operational
costs as a result of higher electric costs.
30
Apart
from actual and potential regulation of air emissions and solid
wastes from coal-fired plants, state and federal mandates for
increased use of electricity from renewable energy sources could
have an impact on the market for our coal. Several states have
enacted legislative mandates requiring electricity suppliers to use
renewable energy sources to generate a certain percentage of power.
Possible advances in technologies and incentives, such as tax
credits, to enhance the economics of renewable energy sources could
make these sources more competitive with coal. Any reductions in
the amount of coal consumed by electric power generators as a
result of current or new standards for the emission of impurities,
or current or new incentives to switch to renewable fuels or
renewable energy sources, such as the CPP and various state
programs, could reduce the demand for our coal, thereby reducing
our revenues and adversely affecting our business, cash flows,
results of operations and our ability to pay dividends to our
common stockholders.
Environmental activism and initiatives aimed at limiting climate
change and a reduction of air pollutants could interfere with our
business activities, operations and ability to access capital
sources.
Participants in the
coal mining industry are frequently targeted by environmental
activist groups that openly attempt to disrupt the industry. It is
possible that we may be the target of such activism in the future,
including when we attempt to grow our business through
acquisitions, commence new mining operations or register our
securities with the SEC. If that were to happen, our ability to
operate our business or raise capital could be materially and
adversely impacted.
In
addition, there have also been efforts in recent years to influence
the investment community, including investment advisors, sovereign
wealth funds, public pension funds, universities and other groups,
promoting the divestment of fossil fuel equities and also
pressuring lenders to limit funding to companies engaged in the
extraction of fossil fuel reserves. In California, for example,
legislation was signed into law in October 2015 that required
California’s state pension funds to divest investments in
companies that generate 50% or more of their revenue from coal
mining, which was done by the established deadline of July 2017.
Several large investment banks also announced that they had adopted
climate change guidelines for lenders. The guidelines require the
evaluation of carbon risks in the financing of electric power
generation plants, which may make it more difficult for utilities
to obtain financing for coal-fired plants. Other activist campaigns
have urged banks to cease financing coal-driven businesses. As a
result, the World Bank announced in December 2017 that it would no
longer finance upstream oil and gas projects after 2019, apart from
certain gas projects in the poorest countries in exceptional
circumstances. The impact of such efforts may adversely affect the
demand for and price of securities issued by us and impact our
access to the capital and financial markets. In addition, several
well-funded non-governmental organizations have explicitly
undertaken campaigns to minimize or eliminate mining and the use of
coal as a source of electricity generation. The net effect of these
developments is to make it more costly and difficult to maintain
our business and to continue to depress the market for
coal.
Our mines are subject to stringent federal and state safety
regulations that increase our cost of doing business at active
operations and may place restrictions on our methods of operation.
In addition, government inspectors in certain circumstances may
have the ability to order our operations to be shut down based on
safety considerations.
The
Federal Mine Safety and Health Act of 1977 (the “Mine
Act”) and Mine Improvement and New Emergency Response Act
(the “MINER Act”), and regulations issued under these
federal statutes, impose stringent health and safety standards on
mining operations. The regulations that have been adopted under the
Mine Act and the MINER Act are comprehensive and affect numerous
aspects of mining operations, including training of mine personnel,
mining procedures, roof control, ventilation, blasting, use and
maintenance of mining equipment, dust and noise control,
communications, emergency response procedures, and other matters.
MSHA regularly inspects mines to ensure compliance with regulations
promulgated under the Mine Act and MINER Act. In addition, Kentucky
has similar programs for mine safety and health regulation and
enforcement. The various requirements mandated by federal and state
statutes, rules, and regulations may place restrictions on our
methods of operation and potentially result in fees and civil
penalties for violations of such requirements or criminal liability
for the knowing violation of such standards, significantly
impacting operating costs and productivity. In addition, government
inspectors have the authority to issue orders to shut down our
operations based on safety considerations under certain
circumstances, such as imminent dangers, accidents, failures to
abate violations, and unwarrantable failures to comply with
mandatory safety standards.
31
The
regulations enacted under the Mine Act and MINER Act as well as
under similar state acts are routinely expanded, raising compliance
costs and increasing potential liability. For example, in 2014,
MSHA finalized a new rule limiting miners’ exposure to
respirable coal dust. The first phase of the rule went into effect
as of August 1, 2014, and requires, among other things, single
shift sampling to determine noncompliance and corrective action to
remedy any excessive levels of dust. The next phase of the rule
went into effect as of February 1, 2016 and requires increased
sampling frequency and the use of continuous personal dust
monitors. This and other future mine safety rules could potentially
result in or require significant expenditures, as well as
additional safety training and planning, enhanced safety equipment,
more frequent mine inspections, stricter enforcement practices and
enhanced reporting requirements. At this time, it is not possible
to predict the full effect that new or proposed statutes,
regulations and policies will have on our operating costs, but any
expansion of existing regulations, or making such regulations more
stringent may have a negative impact on the profitability of our
operations. If we were to be found in violation of mine safety and
health regulations, we could face penalties or restrictions that
may materially and adversely impact our operations, financial
results and liquidity.
We must
also compensate employees for work-related injuries. State
workers’ compensation acts typically provide for an exception
to an employer’s immunity from civil lawsuits for workplace
injuries in the case of intentional torts. In such situations, an
injured worker would be able to bring suit against his or her
employer for damages in excess of workers’ compensation
benefits. In addition, Kentucky’s workers’ compensation
act provides a much broader exception to workers’
compensation immunity, allowing an injured employee to recover
against his or her employer if he or she can show damages caused by
an unsafe working condition of which the employer was aware and
that was a violation of a statute, regulation, rule or consensus
industry standard. These types of lawsuits are not uncommon and
could have a significant effect on our operating
costs.
In
addition, we have obtained from a third-party insurer a
workers’ compensation insurance policy, which includes
coverage for medical and disability benefits for black lung disease
under the Federal Coal Mine Health and Safety Act of 1969 and the
Mine Act, as amended. We perform periodic evaluations of our black
lung liability, using assumptions regarding rates of successful
claims, discount factors, benefit increases and mortality rates,
among others. Of note, the Affordable Care Act of 2010
significantly amended the black lung provisions of the Mine Act by
reenacting two provisions, which had been eliminated in 1981. Under
the amendments, a miner with at least fifteen years of underground
coal mine employment (or surface mine employment with similar dust
exposure) who can prove that he suffers from a totally disabling
respiratory condition is entitled to a rebuttable presumption that
his disability is caused by black lung. The other amendment
provides that the surviving spouse of a miner who was collecting
federal black lung benefits at the time of his death is entitled to
a continuation of those benefits. These changes could have a
material impact on our costs expended in association with the
federal black lung program.
We have reclamation, mine closing, and related environmental
obligations under the Surface Mining Control and Reclamation Act.
If the assumptions underlying our accruals are inaccurate, we could
be required to expend greater amounts than
anticipated.
SMCRA
establishes operational, reclamation and closure standards for our
mining operations. SMCRA requires that comprehensive environmental
protection and reclamation standards be met during the course of
and following completion of mining activities. Permits for all
mining operations must be obtained from the U.S. Office of Surface
Mining (“OSM”) or, where state regulatory agencies have
adopted federally approved state programs under SMCRA, the
appropriate state regulatory authority. Our operations are located
in states which have achieved primary jurisdiction for enforcement
of SMCRA through approved state programs. See
“Business—Environmental and Other Regulatory
Matters.”
In
December 2016 OSM published the final version of the Stream
Protection Rule, which became effective in January 2017. The rule
would have impacted both surface and underground mining operations,
as it would have imposed stricter guidelines on conducting coal
mining operations, and would have required more extensive baseline
data on hydrology, geology and aquatic biology in permit
applications. The rule also required the collection of increased
pre-mining data about the site of the proposed mining operation and
adjacent areas to establish a baseline for evaluation of the
impacts of mining and the effectiveness of reclamation associated
with returning streams to pre-mining conditions. However, in
February 2017, both the House and Senate passed a resolution
disapproving of the Stream Protection Rule pursuant to the
Congressional Review Act (“CRA”). President Trump
signed the resolution on February 16, 2017 and, pursuant to the
CRA, the Stream Protection Rule “shall have no force or
effect” and cannot be replaced by a similar rule absent
future legislation. On November 17, 2017, OSMRE published a Federal
Register notice that removed the text of the Stream Protection Rule
from the Code of Federal Regulations. Whether Congress will enact
future legislation to require a new Stream Protection Rule remains
uncertain. The existing rules, or other new SMCRA regulations,
could result in additional material costs, obligations and
restrictions upon our operations.
32
In
addition, SMCRA imposes a reclamation fee on all current mining
operations, the proceeds of which are deposited in the Abandoned
Mine Reclamation Fund (“AML Fund”), which is used to
restore unreclaimed and abandoned mine lands mined before 1977. The
current per ton fee is $0.28 per ton for surface mined coal and
$0.12 per ton for underground mined coal. These fees are currently
scheduled to be in effect until September 30, 2021. We accrue
for the costs of current mine disturbance and of final mine
closure, including the cost of treating mine water discharge where
necessary.
The
amounts recorded are dependent upon a number of variables,
including the estimated future closure costs, the amount of
estimated coal deposits, assumptions involving profit margins,
inflation rates, and the assumed credit-adjusted risk-free interest
rates. If these accruals are insufficient or our liability in a
particular year is greater than currently anticipated, our future
operating results could be adversely affected. We are also required
to post bonds for the cost of a coal mine as a condition of our
mining activities.
Volatility in the Products We Sell.
Our
business plan involves selling coal to various customers, and the
price of coal has historically been volatile and unpredictable. Any
significant change in the price of coal could cause detriment to
our ability to execute our business plan or our ability to be
profitable.
Limited Operating History.
We
have a limited operating history and have incurred significant
losses to date, and our current profitability is not guaranteed,
and we may incur significant losses in the future.
We
have generated limited revenues from the sale of our products, and
our business may fail if we are not able to mine the coal, not
successfully sell the coal we produce, or if we produce the coal at
a loss.
The
successful development of our business depends on our ability to
efficiently and cost-effectively mine, transport, and process coal
that will be purchased at a price above our costs.
Our business currently requires substantial capital expenditures
and any expansion of our operations requires substantial capital
investment and we may not have access to the capital required to
reach profitability.
Maintaining
and expanding our existing business is capital intensive.
Specifically, the ongoing expenses of coal mining and processing,
the required capital investment for any new mines going into
production, and compliance with the applicable laws and regulations
all require substantial capital expenditures. In order to maintain
compliance of existing or future regulations, we invest significant
capital and continue to invest significant capital to maintain our
production and operations. We cannot assure you that we will be
able to maintain our existing or future levels of business or
generate sufficient cash flow, or that we will have access to
sufficient financing to continue our production, development or
marketing at or above our present levels and on our current or
projected timelines and we may be required to defer all or a
portion of our capital expenditures. Our results of operations,
business and financial condition, as well as our ability to satisfy
our obligations may be materially adversely affected if we cannot
make such capital expenditures.
Our business is highly contractual in nature and failure to adhere
to the terms of agreements, such as mineral lease agreements, may
result in significant business impairment.
All
of our material coal deposits and surface rights are leased from
mineral and surface owners, such as Elk Horn Coal Company, LLC,
Alma Land Company, Big Sandy Company, LP, Kentucky Berwind Land
Company, and various individuals and companies (including
potentially Land Resources & Royalties LLC in the future). Our
ability to retain these coal leases is dependent on our ability to
meet the contractual obligations of the leases, such as payments of
royalties and other performance metrics. Failure to adhere to the
lease agreements may result in significantly impairment of our
business, including the loss of coal deposits under management,
loss of revenue, loss of certain operational divisions, and/or
additional costs incurred by our business.
33
A defect in title or the loss of a leasehold interest in certain
property could limit our ability to mine our coal deposits or
result in significant unanticipated costs.
We
conduct our coal mining operations on properties that we lease. A
title defect or the loss of a lease could adversely affect our
ability to mine the associated coal deposit. We may not verify
title to our leased properties or associated coal deposits until we
have committed to developing those properties or coal deposits. We
may not commit to develop property or coal deposits until we have
obtained necessary permits and completed exploration. As such, the
title to property that we intend to lease or coal deposits that we
intend to mine may contain defects prohibiting our ability to
conduct mining operations. Similarly, our leasehold interests may
be subject to superior property rights of other third parties or to
royalties owed to those third parties. In order to conduct our
mining operations on properties where these defects exist, we may
incur unanticipated costs. In addition, some leases require us to
produce a minimum quantity of coal and require us to pay minimum
production royalties. Our inability to satisfy those requirements
may cause the leasehold interest to terminate.
We outsource certain aspects of our business to third party
contractors, which subjects us to risks, including disruptions in
our business.
A
significant portion of our business is operated via contractor
model, in which we contract with third parties to provide coal
extraction, coal mining, blasting services, and other operational
functions at all of our mines. In addition, we contract with third
parties to provide truck transportation services between our mines
and our preparation plants. Accordingly, we are subject to the
risks associated with the contractors’ ability to
successfully provide the necessary services to meet our needs. If
the contractors are unable to adequately provide the contracted
services, and we are unable to find alternative service providers
in a timely manner, our ability to conduct our coal mining
operations and deliver coal to our customers may be
disrupted.
Our coal sale agreements are subject to quality specifications that
we may not be able to meet, resulting in lower sales price of our
coal or non-acceptance of delivery of our coal by the
customer.
The
coal we sell is subject to stated specifications or a range of
specifications, such as heat value (BTU/lb value), percent sulfur,
percent volatile matter, and percent ash, among other
characteristics. Failure to meet these characteristics on a
particular order, or in general, could result in rejection of coal
delivery, non-payment of coal sales, and/or refusal to continue the
sales relationship. Any of these factors could have a detrimental
effect on our business and our ability to sell our coal and pay our
expenses.
Our coal is sold primarily through various regional coal brokers
and our ability to sell our coal to these brokers and receive
payment for such sales is dependent on their ability to properly
operate and manage their business.
For
the coal we sell to brokers and intermediaries, which is all of our
sales currently and anticipated to be a significant portion of our
sales going forward, the ability to utilize such brokers is
dependent on their ability to successfully operate their business.
Inability to operate their business or impairment of their business
will result in our ability to sell coal to such brokers and
intermediaries.
Furthermore,
there is the risk that any broker or intermediary fails to pay for
any coal delivered, either in whole or in part, due to a potential
combination of factors, such as:
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improper
coal qualities and characteristics that don’t meet delivery
specifications;
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delay
in the broker and/or intermediaries’ receipt of
payment(s);
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fraudulent
activity of the broker and/or intermediary; and
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bankruptcy
of the broker and/or intermediary.
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Any
failure to receive payment from our brokers and/or intermediaries
could result in severe impairment or bankruptcy of our
business.
Furthermore,
for the coal we may sell directly to the end-customer, our ability
to receive payment for the coal we sell depends on the continued
creditworthiness of our customers. The current economic volatility
and tightening credit markets increase the risk that we may not be
able to collect payments from our customers. A continuation or
worsening of current economic conditions or other prolonged global
or U.S. recessions could also impact the creditworthiness of our
customers. If the creditworthiness of a customer declines, this
would increase the risk that we may not be able to collect payment
for all of the coal we sell to that customer. If we determine that
a customer is not creditworthy, we may not be required to deliver
coal under the customer’s coal sales contract. If we are able
to withhold shipments, we may decide to sell the customer’s
coal on the spot market, which may be at prices lower than the
contract price, or we may be unable to sell the coal at all.
Furthermore, the bankruptcy of any of our customers could have a
material adverse effect on our financial position. In addition,
competition with other coal suppliers could force us to extend
credit to customers and on terms that could increase the risk of
payment default.
Our assets and operations are concentrated in eastern Kentucky, and
a disruption within that geographic region could adversely affect
the Company’s performance.
We
currently rely exclusively on sales generated our coal extraction
within eastern Kentucky’s Central Appalachian coal region.
Due to our lack of diversification in geographic location, an
adverse development in these areas, including adverse developments
due to catastrophic events or weather and decreases in demand for
coal or electricity, could have a significantly greater adverse
impact on our ability to operate our business and our results of
operations than if we held more diverse assets and
locations.
Some officers and management of the Company may spend a substantial
amount of time managing the business and affairs of other
businesses and of other interests.
The
officers and management of the Company have other business
interests that may require substantial time apart from management
of the Company. Furthermore, these other business interests may or
may not compete directly with the business of the Company. These
officers may face a conflict regarding the allocation of their time
between our business and the other business interests of the
Company, and as a result our business may be adversely affected if
the officers spend less time on our business and affairs than would
otherwise be available as a result of such officers’ time
being split between the management of the Company. These officers
may also be conflicted when negotiating the terms of contracts
between the Company and other company interests, although the
officers will act in the best faith of the Company, or recuse
themselves from the negotiations, should a potential conflict
arise
Our business model may result in various legal proceedings, which
may have an adverse effect on our business.
Due
to the nature of our business, at times we may be involved in legal
proceedings incidental to our normal business activities. We will
not be able to predict the outcome, and there is always the
potential that the costs of litigation in an individual matter or
the aggregation of many matters could have an adverse effect on our
cash flows, results of operations or financial
position.
Risk Related to Environmental Reclamation and
Remediation.
We
have a large amount of reclamation liability and large number of
regulatory requirements as part of our operations. Our inability to
perform our reclamation or regulatory requirements under local,
state, or federal laws may result in fines or governmental orders
that limit, impair, or stop our ability to operate. Regulatory
fines may be substantial in nature and may significantly impact our
operational results. Furthermore, we have several permit sites that
require constant water monitoring and treatment for the foreseeable
future due to the poor quality of water present within the
permit.
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We do not have Proven or Probable mineral reserves for any of our
properties.
Unlike
other mining companies who have completed a feasibility study, we
do not have any Proven or Probable reserves as described and
defined in the Securities and Exchange Commission’s Industry
Guide 7. As a result, we incur additional risks as compared to
these other mining companies from the fact that we are operating
mines without establishing a Proven or Probable mineral reserve.
These risks may include, but are not limited to, the inherent risk
to commence production without a feasibility study that establishes
the economic recovery of any coal mineralization, as well as
possible volatility in earnings due to our inability to record
certain investments as assets in our financial statements, such as
new mine construction and development costs.
Risks Related to this Offering and Our Common Stock
We have broad discretion in the use of the net proceeds we receive
from this offering and may not use them effectively.
Although we intend
to use a portion of the net proceeds we receive to repay certain
indebtedness as described under “Use of Proceeds,” we
cannot specify with certainty the particular other uses of the net
proceeds that we will receive from such purchase. Our management
will have broad discretion in the application of such proceeds,
including for any of the purposes described in “Use of
Proceeds.” Accordingly, you will have to rely upon the
judgment of our management with respect to the use of the proceeds,
with only limited information concerning management’s
specific intentions. Our management may spend a portion or all of
the net proceeds from this offering in ways that our stockholders
may not desire or that may not yield a favorable return. The
failure by our management to apply these funds effectively could
harm our business. Pending their use, we may invest the net
proceeds from this offering in a manner that does not produce
income or that loses value.
Our ability to pay dividends may be limited by the amount of cash
we generate from operations following the payment of fees and
expenses, by restrictions in any future debt instruments and by
additional factors unrelated to our profitability.
We
intend to pay special and regular quarterly dividends. The
declaration and payment of dividends, if any, is subject to the
discretion of our board of directors and the requirements of
applicable law. The timing and amount of any dividends declared
will depend on, among other things: (a) our earnings, earnings
outlook financial condition, cash flow, cash requirements and
outlook on current and future market conditions, (b) our liquidity,
including our ability to obtain debt and equity financing on
acceptable terms, (c) restrictive covenants in any future debt
instruments and (d) provisions of applicable law governing the
payment of dividends.
The
metallurgical coal industry, and the coal industry in general, is
highly volatile, and we cannot predict with certainty the amount of
cash, if any, that will be available for distribution as dividends
in any period. Also, there may be a high degree of variability from
period to period in the amount of cash, if any, that is available
for the payment of dividends. The amount of cash we generate from
operations and the actual amount of cash we will have available for
dividends will vary based upon, among other things:
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the
development of our properties into producing coal
mines;
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the
ability to begin generating significant revenues and operating cash
flows;
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the
market price for coal;
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overall
domestic and global economic conditions, including the supply of
and demand for domestic and foreign coal, coke and
steel;
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unexpected
operational events or geological conditions;
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cost
overruns;
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our
ability to enter into agreements governing the sale of coal, which
are generally short-term in nature and subject to fluctuations in
market pricing;
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the
level of our operating costs;
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prevailing
global and regional economic and political conditions;
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changes
in interest rates;
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the
impact of domestic and foreign governmental laws and regulations,
including environmental and climate change regulations and
regulations affecting the coal mining industry;
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delays
in the receipt of, failure to receive, failure to maintain or
revocation of necessary governmental permits;
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modification
or revocation of our dividend policy by our board of directors;
and
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the
amount of any cash reserves established by our board of
directors.
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36
The
amount of cash we generate from our operations may differ
materially from our net income or loss for the period, which will
be affected by non-cash items. We may incur other expenses or
liabilities that could reduce or eliminate the cash available for
distribution as dividends.
We currently pay a
10.0% annual dividend on our Series C preferred stock, which is
compounded on an annual basis and no accrual has been made as of
the date of this filing. In the past, we paid an 8.0% annual
dividend on our Series B preferred stock, of which an accrued
amount was recorded of $104,157, as of September 30, 2018, and
continues to accrue to the Series B preferred stock
holder at the same rate
until all Series B preferred stock were converted to common stock
on November 7, 2018. A total amount of $114,290 in Series B
preferred dividend was accrued to the Series B preferred holders
and was added to the Series B preferred stock balance upon
conversion into common shares on November 7, 2018. The conversion
resulted in a total of 267,859 common shares issued to the former
Series B preferred holders.
In
addition, any future financing agreements may prohibit the payment
of dividends if an event of default has occurred and is continuing
or would occur as a result of the payment of such
dividends.
We may
not have sufficient surplus or net profits in the future to pay
dividends, and our subsidiaries may not have sufficient funds,
surplus or net profits to make distributions to us. As a result of
these and the other factors mentioned above, we can give no
assurance that dividends will be paid in the future.
The requirements of being a public company, including compliance
with the reporting requirements of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and the
requirements of the Sarbanes-Oxley Act, may strain our resources,
increase our costs and distract management, and we may be unable to
comply with these requirements in a timely or cost-effective
manner.
As a
public company, we will need to comply with new laws, regulations
and requirements, certain corporate governance provisions of the
Sarbanes-Oxley Act of 2002, related regulations of the SEC.
Complying with these statutes, regulations and requirements will
occupy a significant amount of time for our board of directors and
management and will significantly increase our costs and expenses.
We will need to:
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institute
a more comprehensive compliance function;
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comply
with rules promulgated by the OTC Pink or any other exchange that
lists our shares;
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continue
to prepare and distribute periodic public reports in compliance
with our obligations under the federal securities
laws;
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establish
new internal policies, such as those relating to insider trading;
and
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involve
and retain to a greater degree outside counsel and accountants in
the above activities.
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Furthermore, while
we generally must comply with Section 404 of the
Sarbanes-Oxley Act of 2002 for our fiscal years, we are not
required to have our independent registered public accounting firm
attest to the effectiveness of our internal controls until our
first annual report subsequent to our ceasing to be an
“emerging growth company” within the meaning of
Section 2(a)(19) of the Securities Act. Accordingly, we may
not be required to have our independent registered public
accounting firm attest to the effectiveness of our internal
controls until as late as our annual report for the fiscal year
ending December 31, 2018. Once it is required to do so, our
independent registered public accounting firm may issue a report
that is adverse in the event it is not satisfied with the level at
which our controls are documented, designed, operated or reviewed.
Compliance with these requirements may strain our resources,
increase our costs and distract management, and we may be unable to
comply with these requirements in a timely or cost-effective
manner.
In
addition, we expect that being a public company subject to these
rules and regulations may make it more difficult and more expensive
for us to obtain director and officer liability insurance and we
may be required to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract
and retain qualified individuals to serve on our board of directors
or as executive officers. We are currently evaluating these rules,
and we cannot predict or estimate the amount of additional costs we
may incur or the timing of such costs.
If we fail to develop or maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent fraud. As a result, current and potential
stockholders could lose confidence in our financial reporting,
which would harm our business and the trading price of our common
stock.
Effective internal
controls are necessary for us to provide reliable financial
reports, prevent fraud and operate successfully as a public
company. If we cannot provide reliable financial reports or prevent
fraud, our reputation and operating results would be
harmed.
37
We
cannot be certain that our efforts to develop and maintain our
internal controls will be successful, that we will be able to
maintain adequate controls over our financial processes and
reporting in the future or that we will be able to comply with our
obligations under Section 404 of the Sarbanes Oxley Act of
2002. Any failure to develop or maintain effective internal
controls, or difficulties encountered in implementing or improving
our internal controls, could harm our operating results or cause us
to fail to meet our reporting obligations. Ineffective internal
controls could also cause investors to lose confidence in our
reported financial information, which would likely have a negative
effect on the trading price of our common stock.
The offering price of our common stock may not be indicative of the
market price of our common stock after this offering or throughout
the course of our sale of shares under this offering. In addition,
an active, liquid and orderly trading market for our common stock
may not develop or be maintained, and our stock price may be
volatile and/or decrease substantially as a result of the sale of
the shares under this offering.
Prior
to this offering, our common stock was very thinly traded on the
OTC Pink markets. An active, liquid and orderly trading market for
our common stock may not develop or be maintained after this
offering. Active, liquid and orderly trading markets usually result
in less price volatility and more efficiency in carrying out
investors’ purchase and sale orders. The market price of our
common stock could vary significantly as a result of a number of
factors, some of which are beyond our control. In the event of a
drop in the market price of our common stock, you could lose a
substantial part or all of your investment in our common stock. The
offering price will be determined by us and the underwriters in
this offering and may be more or less than the market price of our
stock after this offering. Consequently, you may not be able to
sell shares of our common stock at prices equal to or greater than
the price paid by you in this offering and the common stock offered
under this prospectus may be sold significantly less than the
market price of the stock or the anticipated offering
price.
The
following factors could affect our stock price:
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our
operating and financial performance;
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quarterly
variations in the rate of growth of our financial indicators, such
as net income per share, net income and revenues;
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the
public reaction to our press releases, our other public
announcements and our filings with the SEC;
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strategic
actions by our competitors;
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changes
in revenue or earnings estimates, or changes in recommendations or
withdrawal of research coverage, by equity research
analysts;
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speculation
in the press or investment community;
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the
failure of research analysts to cover our common
stock;
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sales
of our common stock by us or underwriters or the perception that
such sales may occur;
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our
payment of dividends;
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changes
in accounting principles, policies, guidance, interpretations or
standards;
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additions
or departures of key management personnel;
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actions
by our stockholders;
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general
market conditions, including fluctuations in commodity
prices;
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domestic
and international economic, legal and regulatory factors unrelated
to our performance; and
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the
realization of any risks described under this “Risk
Factors” section.
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The
stock markets in general have experienced extreme volatility that
has often been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the
trading price of our common stock. Securities class action
litigation has often been instituted against companies following
periods of volatility in the overall market and in the market price
of a company’s securities. Such litigation, if instituted
against us, could result in very substantial costs, divert our
management’s attention and resources and harm our business,
operating results and financial condition.
38
Certain of our directors, members of our management team, and
officers have significant duties with, and spend significant time
serving, other entities, including those entities that may compete
with us in seeking acquisitions and business opportunities and,
accordingly, may have conflicts of interest in allocating time or
pursuing business opportunities.
Certain
of our directors, members of our management team and/or officers
(such as Mark C. Jensen and Thomas M. Sauve, among others), who are
responsible for managing the direction of our operations and
acquisition activities, hold positions of responsibility with other
entities (including T Squared Partners LP and other entities) that
have other business interests and may find itself in the business
of identifying and acquiring coal deposits. The existing positions
held by these directors, members of our management team, and/or
officers may give rise to fiduciary or other duties (such as
devotion of time to the company) that are in conflict with the
duties they owe to us. These directors, members of our management
team, and/or officers, may become aware of business opportunities
that may be appropriate for presentation to us as well as to the
other entities with which they are or may become affiliated. Due to
these existing and potential future affiliations, they may present
potential business opportunities to other entities prior to
presenting them to us, which could cause additional conflicts of
interest. They may also decide that certain opportunities are more
appropriate for other entities with which they are affiliated, and
as a result, they may elect not to present those opportunities to
us. These conflicts may not be resolved in our favor. For
additional discussion of our management’s business
affiliations and the potential conflicts of interest of which our
stockholders should be aware, see “Certain Relationships and
Related Party Transactions.”
Our amended and restated certificate of incorporation and amended
and restated bylaws, as well as Florida law, will contain
provisions that could discourage acquisition bids or merger
proposals, which may adversely affect the market price of our
common stock.
Our
amended and restated certificate of incorporation will authorize
our board of directors to issue preferred stock without stockholder
approval. If our board of directors elects to issue preferred
stock, it could be more difficult for a third party to acquire us.
In addition, some provisions of our amended and restated
certificate of incorporation and amended and restated bylaws could
make it more difficult for a third party to acquire control of us,
even if the change of control would be beneficial to our
stockholders, including:
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limitations
on the removal of directors;
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limitations
on the ability of our stockholders to call special
meetings;
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establishing
advance notice provisions for stockholder proposals and nominations
for elections to the board of directors to be acted upon at
meetings of stockholders;
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providing
that the board of directors is expressly authorized to adopt, or to
alter or repeal our bylaws; and
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establishing
advance notice and certain information requirements for nominations
for election to our board of directors or for proposing matters
that can be acted upon by stockholders at stockholder
meetings.
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39
Investors in this offering will experience immediate and
substantial dilution.
The
sale of up to 1,000,000 shares under this prospectus
could result in significant shareholder dilution and significantly
negatively impact the share price of our stock. Furthermore, some
investors in our stock may pay substantially different prices than
other investors. There also exists the possibility that a large
purchaser of our stock offered under this prospectus may negotiate
a stock price that is more favorable than another purchaser of our
stock offered under this prospectus, include the possibility of
stock price that is priced at a variable rate to the market price
of our stock. This would result in further significant and
substantial dilution to all other holders of our common
stock.
Future sales of our common stock in the public market, or the
perception that such sales may occur, could reduce our stock price,
and any additional capital raised by us through the sale of equity
or convertible securities may dilute your ownership in
us.
We may
issue additional shares of common stock or convertible securities
in subsequent public offerings. After the completion of this
offering, we will have 23,298,530 outstanding shares of common
stock. There may be no market for buyers of our common stock
offered under this prospectus, or any sale of common stock under
this prospectus may be sold at a substantial discount to the market
price.
At some
point after this offering, we intend to file a registration
statement with the SEC on Form S-8 providing for the registration
of up to 4,000,000 shares of our common stock issued or
reserved for issuance under our equity incentive plan. Subject to
the satisfaction of vesting conditions and the expiration of
lock-up agreements, shares registered under the registration
statement on Form S-8 will be available for resale immediately in
the public market without restriction, subject to Rule 144
limitations with respect to affiliates. In addition, the issuance
of shares of common stock upon the exercise of outstanding options
will result in dilution to the interests of other stockholders.
Please read “Description of Capital Stock— Outstanding
Options or Warrants.”
We
cannot predict the size of future issuances of our common stock or
securities convertible into common stock or the effect, if any,
that future issuances and sales of shares of our common stock will
have on the market price of our common stock or the dividend amount
payable per share on our common stock. Sales of substantial amounts
of our common stock (including shares issued in connection with an
acquisition), or the perception that such sales could occur, may
adversely affect prevailing market prices of our common stock or
the dividend amount payable per share on our common
stock.
Certain U.S. federal income tax preferences currently available
with respect to coal exploration and development may be eliminated
by future legislation.
From
time to time, legislation is proposed that could result in the
reduction or elimination of certain U.S. federal income tax
preferences currently available to companies engaged in the
exploration and development of coal. These proposals have included,
but are not limited to, (1) the elimination of current
deductions, the 60-month amortization period and the 10-year
amortization period for exploration and development costs relating
to coal and other hard mineral fossil fuels, (2) the repeal of
the percentage depletion allowance with respect to coal properties,
(3) the repeal of capital gains treatment of coal and lignite
royalties and (4) the elimination of the domestic
manufacturing deduction for coal and other hard mineral fossil
fuels. The passage of these or other similar proposals could
increase our taxable income and negatively impact the value of an
investment in our common stock.
We may issue preferred stock whose terms could adversely affect the
voting power or value of our common stock.
Our amended and restated certificate of
incorporation will authorize us to issue, without the approval of
our stockholders, one or more classes or series of preferred stock
having such designations, preferences, limitations and relative
rights, including preferences over our common stock respecting
dividends and distributions, as our board of directors may
determine. The terms of one or more classes or series of preferred
stock could adversely impact the voting power or value of our
common stock. For example, we might grant holders of preferred
stock the right to elect some number of our directors in all events
or on the happening of specified events or the right to veto
specified transactions. Similarly, the repurchase or redemption
rights or liquidation preferences we might assign to holders of
preferred stock could affect the residual value of the common
stock.
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For as long as we are an emerging growth company, we will not be
required to comply with certain reporting requirements, including
those relating to accounting standards and disclosure about our
executive compensation, that apply to other public
companies.
In
April 2012, President Obama signed into law the JOBS Act. We are
classified as an “emerging growth company” under the
JOBS Act. For as long as we are an emerging growth company, which
may be up to five full fiscal years subsequent to our first sale of
an equity security pursuant to registration in 2014, unlike other
public companies, we will not be required to, among other things:
(i) provide an auditor’s attestation report on
management’s assessment of the effectiveness of our system of
internal control over financial reporting pursuant to
Section 404(b) of the Sarbanes-Oxley Act; (ii) comply
with any new requirements adopted by the PCAOB requiring mandatory
audit firm rotation or a supplement to the auditor’s report
in which the auditor would be required to provide additional
information about the audit and the financial statements of the
issuer; (iii) provide certain disclosure regarding executive
compensation required of larger public companies; or (iv) hold
nonbinding advisory votes on executive compensation. We will remain
an emerging growth company for up to five years subsequent to our
first sale of an equity security pursuant to registration in 2014,
although we will lose that status sooner if we have more than $1.07
billion of revenues in a fiscal year, have more than $700.0 million
in market value of our common stock held by non-affiliates, or
issue more than $1.0 billion of non-convertible debt over a
three-year period.
To the
extent that we rely on any of the exemptions available to emerging
growth companies, you will receive less information about our
executive compensation and internal control over financial
reporting than issuers that are not emerging growth companies. If
some investors find our common stock to be less attractive as a
result, there may be a less active trading market for our common
stock and our stock price may be more volatile.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our common stock or if our operating
results do not meet their expectations, our stock price could
decline.
The
trading market for our common stock will be influenced by the
research and reports that industry or securities analysts publish
about us or our business. If one or more of these analysts cease
coverage of our company or fail to publish reports on us regularly,
we could lose visibility in the financial markets, which in turn
could cause our stock price or trading volume to decline. Moreover,
if one or more of the analysts who cover our company downgrades our
common stock or if our operating results do not meet their
expectations, our stock price could decline.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
The
information in this prospectus includes “forward-looking
statements.” All statements, other than statements of
historical fact included in this prospectus, regarding our
strategy, future operations, financial position, estimated revenues
and losses, projected costs, prospects, plans and objectives of
management are forward-looking statements. When used in this
prospectus, the words “could,” “believe,”
“anticipate,” “intend,”
“estimate,” “expect,” “project”
and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
such identifying words. These forward-looking statements are based
on management’s current expectations and assumptions about
future events and are based on currently available information as
to the outcome and timing of future events. When considering
forward-looking statements, you should keep in mind the risk
factors and other cautionary statements described under the heading
“Risk Factors” included in this
prospectus.
41
Forward-looking statements may include statements
about:
●
our
status as a recently organized corporation with limited operating
history, limited current revenue and properties that have limited
production history;
●
deterioration
of economic conditions in the steel industry or other markets for
our coal, generally;
●
deterioration
of economic conditions in the metallurgical and/or thermal coal
industry and other markets for our coal, generally;
●
higher
than expected costs to develop our planned mining operations,
including, but not limited to, the costs to rehabilitate our
mines;
●
decreases
in the estimated quantities or quality of our coal
deposits;
●
changes
in the estimated geological conditions in our mines;
●
our
expectations relating to dividend payments and our ability to make
such payments;
●
our
inability to obtain additional financing on favorable terms, if
required, to complete the acquisition of additional metallurgical
coal deposits as currently contemplated or to fund the operations
and growth of our business;
●
increased
maintenance, operating or other expenses or changes in the timing
thereof;
●
impaired
financial condition and liquidity of our customers;
●
increased
competition in coal markets;
●
decreases
in the price of metallurgical coal and/or thermal
coal;
●
the
impact of and costs of compliance with stringent domestic and
foreign laws and regulations, including environmental, climate
change and health and safety regulations, and permitting
requirements, as well as changes in the regulatory environment, the
adoption of new or revised laws, regulations and permitting
requirements;
●
the
impact of potential legal proceedings and regulatory inquiries
against us;
●
our
inability to effectively deploy the net proceeds of this
offering;
42
●
impact
of weather and natural disasters on demand, production and
transportation;
●
reductions
and/or deferrals of purchases by major customers and our ability to
renew sales contracts;
●
credit
and performance risks associated with customers, suppliers,
contract miners, co-shippers and trading, banks and other financial
counterparties;
●
geologic,
equipment, permitting, site access, operational risks and new
technologies related to mining;
●
our
ability to attract and retain employees;
●
transportation
availability, performance and costs;
●
availability,
timing of delivery and costs of key supplies, capital equipment or
commodities such as diesel fuel, steel, explosives and
tires;
●
the
existence of registration rights with respect to the securities
being offered and the costs of compliance or penalties for
noncompliance with such rights;
●
the
amount of expenses and other liabilities incurred or accrued after
the completion of this offering;
●
the
lack of a public market for our securities; and
●
the
other risks identified in this prospectus including, without
limitation, those under the headings “Risk Factors,”
“Business” and “Certain Relationships and Related
Party Transactions.”
We
caution you that these forward-looking statements are subject to
all of the risks and uncertainties, most of which are difficult to
predict and many of which are beyond our control, incident to the
development, production, gathering and sale of coal. These risks
include, but are not limited to, commodity price volatility, demand
for domestic and foreign steel, inflation, lack of availability of
mining equipment and services, environmental risks, operating
risks, regulatory changes, the uncertainty inherent in estimating
coal deposits and in projecting future rates of production, cash
flow and access to capital, the timing of development expenditures
and the other risks described under “Risk Factors” in
this prospectus.
Should
one or more of the risks or uncertainties described in this
prospectus occur, or should underlying assumptions prove incorrect,
our actual results and plans could differ materially from those
expressed in any forward-looking statements.
All
forward-looking statements, expressed or implied, included in this
prospectus are expressly qualified in their entirety by this
cautionary statement. This cautionary statement should also be
considered in connection with any subsequent written or oral
forward-looking statements that we or persons acting on our behalf
may issue.
Except
as otherwise required by applicable law, we disclaim any duty to
update any forward-looking statements, all of which are expressly
qualified by the statements in this section, to reflect events or
circumstances after the date of this prospectus.
43
USE OF PROCEEDS
We
expect to receive approximately $5,580,000
of net proceeds from the sale of the
common stock offered by us, assuming the full sale of 1,000,000
common shares registered under this prospectus, other than the 15%
underwriter’s Over-Allotment and after deducting the
underwriters discount of 7%.
We intend to use approximately
$1.0 million for the purchase of additional surface and
underground equipment and parts and supplies for such equipment, or
the rehabilitation of our current equipment. The equipment will be
used to increase production at existing operating mines and bring
other mines into production at our various operating
subsidiaries.
We intend to use approximately
$0.5 million for future acquisitions of regional coal
mines to complement our current regional operations, larger coal
mining complexes, and/or other businesses related to the coal
mining industry.
We intend to use approximately
$0.67 million for mine rehabilitation of our existing
idled mines to bring these mines in production. The mine
rehabilitation costs are primarily comprised of labor and mining
supplies and are dependent on the amount of rehabilitation and the
existing conditions at the idled mine.
We intend to use approximately
$1.17 million for partial repayment of certain debt and
payables including amounts owed to management and related
parties. We expect to fund our
remaining current liabilities and satisfy our liquidity
requirements with cash on hand, future borrowings and cash flow
from operations. If future cash flows are insufficient to meet our
liquidity needs or capital requirements, we may reduce our mine
development and/or fund a portion of our expenditures through
issuance of debt or equity securities, the entry into debt
arrangements for from other sources, such as asset
sales.
We intend to use approximately
$0.88 million for working capital, including the public
company costs, closing costs, and general expenses of the
company.
We
do not intend to use any proceeds from this offering to satisfy
Series C preferred stock accrued dividend amounts, if any exist at
the time of this offering. The company has not yet accrued a
dividend for the Series C preferred stock as of the date of this
prospectus.
The
expected use of the net proceeds from this offering represents our
intentions based upon our current plans and business conditions,
which could change in the future as our plans and business
conditions evolve. We believe the net proceeds from this offering,
together with our current cash and investments, and projected cash
flow from future operations will be sufficient to fund our initial
phase of projected capital expenditures. However, the amounts and
timing of our actual expenditures depend on numerous factors,
including the progress of development of our properties, which
involves numerous uncertainties described under “Risk
Factors” included elsewhere in this prospectus. Accordingly,
we may choose to reallocate or otherwise use the proceeds from this
offering and will have broad discretion in the use of the net
proceeds from this offering.
44
CAPITALIZATION
The
following table summarizes our capitalization and cash and cash
equivalents as of September 30, 2018:
●
on
an actual basis; and
●
on
an as adjusted basis to reflect (i) the sale by us of units in this
offering based on a public offering price of $[ ] per unit,
assuming no exercise of the underwriters’ option to purchase
additional units, and (ii) the deduction of estimated underwriting
discounts and commissions and estimated offering expenses payable
by us.
The
nature and purpose of this capitalization table is to illustrate
the pro-forma adjustments from our September 30, 2018 quarterly
statement to the current date as of this filing and including the
results of this offering. You
should read this table together with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operation,” as well as our financial statements and related
notes and the other financial information, appearing elsewhere in
this prospectus.
|
As
of September 30, 2018 (unaudited)
|
||
|
Actual
|
Pro-Forma
Adjustment
|
Pro-forma
As-Adjusted
|
Cash & Cash
Equivalents (8)(9)(15)
|
$ 343,782
|
$ 11,231,000
|
$ 11,574,782
|
Fixed Assets and
Coal Properties (1)(10)
|
12,118,730
|
50,106,101
|
62,224,831
|
Cash, Cash
Equivalents, Fixed Assets and Coal Properties
|
12,462,512
|
61,477,101
|
73,939,613
|
|
|
|
|
Debt:
|
|
|
|
Current Debt &
Certain Payables (1)(2)(3)
|
21,543,180
|
8,222,000
|
29,765,180
|
Long Term
Debt
|
5,072,493
|
-
|
-
|
Reclamation
Liability (1)
|
22,565,375
|
234,240
|
22,799,615
|
Current Debt,
Certain Payables, Long Term Debt and Reclamation
Liability:
|
$ 49,181,048
|
$ 8,456,240
|
$ 57,637,288
|
|
|
|
|
Class A Common
stock, $0.0001 par value, 230,000,000 shares authorized, 1,192,044
shares issued and outstanding, actual and 23,138,700 issued and
outstanding, as adjusted
(1)(2)(3)(4)(5)(6)(8)(9)(10)(11)(12)(13)(14)
|
118
|
2,196
|
2,314
|
Series A Preferred
stock, $0.0001 par value, 4,817,792 shares authorized, 4,817,792
shares issued and outstanding, actual and no issued and
outstanding, as adjusted (5)
|
482
|
(482)
|
-
|
Series B Preferred
stock, $0.001 par value, 20,000,000 shares authorized, 850,000
shares issued and outstanding, actual and 0 issued and outstanding,
as adjusted (6)
|
850
|
(850)
|
-
|
Series C Preferred
stock, $0.0001 par value, 20,000,000 shares authorized, 0 shares
issued and outstanding, actual and 50,000 issued and outstanding,
as adjusted (7)
|
-
|
5
|
5
|
Additional paid in
capital
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)
|
19,816,567
|
53,257,274
|
73,073,841
|
Accumulated deficit
(4)(11)
|
(50,265,183)
|
(247,200)
|
(50,512,383)
|
Total
stockholders’ equity
|
(30,447,166)
|
53,010,943
|
22,563,777
|
Total
capitalization
|
18,733,882
|
61,467,183
|
80,201,065
|
(1)
Acquisition of assets creating Wyoming County Coal LLC subsidiary.
For discussion of the terms of the acquisitions see "Management's
Discussion and Analysis". Management is still gathering the
information needed to complete the allocation of the purchase price
to the assets and acquired liabilities assumed
(2)
Conversion of $225,000 unrelated debt into 37,500 shares of Class A
Common stock
(3)
Conversion of $36,000 of unrelated payables into 6,000 shares of
Class A Common stock
(4)
Pursuant to a consulting agreement, issued 10,000 shares of Class A
Common stock
(5) Conversion
of 4,817,792 shares of Series A Preferred stock into 16,059,307
shares of Class A Common stock
(6)
Conversion of 964,290 shares (including accrued dividends) of
Series B Preferred stock into 267,859 shares of Class A Common
stock
(7)
Sale of 50,000 shares of Series C Preferred stock
(8)
Sale of 1,000,000 shares of newly registered Class A Common stock
at $4.00 per share.
(9)
Sale of 20,200 previously registered Class A Common Shares for
cash
(10) Acquisition
of stock and membership interests of entities with non-operating
assets consisting of surface and mineral ownership and other
related agreements. The transaction is expected to close
simultaneous with this offering. Consideration is in the form of
2,000,000 Class A common shares as well as $500,000 cash and a
promissory note totaling $2,000,000 with a maturity of less than 1
year. The note is secured by a land contract on the acquired
property. Further described in the discussion of subsequent events
included in Note 8 to our consolidated interim financial statements
appearing on page F-12. Management is still gathering the
information needed to complete the allocation of the purchase price
to the assets and acquired liabilities assumed
(11)
Issuance of 9,000 of previously registered Class A Common
Shares
(13)
Issuance of 150,000 Class A Common Shares for
services.
(14)
Issuance of 500 Class A Common Shares for the settlement of $3,000
of trade payables.
(15)
Loan agreement with an unrelated customer for an amount up to
$6,500,000 of which $3,000,000 was advanced on December 31, 2018
and $2,500,000 was advanced on February 1, 2019. The remaining
balance of $1,500,000 remains available for draw on-demand by the
company. The proceeds of the loan are used for expansion of certain
mines at the company’s McCoy Elkhorn subsidiary and do not
replace any of the use of proceeds expected from this offering, and
the company is not required to repay any of this loan from the
proceeds of this offering. The promissory agreement carries
interest at 5% annual interest rate and payments of principal and
interest shall be repaid at a per-ton rate of coal sold to the
lender. The outstanding amount of the note has a maturity of
April 1, 2020. The note is secured by the assets of the
Company
45
INFORMATION WITH RESPECT TO THE REGISTRANT
Description of Business, Principal Products, Services
We are
a low-cost producer of primarily high-quality, metallurgical coal
in eastern Kentucky. We began our Company on October 2, 2013 and
changed our name from Natural Gas Fueling and Conversion Inc. to
NGFC Equities, Inc. on February 25, 2015, and then changed our name
from NGFC Equities, Inc. to American Resources Corporation on
February 17, 2017. On January 5, 2017, ARC executed a Share
Exchange Agreement between the Company and Quest Energy Inc., a
private company incorporated in the State of Indiana with offices
at 9002 Technology Lane, Fishers IN 46038, and due to the
fulfillment of various conditions precedent to closing of the
transaction, the control of the Company was transferred to the
Quest Energy shareholders on February 7, 2017 resulting in Quest
Energy becoming a wholly-owned subsidiary of ARC. Through its
wholly-owned subsidiary Quest Energy, which is an Indiana
corporation founded in June 2015, ARC was able to acquire coal
mining and coal processing operations, substantially all located in
eastern Kentucky. A majority of our domestic and international
target customer base includes blast furnace steel mills and coke
plants, as well as international metallurgical coal consumers,
domestic electricity generation utilities, and other industrial
customers. Pursuant to the
definitions in Paragraph (a) (4) of the Securities and Exchange
Commission’s Industry Guide 7, our company and its business
activities are deemed to be in the exploration stage until mineral
reserves are defined on our properties.
We
achieved initial commercial production of metallurgical coal in
September 2016 from our McCoy Elkhorn Mine #15 and from our McCoy
Elkhorn Carnegie 1 Mine in March 2017. In October 2017 we achieved
commercial production of thermal coal from our Deane Mining Access
Energy Mine and from our Deane Mining Razorblade Surface Mine in
May 2018. We believe that we will be able to take advantage of
recent increases in U.S. and global benchmark metallurgical and
thermal coal prices and intend to opportunistically increase the
amount of our projected production that is directed to the export
market to capture favorable differentials between domestic and
global benchmark prices. The Company commenced operations of two
out of four of its internally owned preparation plants in July of
2016 (Bevins #1 and Bevins #2 Prep Plants at McCoy Elkhorn), with a
third preparation plant commencing operation in October 2017 (Mill
Creek Prep Plant at Deane Mining).
Distribution Methods Of The Products and Services
Quest
Energy has six coal mining and processing operating subsidiaries:
McCoy Elkhorn Coal LLC (doing business as McCoy Elkhorn Coal
Company, “McCoy Elkhorn”), Knott County Coal LLC
(“Knott County Coal”), Deane Mining LLC (“Deane
Mining”), Wyoming County Coal LLC (“Wyoming County
Coal”), ERC Mining Indiana Corporation (“ERC”),
and Quest Processing LLC (“Quest Processing”), all of
which are located in eastern Kentucky and West Virginia within the
Central Appalachian coal basin, with the exception of ERC Mining
Indiana Corporation, which is located in southwestern Indiana in
the Illinois coal basin. Below is an organizational and ownership
chart of our Company.
46
The
coal deposits under control by the Company generally comprise of
metallurgical coal (used for steel making), pulverized coal
injections (“PCI”, used in the steel making process)
and high-BTU, low sulfur, low moisture bituminous coal used for a
variety of uses within several industries, including industrial
customers, specialty products and thermal coal used for electricity
generation.
McCoy Elkhorn Coal LLC
General:
Located
primarily within Pike County, Kentucky, McCoy Elkhorn is currently
comprised of two active mines (Mine #15 and the Carnegie 1 Mine),
one mine in “hot idle” status (the PointRock Mine), two
coal preparation facilities (Bevins #1 and Bevins #2), and other
mines in various stages of development or reclamation. McCoy
Elkhorn sells its coal to a variety of customers, both domestically
and internationally, primarily to the steel making industry as a
high-vol “B” coal or blended coal. The coal controlled
at McCoy Elkhorn (along with our other subsidiaries) has not been
classified as either “proven” or “probable”
as defined in the United States Securities and Exchange Commission
Industry Guide 7, and as a result, do not have any
“proven” or “probable” reserves under such
definition and are classified as an “Exploration Stage”
pursuant to Industry Guide 7.
Mines:
Mine
#15 is an underground mine in the Millard (also known as Glamorgan)
coal seam and located near Meta, Kentucky. Mine #15 is mined via
room-and-pillar mining methods using continuous miners, and the
coal is belted directly from the stockpile to McCoy Elkhorn’s
coal preparation facility. Mine #15 is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine. The coal from Mine #15 is
stockpiled at the mine site and belted directly to the
Company’s nearby coal preparation facilities. Production at
Mine #15 re-commenced under Quest Energy’s ownership in
September 2016. Mine #15 has the
estimated capacity to produce up to approximately 40,000 tons per
month of coal. The Company acquired Mine #15 as an idled mine, and
since acquisition, the primary work completed at Mine #15 by the
Company includes changing working sections within the underground
mine, air ventilation enhancements primarily through brattice work
and the use of overcasts and installing underground mining
infrastructure as the mine advances due to coal extraction. In
2017, Mine #15 produced approximately 247,234 tons and sold the coal at an average price
of $67.23 per ton. In 2016, Mine #15 started production and
produced approximately 62,941 tons and sold the coal at an average
price of $82.45 per ton. During 2017 and 2016, 100% and 100%,
respectively, of the coal extracted from Mine #15 was high-vol
“B” metallurgical coal quality, of which 71% and 100%,
respectively, was sold into the metallurgical market, with the
balance sold in the thermal market.
The
Carnegie 1 Mine is an underground mine in the Alma and Upper Alma
coal seams and located near Kimper, Kentucky. In 2011, coal
production from the Carnegie 1 Mine in the Alma coal seam commenced
and then subsequently the mine was idled. Production at the
Carnegie 1 Mine was reinitiated in early 2017 under Quest
Energy’s ownership and is currently being mined via
room-and-pillar mining methods utilizing a continuous miner. The
coal is stockpiled on-site and trucked approximately 7 miles to
McCoy Elkhorn’s preparation facilities. The Carnegie 1 Mine
is currently a “company run” mine, whereby the Company
manages the workforce at the mine and pays all expenses of the
mine. The Carnegie 1. Mine has the
estimated capacity to produce up to approximately 10,000 tons per
month of coal. The Company acquired the Carnegie Mine as an idled
mine, and since acquisition, the primary work completed at the
Carnegie Mine by the Company includes mine rehabilitation work in
preparation for production, changing working sections within the
underground mine, air ventilation enhancements primarily through
brattice work, and installing underground mining infrastructure as
the mine advances due to coal extraction. In 2017, the first year
of the mine’s production, the Carnegie 1 Mine produced
approximately 11,974 tons and sold the coal at an average price of
$59.78. During 2017, 100% of the coal extracted from the Carnegie
Mine was high-vol “B” metallurgical coal quality, of
which 51% was sold into the metallurgical market, with the balance
sold in the thermal market.
The
PointRock Mine is surface mine in a variety of coal seams,
primarily in the Pond Creek, the Lower Alma, the Upper Alma, and
Cedar Grove coal seams and located near Phelps, Kentucky. Coal has
been produced from the PointRock Mine in the past under different
operators. Quest Energy acquired the PointRock Mine in April 2018
and is currently performing reclamation work in advance of
re-starting production, which is expected in later 2018. PointRock
is anticipated to be mined via contour, auger, and highwall mining
techniques. The coal will be stockpiled on-site and trucked
approximately 23 miles to McCoy Elkhorn’s preparation
facilities. The PointRock Mine is anticipated to be operated as a
modified contractor mine, whereby McCoy Elkhorn provides certain
mining infrastructure and equipment for the operations and pays a
contractor a fixed per-ton fee for managing the workforce,
procuring other equipment and supplies, and maintaining the
equipment and infrastructure in proper working order. The PointRock Mine has the estimated capacity to
produce up to approximately 15,000 tons per month of coal and has
not yet started coal production under McCoy Elkhorn’s
ownership.
47
Processing & Transportation:
The
Bevins #1 Preparation Plant is an 800 ton-per hour coal preparation
facility located near Meta, Kentucky, across the road from Mine
#15. Bevins #1 has raw coal stockpile storage of approximately
25,000 tons and clean coal stockpile storage of 100,000 tons of
coal. The Bevins #1 facility has a fine coal circuit and a stoker
circuit that allows for enhance coal recovery and various coal
sizing options depending on the needs of the customer.
The Company
acquired the Bevins Preparation Plants as idled facilities, and
since acquisition, the primary work completed at the Bevins
Preparation Plants by the Company includes rehabilitating the
plants’ warehouse and replacing belt
lines.
The
Bevins #2 Preparation Plant is on the same permit site as Bevins #1
and is a 500 ton-per-hour processing facility with fine coal
recovery and a stoker circuit for coal sizing options. Bevins #2
has raw coal stockpile storage of 25,000 tons of coal and a clean
coal stockpile storage of 45,000 tons of coal. We are currently
utilizing less than 10% of the available processing capacity of
Bevins #1 and Bevins #2.
Both
Bevins #1 and Bevins #2 have a batch-weight loadout and rail spur
for loading coal into trains for rail shipments. The spur has
storage for 110 rail cars and is serviced by CSX Transportation and
is located on CSX’s Big Sandy, Coal Run Subdivision. Both
Bevins #1 and Bevins #2 have coarse refuse and slurry impoundments
called Big Groundhog and Lick Branch. While the Big Groundhog
impoundment is nearing the end of its useful life, the Lick Branch
impoundment has significant operating life and will be able to
provide for coarse refuse and slurry storage for the foreseeable
future at Bevins #1 and Bevins #2. Coarse refuse from Bevins #1 and
Bevins #2 is belted to the impoundments. Both Bevins #1 and Bevins
#2 are facilities owned by McCoy Elkhorn, subject to certain
restrictions present in the agreement between McCoy Elkhorn and the
surface land owner.
Both Bevins #1 and
Bevins #2, as well as the rail loadout, are operational and any
work required on any of the plants or loadouts would be routine
maintenance. The allocated cost of for this property at McCoy
Elkhorn Coal paid by the company is
$58,681.
Due to
additional coal processing storage capacity at Bevins #1 and Bevins
#2 Preparation Plants, McCoy Elkhorn processes, stores, and loads
coal for other regional coal producers for an agreed-to
fee.
Additional Permits:
In
addition to the above mines, McCoy Elkhorn holds 11 additional coal
mining permits that are idled operations or in various stages of
reclamation. For the idled coal mining operations, McCoy Elkhorn
will determine which coal mines to bring back into production, if
any, as the coal market changes, and there are currently no other
idled mines within McCoy Elkhorn that are slated to go into
production in the foreseeable future. Any idled mines that are
brought into production would require significant upfront capital
investment, and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the material properties at McCoy
Elkhorn:
48
Knott County Coal LLC
General:
Located
primarily within Knott County, Kentucky (but with additional idled
permits in Leslie County, Perry County, and Breathitt County,
Kentucky), Knott County Coal is comprised of one active mine (the
Wayland Surface Mine) and 22 idled mining permits (or permits in
reclamation), including the permits associated with the idled
Supreme Energy Preparation Plant. The idled mining permits are
either in various stages of planning, idle status or reclamation.
The idled mines at Knott County Coal are primarily underground
mines that utilize room-and-pillar mining. The coal controlled
at Knott County Coal (along with our other subsidiaries) has not
been classified as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7.
Mines:
The
Wayland Surface Mine is a surface waste-rock reprocessing mine in a
variety of coal seams (primarily the Upper Elkhorn 1 coal seam)
located near Wayland, Kentucky. The Wayland Surface Mine is mined
via area mining through the reprocessing of previously processed
coal, and the coal is trucked approximately 22 miles to the Mill
Creek Preparation Plant at Deane Mining, where it is processed and
sold. The Wayland Surface Mine is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine. During June 2018,
production at the Wayland Surface Mine commenced under Quest
Energy’s ownership. The associated permit was purchased
during May 2018. Since acquisition,
the primary work completed at the Wayland Surface Mine has been
removing overburden to access the coal. The Wayland Surface Mine has the estimated
capacity to produce up to approximately 15,000 tons per month of
coal and started production in mid-2018 with nominal coal extracted
and sold as thermal coal.
49
Other
potential customers of Knott County Coal include industrial
customers, specialty customers and utilities for electricity
generation, although no definitive sales have been identified
yet.
Processing & Transportation:
The
idled Supreme Energy Preparation Plant is a 400 ton-per-hour coal
preparation facility with a fine coal circuit located in Kite,
Kentucky. The Bates Branch rail loadout associated with the Supreme
Energy Preparation Plant is a batch-weigh rail loadout with 220
rail car storage capacity and serviced by CSX Transportation in
their Big Sandy rate district. The coarse refuse is trucked to the
Kings Branch impoundment, which is approximately one mile from the
Supreme Energy facility. The slurry from coal processing is piped
from the Supreme Energy facility to the Kings Branch
impoundment.
The
Supreme Energy Preparation Plant is owned by Knott County Coal,
subject to certain restrictions present in the agreement between
Knott County Coal and the surface land owner, Land Resources &
Royalties LLC.
The Company
acquired the Supreme Energy Preparation Plants as an idled
facility, and since acquisition, no work has been performed at the
facility other than minor maintenance. Both the Supreme Energy
Preparation Plant and the rail loadout are idled and would require
an undetermined amount of work and capital to bring them into
operation. The allocated cost of for the property at Knott County
Coal paid by the company is $200,236.
Additional Permits:
In
addition to the above mines, Knott County Coal holds 20 additional
coal mining permits that are in development, idled or in various
stages of reclamation. Any idled mines that are brought into
production would require significant upfront capital investment
and
there is no assurance of the feasibility of any such new
operations.
Below
is a map showing the location of the idled Supreme Energy Prep
Plant, Raven Prep Plant, Loadouts, and plant impoundments at Knott
County Coal:
50
Deane Mining LLC
General:
Located
within Letcher County and Knott County, Kentucky, Deane Mining LLC
is comprised of one active underground coal mine (the Access Energy
Mine), one active surface mine (Razorblade Surface) and one active
coal preparation facility called Mill Creek Preparation Plant,
along with 12 additional idled mining permits (or permits in
reclamation). The idled mining permits are either in various stages
of development, reclamation or being maintained as idled, pending
any changes to the coal market that may warrant re-starting
production. The coal controlled
at Deane Mining (along with our other subsidiaries) has not been
classified as either “proven” or “probable”
as defined in the United States Securities and Exchange Commission
Industry Guide 7, and as a result, do not have any
“proven” or “probable” reserves under such
definition and are classified as an “Exploration Stage”
pursuant to Industry Guide 7.
Mines:
Access
Energy is a deep mine in the Elkhorn 3 coal seam and located in
Deane, Kentucky. Access Energy is mined via room-and-pillar mining
methods using continuous miners, and the coal is belted directly
from the mine to the raw coal stockpile at the Mill Creek
Preparation Plant across the road from Access Energy. Similar to
McCoy Elkhorn’s Carnegie 1 Mine, Access Energy is currently
run as a modified contractor mine, whereby Deane Mining provides
the mining infrastructure and equipment for the operations and pays
the contractor a fixed per-ton fee for managing the workforce,
procuring the supplies, and maintaining the equipment and
infrastructure in proper working order. The Company
acquired Access Energy as an idled mine, and since acquisition, the
primary work completed at Access Energy by the Company includes
mine rehabilitation work in preparation for production, air
ventilation enhancements primarily through brattice work, and
installing underground mining infrastructure as the mine advances
due to coal extraction. Access Energy
has the estimated capacity to produce up to approximately 20,000
tons per month of coal. In 2017, the first year of the mine’s
production, Access Energy produced approximately 43,286 tons and
sold the coal at an average price of $58.67 per ton. 100% of the
coal sold from Access Energy in 2017 was sold as thermal
coal.
Razorblade Surface
is a surface mine currently mining the Hazard 4 and Hazard 4 Rider
coal seams and located in Deane, Kentucky. Razorblade Surface is
mined via contour, auger, and highwall mining methods, and the coal
is stockpiled on site where it trucked to the Mill Creek
Preparation Plant approximately one mile away for processing.
Razorblade Surface is run as both a contractor mine and as a
“company run” mine for coal extraction and began
extracting coal in spring of 2018. Coal produced from Razorblade
Surface will be trucked approximately one mile to the Mill Creek
Preparation Plant. The Company acquired the Razorblade Surface mine
as a new, undisturbed mine, and since acquisition, the primary work
completed at Razorblade Surface has been some initial engineering
work and removing overburden to access the coal. Razorblade Surface mine has the estimated capacity
to produce up to approximately 8,000 tons per month of coal and
started production in mid-2018 with nominal coal extracted and sold
as thermal coal.
The
coal production from Deane Mining LLC is currently sold a utility
located in southeast United States under a contract that expires
December 2018, along with coal sold in the spot market. Deane
Mining is in discussions with various customers to sell additional
production from Access Energy, Razorblade, and Wayland Surface
mines, combined with other potential regional coal production, as
pulverized coal injection (PCI) to steel mills, industrial coal,
and thermal coal to other utilities for electricity
generation.
51
Processing & Transportation:
The
Mill Creek Preparation Plant is an 800 ton-per-hour coal
preparation facility located in Deane, Kentucky. The associated
RapidLoader rail loadout is a batch-weight rail loadout with 110
car storage capacity and services by CSX Transportation in their
Big Sandy and Elkhorn rate districts. The Mill Creek Preparation
Plant is owned by Deane Mining, subject to certain restrictions
present in the agreement between Deane Mining and the surface land
owner, Land Resources & Royalties LLC. We
are currently utilizing less than 10% of the available processing
capacity of the Mill Creek Preparation Plant.
Both the Mill Creek
Preparation Plant and the rail loadout are operational, and any
work required on any of the plant or loadouts would be routine
maintenance. The allocated cost of for the property at Deane Mining
paid by the company is $2,655,505.
Additional Permits:
In
addition to the above mines and preparation facility, Deane Mining
holds 12 additional coal mining permits that are in development,
idled or in various stages of reclamation. Any idled mines that are
brought into production would require significant upfront capital
investment and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the material properties at Deane
Mining:
Wyoming County Coal LLC
General:
Located
within Wyoming County, West Virginia, Wyoming County Coal is
comprised of two idled underground mining permits and the three
permits associated with the idled Pioneer Preparation Plant, the
Hatcher rail loadout, and Simmons Fork Refuse Impoundment. The two
idled mining permits are undisturbed underground mines that are
anticipated to utilize room-and-pillar mining. The coal controlled
at Wyoming County Coal (along with our other subsidiaries) has not
been classified as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7.
Mines:
The
mining permits held by Wyoming County Coal are in various stages of
planning with no mines currently in production.
Potential customers
of Wyoming County Coal would include steel mills in the United
States or international marketplace although no definitive sales
have been identified yet.
Processing & Transportation:
The
idled Pioneer Preparation Plant is a 350 ton-per-hour coal
preparation facility located near Oceana, West Virginia. The
Hatcher rail loadout associated with the Pioneer Preparation Plant
is a rail loadout serviced by Norfolk Southern Corporation. The
refuse from the preparation facility is trucked to the Simmons Fork
Refuse Impoundment, which is approximately 1.0 mile from the
Pioneer Preparation facility. The preparation plant utilizes a belt
press technology which eliminates the need for pumping slurry into
a slurry pond for storage within an impoundment.
52
The
Company is in the initial planning phase of getting estimates on
the cost to upgrade the preparation facility to a modern 350 ton
per hour preparation facility, although no cost estimates have yet
been received. The Company is also in the initial planning phase of
getting estimates on the cost and timing of upgrading the rail load
out facility to a modern batch weight load out system, although no
cost estimates have yet been received.
The
Company acquired the Pioneer Preparation Plants as an idled
facility, and since acquisition, no work has been performed at the
facility. Both the Pioneer Preparation Plant and the rail loadout
are idled and would require an undetermined amount of work and
capital to bring them into operation, which is currently in the
initial phases of planning and no cost estimates have been
received. The allocated cost for the property at Wyoming County
Coal will pay by the Company is $22,926,101 of which $22,326,101
has been paid.
Permits:
Wyoming
County Coal holds two coal mining permits that are in the initial
planning phase and three permits associated with the idled Pioneer
Preparation Plant, the Hatcher rail loadout, and Simmons Fork
Refuse Impoundment. Any mine that is brought into production would
require significant upfront capital investment and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the location of the idled Pioneer Prep Plant,
Hatcher rail Loadout, and Simmons Fork Refuse Impoundment at
Wyoming County Coal:
Quest Processing LLC
Quest
Energy’s wholly-owned subsidiary, Quest Processing LLC,
manages the assets, operations, and personnel of the certain coal
processing and transportation facilities of Quest Energy’s
various other subsidiaries, namely the Supreme Energy Preparation
Facility (of Knott County Coal LLC), the Raven Preparation Facility
(of Knott County Coal LLC), and the Mill Creek Preparation Facility
(of Deane Mining LLC). Quest Processing LLC was the recipient of a
New Markets Tax Credit loan that allowed for the payment of certain
expenses of these preparation facilities. As part of that financing
transaction, Quest Energy loaned Quest MGMT LLC, an entity owned by
members of Quest Energy, Inc.’s management, $4,120,000 to
facilitate the New Markets Tax Credit loan, of which is all
outstanding as of December 31, 2017.
ERC Mining Indiana Corporation (the Gold Star Mine)
General:
Quest
Energy, through its wholly-owned subsidiary, ERC Mining Indiana
Corporation (“ERC”), has a management agreement with an
unrelated entity, LC Energy Operations LLC, to manage an
underground coal mine, clean coal processing facility and rail
loadout located in Greene County, Indiana (referred to as the
“Gold Star Mine”) for a monthly cash and per-ton fee.
As part of that management agreement, ERC manages the operations of
the Gold Star Mine, is the holder of the mining permit, provides
the reclamation bonding, is the owner of some of the equipment
located at the Gold Star Mine, and provides the employment for the
personnel located at the Gold Star Mine. LC Energy Operations LLC
owns the remaining equipment and infrastructure, is the lessee of
the mineral (and the owner of some of the mineral and surface) and
provides funding for the operations. Currently the coal mining
operations at the Gold Star Mine are idled. Any cash flow from the
operations of the Gold Star Mine for the foreseeable future will go
to LC Energy Operations LLC to satisfy prior debt advanced to the
Gold Star Mine.
Mine:
The
Gold Star Mine, which is currently the only coal mining operation
within ERC Mining Indiana Corporation (a wholly-owned subsidiary of
Quest Energy Inc.). The Gold Star Mine is an underground mine
located in the Indiana IV (aka Survant) coal seam, which is a low
sulfur coal relative to other coal mining operations in the region.
With a sulfur ranging from 1.0% to 1.5%, the coal has historically
been sold to local power generating facilities that lack more
advanced sulfur capture technologies, as well as to other regional
coal producers to blend their sulfur lower to sell their coal at a
premium.
Processing & Transportation:
Coal
extracted from the Gold Star Mine is belted directly to the
preparation facility on site. The coal can either be loaded to rail
or transported via truck. The rail spur at Gold Star is serviced by
the Indiana Rail Road Company and holds up to 116 rail
cars.
The
Gold Star Mine is currently idled and ARC management is pursuing
potential sales orders for the coal. Any re-initiation of coal
mining operations at the Gold Star Mine would require capital
investment.
53
In
addition to the current owned permits and controlled coal deposits
described within the above operating subsidiaries, ARC may, from
time to time, and frequently, acquire additional coal mining
permits or coal deposits, or dispose of coal mining permits or coal
deposits currently held by ARC, as management of the Company deems
appropriate.
Status of any publicly announced new products or
services
McCoy Elkhorn Coal LLC:
We are
currently producing at Mine #15 and Carnegie 1 Mine at McCoy
Elkhorn Coal and both of our preparation plants (Bevins 1 and
Bevins 2) are operational, as is the rail loadout facility. Our
PointRock surface mine is currently idled as we interview
contractors for future production. We continue to develop our
Carnegie 2 deep mine in the Alma coal seam and are working on other
permit acquisition and/or development activities in the area of
McCoy Elkhorn.
Knott County Coal LLC:
We are
currently producing at our Wayland Surface mine. The coal from this
mine processed and loaded to rail at the Mill Creek Preparation
Plant and RapidLoader loadout of Deane Mining LLC. We continue
permitting and development work on several other permits, including
the Topper mine.
While
Knott County Coal owns the Supreme Energy Preparation Plant and
Bates Branch rail loadout, those facilities are currently idled and
would require capital to rehabilitate to operational
condition.
Deane Mining LLC:
We are
currently producing at the Access Energy Mine, underground room and
pillar operations, the Razorblade Surface mine, and our Mill Creek
Preparation Plant is operational, as is the rail loadout facility.
We continue to analyze additional coal mines that could be brought
into production, assuming we achieve coal sales for such
operations.
Wyoming County Coal LLC:
We
currently do not have any operations at Wyoming County Coal LLC and
do not anticipate having operations for the foreseeable future.
While Wyoming County Coal LLC owns a preparation plan and rail
loadout those facilities are currently idled and would require
capital to rehabilitate to operational condition.
ERC Mining Indiana Corporation:
We have
completed the rehabilitation of the Gold Star underground mine at
ERC Mining Indiana Corp. and are working to obtain sales for this
mine, although no time frame for production is currently
anticipated. The coal will be belted directly to the on-site
processing facility for coal processing and then anticipated to be
loaded to rail or truck, depending on the customer’s
requirements. ERC Mining Indiana Corp. has a management agreement
with an unrelated entity, LC Energy Operations LLC to manage an
underground coal mine, clean coal processing facility and rail
loadout for a monthly cash and per-ton fee. As part of that
management agreement, LC Energy Operations LLC is required to
provide funding for the operations at the Gold Star mine, and any
cash flow from the operations of the Gold Star Mine for the
foreseeable future will go to LC Energy Operations LLC to satisfy
prior debt advanced to the Gold Star Mine.
Competitive Business Conditions And The Smaller Reporting
Company’s Competitive Position In The Industry And Methods Of
Competition
The
coal industry is intensely competitive. The most important factors
on which the Company competes are coal quality, delivered costs to
the customer and reliability of supply. Our principal domestic
competitors will include Alpha Natural Resources, Ramaco Resources,
Blackhawk Mining, Coronado Coal, Arch Coal, Contura Energy, Warrior
Met Coal, Alliance Resource Partners, and ERP Compliance Fuels.
Many of these coal producers may have greater financial resources
and larger coal deposit bases than we do. We also compete in
international markets directly with domestic companies and with
companies that produce coal from one or more foreign countries,
such as Australia, Colombia, Indonesia and South
Africa.
Coal
prices differ substantially by region and are impacted by many
factors including the overall economy, demand for steel, demand for
electricity, location, market, quality and type of coal, mine
operation costs and the cost of customer alternatives. The major
factors influencing our business are the global economy, the demand
for steel, and the amount of coal being consumed for electricity
generation.
54
Our
initial marketing strategy is to focus on U.S.- and
internationally-based blast furnace still mills and coke plants,
and other customers where our coal is in demand. Our current sales
are primarily conducted through the use of intermediaries and
brokers who have established relationships with our potential
end-customers, although we may develop and employ an in-house
marketing team in the future.
The
Company sells its coal to domestic and international customers,
some which blend the Company’s coal at east coast ports with
other qualities of coal for export. Coal sales currently come from
the Company’s McCoy Elkhorn’s Mine #15, McCoy
Elkhorn’s Carnegie Mine, and Deane Mining’s Access
Energy Mine. The Company may, at times, purchase coal from other
regional producers to sell on its contracts.
Coal
sales at the Company is primarily outsource to third party
intermediaries who act on the Company’s behalf to source
potential coal sales and contracts. The third-party intermediaries
have no ability to bind the Company to any contracts, and all coal
sales are approved by management of the Company.
Sources And Availability Of Raw Materials And The Names Of
Principal Suppliers
Supplies used in
our business include petroleum-based fuels, explosives, tires,
conveyance structure, roof support supplies, ventilation supplies,
lubricants and other raw materials as well as spare parts and other
consumables used in the mining process. We use third-party
suppliers for a significant portion of our equipment rebuilds and
repairs, drilling services and construction. We also may utilize
contract miners at our various operations. We believe adequate
substitute suppliers and contractors are available and we are not
dependent on any one supplier or contractor. We continually seek to
develop relationships with suppliers and contractors that focus on
reducing our costs while improving quality and service. Principal
suppliers for our business include Drill Steel, Banks Miller,
Mineral Labs, Jones Oil, and Maggard Sales & Service, among
other regional and national suppliers of the Company.
Dependence On One Or A Few Customers
As of
December 31, 2017, and 2016 63% and 78% of revenue and 99% and 97%
of outstanding accounts receivable came from three and two
customers, respectively. As of September 30, 2018, and 2017 76% and
100% of outstanding accounts receivable came from three and one
customers, respectively. As of September 30, 2018, and 2017 85% and
72% of revenue came from three and four customers, respectively.
Through our network of intermediaries, coal consolidators and end
users, interested potential customers outpace our ability to
fulfill potential orders. The Company’s desire is to expand
the customer base and those who have purchased our
product.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements Or Labor Contracts, Including Duration
We do
not have any registered trademarks or trade names for our products,
services or subsidiaries, and we do not believe that any trademark
or trade name is material to our business. However, the names of
the seams in which we have coal deposits, and attributes thereof,
are widely recognized in the coal markets. We are not a party to
any union or collective bargaining agreements.
Coal
mining and processing involves the extraction of coal (mineral) and
the use of surface property incidental to such extraction and
processing. All the material mineral and surface related to the
Company’s coal mining operations is leased from various
mineral and surface owners (the “Leases”). The
Company’s operating subsidiaries, collectively, are parties
to approximately 200 various Leases and other agreements required
for the Company’s coal mining and processing operations. The
Leases are with a variety of Lessors, from individuals to
professional land management firms such as the Elk Horn Coal
Company LLC and Alma Land Company. In some instances, the Company
has leases with Land Resources & Royalties LLC (LRR), a
professional leasing firm that is an entity wholly owned by Quest
MGMT LLC, an entity owned by members of Quest Energy Inc.’s
management.
55
Need For Any Government Approval Of Principal Products Or
Services
Prior
to conducting any mining activities, we first need approval from
various local and federal agencies. From our various acquisitions
in 2015 and 2016, we are the holder of 56 coal mining permits
issued by Kentucky Department of Natural Resources and one coal
mining permit issued by Indiana Department of Natural Resources.
The coal mining permits we hold are primarily located in eastern
Kentucky, in the counties of Pike, Knott, Letcher, Perry, Floyd,
Breathitt, and Leslie.
Effect Of Existing Or Probable Governmental Regulations On The
Business
Our
operations are subject to federal, state, and local laws and
regulations, such as those relating to matters such as permitting
and licensing, employee health and safety, reclamation and
restoration of mining properties, water discharges, air emissions,
plant and wildlife protection, the storage, treatment and disposal
of wastes, remediation of contaminants, surface subsidence from
underground mining and the effects of mining on surface water and
groundwater conditions. In addition, we may become subject to
additional costs for benefits for current and retired coal miners.
These environmental laws and regulations include, but are not
limited to, SMCRA with respect to coal mining activities and
ancillary activities; the CAA with respect to air emissions; the
CWA with respect to water discharges and the permitting of key
operational infrastructure such as impoundments; RCRA with respect
to solid and hazardous waste management and disposal, as well as
the regulation of underground storage tanks; the Comprehensive
Environmental Response, Compensation and Liability Act
(“CERCLA” or “Superfund”) with respect to
releases, threatened releases and remediation of hazardous
substances; the Endangered Species Act of 1973 (“ESA”)
with respect to threatened and endangered species; and the National
Environmental Policy Act of 1969 (“NEPA”) with respect
to the evaluation of environmental impacts related to any federally
issued permit or license. Many of these federal laws have state and
local counterparts which also impose requirements and potential
liability on our operations.
Compliance with
these laws and regulations may be costly and time-consuming and may
delay commencement, continuation or expansion of exploration or
production at our facilities. They may also depress demand for our
products by imposing more stringent requirements and limits on our
customers’ operations. Moreover, these laws are constantly
evolving and are becoming increasingly complex and stringent over
time. These laws and regulations, particularly new legislative or
administrative proposals, or judicial interpretations of existing
laws and regulations related to the protection of the environment
could result in substantially increased capital, operating and
compliance costs. Individually and collectively, these developments
could have a material adverse effect on our operations directly
and/or indirectly, through our customers’ inability to use
our products.
Certain
implementing regulations for these environmental laws are
undergoing revision or have not yet been promulgated. As a result,
we cannot always determine the ultimate impact of complying with
existing laws and regulations.
Due in
part to these extensive and comprehensive regulatory requirements
and ever- changing interpretations of these requirements,
violations of these laws can occur from time to time in our
industry and also in our operations. Expenditures relating to
environmental compliance are a major cost consideration for our
operations and safety and compliance is a significant factor in
mine design, both to meet regulatory requirements and to minimize
long-term environmental liabilities. To the extent that these
expenditures, as with all costs, are not ultimately reflected in
the prices of our products and services, operating results will be
reduced.
In
addition, our customers are subject to extensive regulation
regarding the environmental impacts associated with the combustion
or other use of coal, which may affect demand for our coal. Changes
in applicable laws or the adoption of new laws relating to energy
production, GHG emissions and other emissions from use of coal
products may cause coal to become a less attractive source of
energy, which may adversely affect our mining operations, the cost
structure and, the demand for coal. For example, if the emissions
rates or caps adopted under the CPP on GHGs are upheld or a tax on
carbon is imposed, the market share of coal as fuel used to
generate electricity would be expected to decrease.
We
believe that our competitors with operations in the United States
are confronted by substantially similar conditions. However,
foreign producers and operators may not be subject to similar
requirements and may not be required to undertake equivalent costs
in or be subject to similar limitations on their operations. As a
result, the costs and operating restrictions necessary for
compliance with United States environmental laws and regulations
may have an adverse effect on our competitive position with regard
to those foreign competitors. The specific impact on each
competitor may vary depending on a number of factors, including the
age and location of its operating facilities, applicable
legislation and its production methods.
56
Surface Mining Control and Reclamation Act
SMCRA
establishes operational, reclamation and closure standards for our
mining operations and requires that comprehensive environmental
protection and reclamation standards be met during the course of
and following completion of mining activities. SMCRA also
stipulates compliance with many other major environmental statutes,
including the CAA, the CWA, the ESA, RCRA and CERCLA. Permits for
all mining operations must be obtained from the United States
Office of Surface Mining (“OSM”) or, where state
regulatory agencies have adopted federally approved state programs
under SMCRA, the appropriate state regulatory authority. Our
operations are located in states which have achieved primary
jurisdiction for enforcement of SMCRA through approved state
programs.
SMCRA
imposes a complex set of requirements covering all facets of coal
mining. SMCRA regulations govern, among other things, coal
prospecting, mine plan development, topsoil or growth medium
removal and replacement, disposal of excess spoil and coal refuse,
protection of the hydrologic balance, and suitable post mining land
uses.
From
time to time, OSM will also update its mining regulations under
SMCRA. For example, in December 2016, OSM finalized a new version
of the Stream Protection Rule which became effective in January
2017. The rule would have impacted both surface and underground
mining operations, as it would have imposed stricter guidelines on
conducting coal mining operations, and would have required more
extensive baseline data on hydrology, geology and aquatic biology
in permit applications. The rule also required the collection of
increased pre-mining data about the site of the proposed mining
operation and adjacent areas to establish a baseline for evaluation
of the impacts of mining and the effectiveness of reclamation
associated with returning streams to pre-mining conditions.
However, in February 2017, both the House and Senate passed a
resolution disapproving of the Stream Protection Rule pursuant to
the Congressional Review Act (“CRA”). President Trump
signed the resolution on February 16, 2017 and, pursuant to the
CRA, the Stream Protection Rule “shall have no force or
effect” and cannot be replaced by a similar rule absent
future legislation. On November 17, 2017, OSMRE published a Federal
Register notice that removed the text of the Stream Protection Rule
from the Code of Federal Regulations. Whether Congress will enact
future legislation to require a new Stream Protection Rule remains
uncertain. The existing rules, or other new SMCRA regulations,
could result in additional material costs, obligations and
restrictions upon our operations.
Abandoned Mine Lands Fund
SMCRA
also imposes a reclamation fee on all current mining operations,
the proceeds of which are deposited in the AML Fund, which is used
to restore unreclaimed and abandoned mine lands mined before 1977.
The current per ton fee is $0.280 per ton for surface mined coal
and $0.120 per ton for underground mined coal. These fees are
currently scheduled to be in effect until September 30,
2021.
Mining Permits and Approvals
Numerous
governmental permits and approvals are required for mining
operations. We are required to prepare and present to federal,
state, and local authorities data detailing the effect or impact
that any proposed exploration project for production of coal may
have upon the environment, the public and our employees. The
permitting rules, and the interpretations of these rules, are
complex, change frequently, and may be subject to discretionary
interpretations by regulators. The requirements imposed by these
permits and associated regulations can be costly and time-consuming
and may delay commencement or continuation of exploration,
production or expansion at our operations. The governing laws,
rules, and regulations authorize substantial fines and penalties,
including revocation or suspension of mining permits under some
circumstances. Monetary sanctions and, in certain circumstances,
even criminal sanctions may be imposed for failure to comply with
these laws.
Applications for
permits and permit renewals at our mining operations are also
subject to public comment and potential legal challenges from third
parties seeking to prevent a permit from being issued, or to
overturn the applicable agency’s grant of the permit. Should
our permitting efforts become subject to such challenges, they
could delay commencement, continuation or expansion of our mining
operations. If such comments lead to a formal challenge to the
issuance of these permits, the permits may not be issued in a
timely fashion, may involve requirements which restrict our ability
to conduct our mining operations or to do so profitably, or may not
be issued at all. Any delays, denials, or revocation of these or
other similar permits we need to operate could reduce our
production and materially adversely impact our cash flow and
results of our operations.
57
In
order to obtain mining permits and approvals from state regulatory
authorities, mine operators must also submit a reclamation plan for
restoring the mined property to its prior condition, productive use
or other permitted condition. The conditions of certain permits
also require that we obtain surface owner consent if the surface
estate has been split from the mineral estate. This requires us to
negotiate with third parties for surface access that overlies coal
we acquired or intend to acquire. These negotiations can be costly
and time-consuming, lasting years in some instances, which can
create additional delays in the permitting process. If we cannot
successfully negotiate for land access, we could be denied a permit
to mine coal we already own.
Finally, we
typically submit necessary mining permit applications several
months, or even years, before we anticipate mining a new area.
However, we cannot control the pace at which the government issues
permits needed for new or ongoing operations. For example, the
process of obtaining CWA permits can be particularly time-consuming
and subject to delays and denials. The EPA also has the authority
to veto permits issued by the Corps under the CWA’s Section
404 program that prohibits the discharge of dredged or fill
material into regulated waters without a permit. Even after we
obtain the permits that we need to operate, many of the permits
must be periodically renewed, or may require modification. There is
some risk that not all existing permits will be approved for
renewal, or that existing permits will be approved for renewal only
upon terms that restrict or limit our operations in ways that may
be material.
Financial Assurance
Federal
and state laws require a mine operator to secure the performance of
its reclamation and lease obligations under SMCRA through the use
of surety bonds or other approved forms of financial security for
payment of certain long-term obligations, including mine closure or
reclamation costs. The changes in the market for coal used to
generate electricity in recent years have led to bankruptcies
involving prominent coal producers. Several of these companies
relied on self-bonding to guarantee their responsibilities under
the SMCRA permits including for reclamation. In response to these
bankruptcies, OSMRE issued a Policy Advisory in August 2016 to
state agencies that are authorized under the SMCRA to implement the
act in their states. Certain states, including Virginia, had
previously announced that it would no longer accept self-bonding to
secure reclamation obligations under the state mining laws. This
Policy Advisory is intended to discourage authorized states from
approving self-bonding arrangements and may lead to increased
demand for other forms of financial assurance, which may strain
capacity for those instruments and increase our costs of obtaining
and maintaining the amounts of financial assurance needed for our
operations. In addition, OSMRE announced in August 2016 that it
would initiate a rulemaking under SMCRA to revise the requirements
for self-bonding. Individually and collectively, these revised
various financial assurance requirements may increase the amount of
financial assurance needed and limit the types of acceptable
instruments, straining the capacity of the surety markets to meet
demand. This may delay the timing for and increase the costs of
obtaining the required financial assurance.
We may
use surety bonds, trusts and letters of credit to provide financial
assurance for certain transactions and business activities. Federal
and state laws require us to obtain surety bonds to secure payment
of certain long-term obligations including mine closure or
reclamation costs and other miscellaneous obligations. The bonds
are renewable on a yearly basis. Surety bond rates have increased
in recent years and the market terms of such bonds have generally
become less favorable. Sureties typically require coal producers to
post collateral, often having a value equal to 40% or more of the
face amount of the bond. As a result, we may be required to provide
collateral, letters of credit or other assurances of payment in
order to obtain the necessary types and amounts of financial
assurance. Under our surety bonding program, we are not currently
required to post any letters of credit or other collateral to
secure the surety bonds; obtaining letters of credit in lieu of
surety bonds could result in a significant cost increase. Moreover,
the need to obtain letters of credit may also reduce amounts that
we can borrow under any senior secured credit facility for other
purposes. If, in the future, we are unable to secure surety bonds
for these obligations, and are forced to secure letters of credit
indefinitely or obtain some other form of financial assurance at
too high of a cost, our profitability may be negatively
affected.
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Although our
current bonding capacity approved by our surety, Lexon Insurance
Company, is substantial and enough to cover our current and
anticipated future bonding needs, this amount may increase or
decrease over time. As of December 31, 2018 and September 30, 2018,
we had outstanding surety bonds at all of our mining operations
totaling approximately $26.66 million,
respectively. As of December 31, 2017, we had outstanding surety
bonds at all of our mining operations totaling approximately $24.80
million. While we anticipate reducing the outstanding surety
bonds through continued reclamation of many of our permits, that
number may increase should we acquire additional mining permits,
acquire additional mining operations, expand our mining operations
that result in additional reclamation bonds, or if any of our sites
encounters additional environmental liability that may require
additional reclamation bonding. While we intend to maintain a
credit profile that eliminates the need to post collateral for our
surety bonds, our surety has the right to demand additional
collateral at its discretion.
Mine Safety and Health
The
Mine Act and the MINER Act, and regulations issued under these
federal statutes, impose stringent health and safety standards on
mining operations. The regulations that have been adopted under the
Mine Act and the MINER Act are comprehensive and affect numerous
aspects of mining operations, including training of mine personnel,
mining procedures, roof control, ventilation, blasting, use and
maintenance of mining equipment, dust and noise control,
communications, emergency response procedures, and other matters.
MSHA regularly inspects mines to ensure compliance with regulations
promulgated under the Mine Act and MINER Act.
From
time to time MSHA will also publish new regulations imposing
additional requirements and costs on our operations. For example,
MSHA implemented a rule in August 2014 to lower miners’
exposure to respirable coal mine dust. The rule requires shift dust
to be monitored and reduces the respirable dust standard for
designated occupants and miners. MSHA also finalized a new rule in
January 2015 on proximity detection systems for continuous mining
machines, which requires underground coal mine operators to equip
continuous mining machines, except full-face continuous mining
machines, with proximity detection systems.
Kentucky, West
Virginia, and Virginia all have similar programs for mine safety
and health regulation and enforcement. The various requirements
mandated by federal and state statutes, rules, and regulations
place restrictions on our methods of operation and result in fees
and civil penalties for violations of such requirements or criminal
liability for the knowing violation of such standards,
significantly impacting operating costs and productivity. The
regulations enacted under the Mine Act and MINER Act as well as
under similar state acts are routinely expanded or made more
stringent, raising compliance costs and increasing potential
liability. Our compliance with current or future mine health and
safety regulations could increase our mining costs. At this time,
it is not possible to predict the full effect that new or proposed
statutes, regulations and policies will have on our operating
costs, but any expansion of existing regulations, or making such
regulations more stringent may have a negative impact on the
profitability of our operations. If we were to be found in
violation of mine safety and health regulations, we could face
penalties or restrictions that may materially and adversely impact
our operations, financial results and liquidity.
In
addition, government inspectors have the authority to issue orders
to shut down our operations based on safety considerations under
certain circumstances, such as imminent dangers, accidents,
failures to abate violations, and unwarrantable failures to comply
with mandatory safety standards. If an incident were to occur at
one of our operations, it could be shut down for an extended period
of time, and our reputation with prospective customers could be
materially damaged. Moreover, if one of our operations is issued a
notice of pattern of violations, then MSHA can issue an order
withdrawing the miners from the area affected by any enforcement
action during each subsequent significant and substantial
(“S&S”) citation until the S&S citation or
order is abated. In 2013 MSHA modified the pattern of violations
regulation, allowing, among other things, the use of non-final
citations and orders in determining whether a pattern of violations
exists at a mine.
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Workers’ Compensation and Black Lung
We are
insured for workers’ compensation benefits for work related
injuries that occur within our United States operations. We retain
exposure for the first $10,000 per accident for all of our
subsidiaries and are insured above the deductible for statutory
limits. Workers’ compensation liabilities, including those
related to claims incurred but not reported, are recorded
principally using annual valuations based on discounted future
expected payments using historical data of the operating subsidiary
or combined insurance industry data when historical data is
limited. State workers’ compensation acts typically provide
for an exception to an employer’s immunity from civil
lawsuits for workplace injuries in the case of intentional torts.
However, Kentucky’s workers’ compensation act provides
a much broader exception to workers’ compensation immunity.
The exception allows an injured employee to recover against his or
her employer where he or she can show damages caused by an unsafe
working condition of which the employer was aware that was a
violation of a statute, regulation, rule or consensus industry
standard. These types of lawsuits are not uncommon and could have a
significant impact on our operating costs.
The
Patient Protection and Affordable Care Act includes significant
changes to the federal black lung program including an automatic
survivor benefit paid upon the death of a miner with an awarded
black lung claim and the establishment of a rebuttable presumption
with regard to pneumoconiosis among miners with 15 or more years of
coal mine employment that are totally disabled by a respiratory
condition. These changes could have a material impact on our costs
expended in association with the federal black lung program. In
addition to possibly incurring liability under federal statutes, we
may also be liable under state laws for black lung
claims.
Clean Air Act
The CAA
and comparable state laws that regulate air emissions affect coal
mining operations both directly and indirectly. Direct impacts on
coal mining and processing operations include CAA permitting
requirements and emission control requirements relating to air
pollutants, including particulate matter such as fugitive dust. The
CAA indirectly affects coal mining operations by extensively
regulating the emissions of particulate matter, sulfur dioxide,
nitrogen oxides, mercury and other compounds emitted by coal-fired
power plants. In addition to the GHG issues discussed below, the
air emissions programs that may materially and adversely affect our
operations, financial results, liquidity, and demand for our coal,
directly or indirectly, include, but are not limited to, the
following:
●
Clean Air Interstate Rule and Cross-State Air
Pollution Rule. the Clean Air Interstate Rule
(“CAIR”) calls for power plants in 28 states and the
District of Columbia to reduce emission levels of sulfur dioxide
and nitrogen oxide pursuant to a cap-and-trade program similar to
the system now in effect for acid rain. In June 2011, the EPA
finalized the Cross-State Air Pollution Rule (“CSAPR”),
a replacement rule to CAIR, which requires 28 states in the Midwest
and eastern seaboard of the U.S. to reduce power plant emissions
that cross state lines and contribute to ozone and/or fine particle
pollution in other states. Following litigation over the rule, the
EPA issued an interim final rule reconciling the CSAPR rule with a
court order, which calls for Phase 1 implementation of CSAPR in
2015 and Phase 2 implementation in 2017. In September 2016, the EPA
finalized an update to CSAPR for the 2008 ozone NAAQS by issuing
the final CSAPR Update. Beginning in May 2017, this rule will
reduce summertime (May—September) nitrogen oxide emissions
from power plants in 22 states in the eastern United States. For
states to meet their requirements under CSAPR, a number of
coal-fired electric generating units will likely need to be
retired, rather than retrofitted with the necessary emission
control technologies, reducing demand for thermal coal. However,
the practical impact of CSAPR may be limited because utilities in
the U.S. have continued to take steps to comply with CAIR, which
requires similar power plant emissions reductions, and because
utilities are preparing to comply with the Mercury and Air Toxics
Standards (“MATS”) regulations, which require
overlapping power plant emissions reductions.
●
Acid Rain. Title IV of the CAA requires
reductions of sulfur dioxide emissions by electric utilities and
applies to all coal-fired power plants generating greater than 25
Megawatts of power. Affected power plants have sought to reduce
sulfur dioxide emissions by switching to lower sulfur fuels,
installing pollution control devices, reducing electricity
generating levels or purchasing or trading sulfur dioxide emission
allowances. These reductions could impact our customers in the
electric generation industry. These requirements are not supplanted
by CSAPR.
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●
NAAQS for Criterion Pollutants. The CAA
requires the EPA to set standards, referred to as NAAQS, for six
common air pollutants: carbon monoxide, nitrogen dioxide, lead,
ozone, particulate matter and sulfur dioxide. Areas that are not in
compliance (referred to as non-attainment areas) with these
standards must take steps to reduce emissions levels. The EPA has
adopted more stringent NAAQS for nitrogen oxide, sulfur dioxide,
particulate matter and ozone. As a result, some states will be
required to amend their existing individual state implementation
plans (“SIPs”) to achieve compliance with the new air
quality standards. Other states will be required to develop new
plans for areas that were previously in “attainment,”
but do not meet the revised standards. For example, in October
2015, the EPA finalized the NAAQS for ozone pollution and reduced
the limit to parts per billion (ppb) from the previous 75 ppb
standard. Under the revised ozone NAAQS, significant additional
emissions control expenditures may be required at coal-fired power
plants. The final rules and new standards may impose additional
emissions control requirements on our customers in the electric
generation, steelmaking, and coke industries. Because coal mining
operations emit particulate matter and sulfur dioxide, our mining
operations could be affected when the new standards are implemented
by the states.
●
Nitrogen Oxide SIP Call. The nitrogen
oxide SIP Call program was established by the EPA in October 1998
to reduce the transport of nitrogen oxide and ozone on prevailing
winds from the Midwest and South to states in the Northeast, which
alleged that they could not meet federal air quality standards
because of migrating pollution. The program is designed to reduce
nitrogen oxide emissions by one million tons per year in 22 eastern
states and the District of Columbia. As a result of the program,
many power plants have been or will be required to install
additional emission control measures, such as selective catalytic
reduction devices. Installation of additional emission control
measures will make it costlier to operate coal-fired power plants,
potentially making coal a less attractive fuel.
●
Mercury and Hazardous Air Pollutants.
In February 2012, the EPA formally adopted the MATS rule to
regulate emissions of mercury and other metals, fine particulates,
and acid gases such as hydrogen chloride from coal- and oil-fired
power plants. Following a legal challenge to MATS, the EPA issued a
new determination in April 2016 that it is appropriate and
necessary to regulate these pollutants from power plants. Like
CSAPR, MATS and other similar future regulations could accelerate
the retirement of a significant number of coal-fired power plants.
Such retirements would likely adversely impact our
business.
Global Climate Change
Climate
change continues to attract considerable public and scientific
attention. There is widespread concern about the contributions of
human activity to such changes, especially through the emission of
GHGs. There are three primary sources of GHGs associated with the
coal industry. First, the end use of our coal by our customers in
electricity generation, coke plants, and steelmaking is a source of
GHGs. Second, combustion of fuel by equipment used in coal
production and to transport our coal to our customers is a source
of GHGs. Third, coal mining itself can release methane, which is
considered to be a more potent GHG than CO2, directly into the
atmosphere. These emissions from coal consumption, transportation
and production are subject to pending and proposed regulation as
part of initiatives to address global climate change.
As a
result, numerous proposals have been made and are likely to
continue to be made at the international, national, regional and
state levels of government to monitor and limit emissions of GHGs.
Collectively, these initiatives could result in higher electric
costs to our customers or lower the demand for coal used in
electric generation, which could in turn adversely impact our
business.
At
present, we are principally focused on metallurgical coal
production, which is not used in connection with the production of
power generation. However, we may seek to sell greater amounts of
our coal into the power-generation market in the future. The market
for our coal may be adversely impacted if comprehensive legislation
or regulations focusing on GHG emission reductions are adopted, or
if our customers are unable to obtain financing for their
operations. At the international level, the United Nations
Framework Convention on Climate Change released an international
climate agreement in December 2015. The agreement has been ratified
by more than 70 countries, and entered into force in November 2016.
Although this agreement does not create any binding obligations for
nations to limit their GHG emissions, it does include pledges to
voluntarily limit or reduce future emissions. In addition, in
November 2014, President Obama announced that the United States
would seek to cut net GHG emissions 26-28 percent below 2005 levels
by 2025 in return for China’s commitment to seek to peak
emissions around 2030, with concurrent increases in renewable
energy.
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At the
federal level, no comprehensive climate change legislation has been
implemented to date. The EPA has, however, has determined that
emissions of GHGs present an endangerment to public health and the
environment, because emissions of GHGs are, according to the EPA,
contributing to the warming of the earth’s atmosphere and
other climatic changes. Based on these findings, the EPA has begun
adopting and implementing regulations to restrict emissions of GHGs
under existing provisions of the CAA. For example, in August 2015,
EPA finalized the CPP to cut carbon emissions from existing power
plants. The CPP creates individualized emission guidelines for
states to follow and requires each state to develop an
implementation plan to meet the individual state’s specific
targets for reducing GHG emissions. The EPA also proposed a federal
compliance plan to implement the CPP in the event that a state does
not submit an approvable plan to the EPA. In February 2016, the
U.S. Supreme Court granted a stay of the implementation of the CPP.
This stay suspends the rule and will remain in effect until the
completion of the appeals process. The Supreme Court’s stay
only applies to EPA’s regulations for CO2 emissions from
existing power plants and will not affect EPA’s standards for
new power plants. If the CPP is ultimately upheld and depending on
how it is implemented by the states, it could have an adverse
impact on the demand for coal for electric generation.
At the
state level, several states have already adopted measures requiring
GHG emissions to be reduced within state boundaries, including
cap-and-trade programs and the imposition of renewable energy
portfolio standards. Various states and regions have also adopted
GHG initiatives and certain governmental bodies, have imposed, or
are considering the imposition of, fees or taxes based on the
emission of GHGs by certain facilities. A number of states have
also enacted legislative mandates requiring electricity suppliers
to use renewable energy sources to generate a certain percentage of
power.
The
uncertainty over the outcome of litigation challenging the CPP and
the extent of future regulation of GHG emissions may inhibit
utilities from investing in the building of new coal-fired plants
to replace older plants or investing in the upgrading of existing
coal-fired plants. Any reduction in the amount of coal consumed by
electric power generators as a result of actual or potential
regulation of GHG emissions could decrease demand for our coal,
thereby reducing our revenues and materially and adversely
affecting our business and results of operations. We or prospective
customers may also have to invest in CO2 capture and storage
technologies in order to burn coal and comply with future GHG
emission standards.
Finally, there have
been attempts to encourage greater regulation of coalbed methane
because methane has a greater GHG effect than CO2. Methane from
coal mines can give rise to safety concerns and may require that
various measures be taken to mitigate those risks. If new laws or
regulations were introduced to reduce coalbed methane emissions,
those rules could adversely affect our costs of operations by
requiring installation of air pollution controls, higher taxes, or
costs incurred to purchase credits that permit us to continue
operations.
Clean Water Act
The CWA
and corresponding state laws and regulations affect coal mining
operations by restricting the discharge of pollutants, including
dredged or fill materials, into waters of the United States.
Likewise, permits are required under the CWA to construct
impoundments, fills or other structure in areas that are designated
as waters of the United States. The CWA provisions and associated
state and federal regulations are complex and subject to
amendments, legal challenges and changes in implementation. Recent
court decisions, regulatory actions and proposed legislation have
created uncertainty over CWA jurisdiction and permitting
requirements.
Prior
to discharging any pollutants into waters of the United States,
coal mining companies must obtain a National Pollutant Discharge
Elimination System (“NPDES”) permit from the
appropriate state or federal permitting authority. NPDES permits
include effluent limitations for discharged pollutants and other
terms and conditions, including required monitoring of discharges.
Failure to comply with the CWA or NPDES permits can lead to the
imposition of significant penalties, litigation, compliance costs
and delays in coal production. Changes and proposed changes in
state and federally recommended water quality standards may result
in the issuance or modification of permits with new or more
stringent effluent limits or terms and conditions. For instance,
waters.
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For
instance, waters that states have designated as impaired (i.e., as
not meeting present water quality standards) are subject to Total
Maximum Daily Load regulations, which may lead to the adoption of
more stringent discharge standards for our coal mines and could
require more costly treatment. Likewise, the water quality of
certain receiving streams requires an anti-degradation review
before approving any discharge permits. TMDL regulations and
anti-degradation policies may increase the cost, time and
difficulty associated with obtaining and complying with NPDES
permits.
In
addition, in certain circumstances private citizens may challenge
alleged violations of NPDES permit limits in court. While it is
difficult to predict the outcome of any potential or future suits,
such litigation could result in increased compliance costs
following the completion of mining at our operations.
Finally, in June
2015, the EPA and the Corps published a new definition of
“waters of the United States” (“WOTUS”)
that became effective on August 28, 2015. Many groups have filed
suit to challenge the validity of this rule. The U.S. Court of
Appeals for the Sixth Circuit stayed the rule nationwide pending
the outcome of this litigation. On January 22, 2018, the Supreme
Court held that the courts of appeals do not have original
jurisdiction to review challenges to the 2015 Rule. With this final
rule, the agencies intend to maintain the status quo by adding an
applicability date to the 2015 Rule and thus providing continuity
and regulatory certainty for regulated entities, the States and
Tribes, and the public while the agencies continue to consider
possible revisions to the 2015 Rule. In light of this holding, in
February 2018 the agencies published a final rule adding an
applicability date to the 2015 Rule of February 6, 2020. We
anticipate that the WOTUS rules, if upheld in litigation, will
expand areas requiring NPDES or Corps Section 404 permits. If so,
the CWA permits we need may not be issued, may not be issued in a
timely fashion, or may be issued with new requirements which
restrict our ability to conduct our mining operations or to do so
profitably.
Resource Conservation and Recovery Act
RCRA
and corresponding state laws establish standards for the management
of solid and hazardous wastes generated at our various facilities.
Besides affecting current waste disposal practices, RCRA also
addresses the environmental effects of certain past hazardous waste
treatment, storage and disposal practices. In addition, RCRA
requires certain of our facilities to evaluate and respond to any
past release, or threatened release, of a hazardous substance that
may pose a risk to human health or the environment.
RCRA
may affect coal mining operations by establishing requirements for
the proper management, handling, transportation and disposal of
solid and hazardous wastes. Currently, certain coal mine wastes,
such as earth and rock covering a mineral deposit (commonly
referred to as overburden) and coal cleaning wastes, are exempted
from hazardous waste management under RCRA. Any change or
reclassification of this exemption could significantly increase our
coal mining costs.
EPA
began regulating coal ash as a solid waste under Subtitle D of RCRA
in 2015. The EPA’s rule requires closure of sites that fail
to meet prescribed engineering standards, regular inspections of
impoundments, and immediate remediation and closure of unlined
ponds that are polluting ground water. The rule also establishes
limits for the location of new sites. However, the rule does not
regulate closed coal ash impoundments unless they are located at
active power plants. These requirements, as well as any future
changes in the management of coal combustion residues, could
increase our customers’ operating costs and potentially
reduce their ability or need to purchase coal. In addition,
contamination caused by the past disposal of coal combustion
residues, including coal ash, could lead to material liability for
our customers under RCRA or other federal or state laws and
potentially further reduce the demand for coal.
Comprehensive Environmental Response, Compensation and Liability
Act
CERCLA
and similar state laws affect coal mining operations by, among
other things, imposing cleanup requirements for threatened or
actual releases of hazardous substances into the environment. Under
CERCLA and similar state laws, joint and several liabilities may be
imposed on hazardous substance generators, site owners,
transporters, lessees and others regardless of fault or the
legality of the original disposal activity. Although the EPA
excludes most wastes generated by coal mining and processing
operations from the primary hazardous waste laws, such wastes can,
in certain circumstances, constitute hazardous substances for the
purposes of CERCLA. In addition, the disposal, release or spilling
of some products used by coal companies in operations, such as
chemicals, could trigger the liability provisions of CERCLA or
similar state laws. Thus, we may be subject to liability under
CERCLA and similar state laws for coal mines that we currently own,
lease or operate or that we or our predecessors have previously
owned, leased or operated, and sites to which we or our
predecessors sent hazardous substances. These liabilities could be
significant and materially and adversely impact our financial
results and liquidity.
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Endangered Species and Bald and Golden Eagle Protection
Acts
The ESA
and similar state legislation protect species designated as
threatened, endangered or other special status. The U.S. Fish and
Wildlife Service (the “USFWS”) works closely with the
OSM and state regulatory agencies to ensure that species subject to
the ESA are protected from mining-related impacts. Several species
indigenous to the areas in which we operate area protected under
the ESA. Other species in the vicinity of our operations may have
their listing status reviewed in the future and could also become
protected under the ESA. In addition, the USFWS has identified bald
eagle habitat in some of the counties where we operate. The Bald
and Golden Eagle Protection Act prohibits taking certain actions
that would harm bald or golden eagles without obtaining a permit
from the USFWS. Compliance with the requirements of the ESA and the
Bald and Golden Eagle Protection Act could have the effect of
prohibiting or delaying us from obtaining mining permits. These
requirements may also include restrictions on timber harvesting,
road building and other mining or agricultural activities in areas
containing the affected species or their habitats.
Use of Explosives
Our
surface mining operations are subject to numerous regulations
relating to blasting activities. Due to these regulations, we will
incur costs to design and implement blast schedules and to conduct
pre-blast surveys and blast monitoring, either directly or through
the costs of a contractor we may employ. In addition, the storage
of explosives is subject to various regulatory requirements. For
example, pursuant to a rule issued by the Department of Homeland
Security in 2007, facilities in possession of chemicals of interest
(including ammonium nitrate at certain threshold levels) are
required to complete a screening review. Our mines are low risk,
Tier 4 facilities which are not subject to additional security
plans. In 2008, the Department of Homeland Security proposed
regulation of ammonium nitrate under the ammonium nitrate security
rule. Additional requirements may include tracking and
verifications for each transaction related to ammonium nitrate,
though a final rule has yet to be issued. Finally, in December
2014, the OSM announced its decision to pursue a rulemaking to
revise regulations under SMCRA which will address all blast
generated fumes and toxic gases. OSM has not yet issued a proposed
rule to address these blasts. The outcome of these rulemakings
could materially adversely impact our cost or ability to conduct
our mining operations.
National Environmental Policy Act
NEPA
requires federal agencies, including the Department of Interior, to
evaluate major agency actions that have the potential to
significantly impact the environment, such as issuing a permit or
other approval. In the course of such evaluations, an agency will
typically prepare an environmental assessment to determine the
potential direct, indirect and cumulative impacts of a proposed
project. Where the activities in question have significant impacts
to the environment, the agency must prepare an environmental impact
statement. Compliance with NEPA can be time-consuming and may
result in the imposition of mitigation measures that could affect
the amount of coal that we are able to produce from mines on
federal lands and may require public comment. Furthermore, whether
agencies have complied with NEPA is subject to protest, appeal or
litigation, which can delay or halt projects. The NEPA review
process, including potential disputes regarding the level of
evaluation required for climate change impacts, may extend the time
and/or increase the costs and difficulty of obtaining necessary
governmental approvals, and may lead to litigation regarding the
adequacy of the NEPA analysis, which could delay or potentially
preclude the issuance of approvals or grant of leases.
The
Council on Environmental Quality recently released guidance
discussing how federal agencies should consider the effects of GHG
emissions and climate change in their NEPA evaluations. The
guidance encourages agencies to provide more detailed discussion of
the direct, indirect, and cumulative impacts of a proposed
action’s reasonably foreseeable emissions and effects. This
guidance could create additional delays and costs in the NEPA
review process or in our operations, or even an inability to obtain
necessary federal approvals for our operations due to the increased
risk of legal challenges from environmental groups seeking
additional analysis of climate impacts.
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Other Environmental Laws
We are
required to comply with numerous other federal, state, and local
environmental laws and regulations in addition to those previously
discussed. These additional laws include but are not limited to the
Safe Drinking Water Act, the Toxic Substances Control Act, and the
Emergency Planning and Community Right-to-Know Act. Each of these
laws can impact permitting or planned operations and can result in
additional costs or operational delays.
Estimate Of The Amount Of Money Spent During Each Of The Last Two
Fiscal Years On Research And Development
The
Company spent a de-minimus amount on research and development
during its last two fiscal years.
Costs and Effects Of Compliance With Environmental
Laws
As of
December 31, 2017, and 2016, the cost of compliance with
environmental laws amounted to $190,940 and $9,806, respectively.
This amount represents the costs of the company associated with
fines incurred from various regulations regarding environmental and
safety compliance; please see elsewhere in this prospectus for
additional detail regarding other reclamation and remediation
costs,
including the discussion surrounding our Asset Retirement
Obligations (ARO) in Note 1 of the Notes to Consolidated Financial
Statements located in the Index to Financial
Statements.
DESCRIPTION OF PROPERTY
Our
principal offices are located at 9002 Technology Lane, Fishers,
Indiana 46038. We pay $2,500 per month in rent for the office space
and the rental lease expires in December 2018. We also rent office
space from an affiliated entity, LRR, at 11000 Highway 7 South,
Kite, Kentucky 41828 and pay $500 per month rent and the rental
lease expires October 30, 2021.
The
Company also utilizes various office spaces on-site at its active
coal mining operations and coal preparation plant locations in
eastern Kentucky, with such rental payments covered under any
surface lease contracts with any of the surface land owners. At
McCoy Elkhorn Coal, located near Kimper, Kentucky, the Company owns
two coal preparation facilities, a train loadout, and two active
mines (Mine #15 and the Carnegie 1 Mine). At Knott County Coal,
located in Kite, Kentucky, the Company owns one coal preparation
facility, a train loadout, and one active mine (Wayland Surface).
At Deane Mining, located in Deane, Kentucky, the Company owns one
coal preparation facility, a train loadout, and two active mines
(Access Energy and Razorblade Surface). At Wyoming County Coal,
located in Oceana, West Virginia, the Company owns one coal
preparation facility and a train loadout. At ERC, located near
Jasonville, Indiana, the Company manages a coal processing
facility, train loadout, and one underground mine (the Gold Star
Mine). We lease the mineral and surface at all our key locations,
with lease terms at our currently-operating, key properties
typically expiring upon exhaustion of the mineral. Across our key
properties, our mineral royalty rates payable to the mineral owner
range from 5.0% to 11.0% of the gross sales price of our coal. All
permits required to operate our material properties have been
obtained. The source of power for all our key properties is
Kentucky Power, and the source of water for all our key properties
is either the local municipality or our existing water withdrawal
permits that allow us to pull water from nearby streams. See “Distribution Methods Of The Products and
Services” starting on page 46 for additional
information and description of each mine. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”
starting on page 63 for additional discussion around the capacity
and utilization rate of our material properties and the work
completed on our material properties.
We have
not classified, and as a result, do not have any
“proven” or “probable” reserves as defined
in United States Securities and Exchange Commission Industry Guide
7. As a result, we are considered an exploration stage company
pursuant to Paragraph (a) (4) of Industry Guide 7.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
Currently we are
trading on the OTC Pink
markets under the symbol “AREC” and we have applied for
a listing on the NASDAQ Global Select Market under the symbol
“AREC”. There is presently very limited liquidity for
our shares of Class A Common Stock and we can provide no assurance
that our shares of Class A Common Stock will trade or that a public
market will materialize.
(b) Holders
As
of February 14, 2019, the Company had 217 shareholders of its
Class A Common Stock, no shareholders of its Series A Preferred
Stock, and 1 shareholder of its Series C Preferred
Stock.
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(c) Dividends
While
we have not paid any dividends on our common stock since our
inception, our longer-term objective is to pay dividends in order
to enhance stockholder returns when the Board of Directors deems
such action as in the best interest of its shareholders.
Our
Series C preferred stock, however, receives an 10.0% annual
dividend, that accrues annually in arrears. As of the date of this
prospectus, no Series C preferred stock dividend has accrued to any
respective holder(s).
Any
determination to declare a dividend, as well as the amount of any
dividend that may be declared, will be based on the board of
director’s consideration of our financial position, earnings,
earnings outlook, capital spending plans, outlook on current and
future market conditions, alternative stockholder return methods
such as share repurchases, and other factors that our board of
directors considers relevant at that time. Our dividend policy may
change from time to time, and there can be no assurance that we
will declare any dividends at all or in any particular amounts.
Please see “Risk Factors.”
(d) Securities authorized for issuance under equity compensation
plans
We
currently have an employee incentive stock option plan
(“Employee Incentive Stock Option Plan”) in place that
could result in additional options being issued to management at
the discretion of the board of directors. To date there has been a
total of 636,830 options issued under the Employee Incentive Stock
Option Plan issued to various employees of the Company, of which
25,000 options vested immediately, with the remainder vesting
equally over three years. In the future, we may file a registration
statement on Form S-8 under the Securities Act to register any or
all shares issuable under that Employee Incentive Stock Option
Plan. Accordingly, should a Form S-8 become effective, shares
registered under such registration statement may be made available
for sale in the open market following the effective date, unless
such shares are subject to vesting restrictions with us, Rule 144
restrictions applicable to our affiliates or the lock-up
restrictions described above.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the “Selected Historical Financial Data” and the
accompanying financial statements and related notes included
elsewhere in this prospectus. The following discussion contains
forward-looking statements that reflect our future plans,
estimates, beliefs and expected performance. The forward-looking
statements are dependent upon events, risks and uncertainties that
may be outside our control. Our actual results could differ
materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to such
differences are discussed elsewhere in this prospectus,
particularly in “Risk Factors” and “Cautionary
Statement Regarding Forward-Looking Statements,” all of which
are difficult to predict. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed may not
occur. We do not undertake any obligation to publicly update any
forward-looking statements except as otherwise required by
applicable law.
Company Overview
We are
a low-cost producer of primarily high-quality, metallurgical coal
in eastern Kentucky. We began our Company on October 2, 2013 and
changed our name from Natural Gas Fueling and Conversion Inc. to
NGFC Equities, Inc. on February 25, 2015, and then changed our name
from NGFC Equities, Inc. to American Resources Corporation on
February 17, 2017. On January 5, 2017, ARC executed a Share
Exchange Agreement between the Company and Quest Energy Inc., a
private company incorporated in the State of Indiana with offices
at 9002 Technology Lane, Fishers IN 46038, and due to the
fulfillment of various conditions precedent to closing of the
transaction, the control of the Company was transferred to the
Quest Energy shareholders on February 7, 2017 resulting in Quest
Energy becoming a wholly-owned subsidiary of ARC. Through its
wholly-owned subsidiary Quest Energy, which is an Indiana
corporation founded in June 2015, ARC was able to acquire coal
mining and coal processing operations, substantially all located in
eastern Kentucky. A majority of our domestic and international
target customer base includes blast furnace steel mills and coke
plants, as well as international metallurgical coal consumers,
domestic electricity generation utilities, and other industrial
customers. Pursuant to the
definitions in Paragraph (a) (4) of the Securities and Exchange
Commission’s Industry Guide 7, our company and its business
activities are deemed to be in the exploration stage until mineral
reserves are defined on our properties.
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We
achieved initial commercial production of metallurgical coal in
September 2016 from our McCoy Elkhorn Mine #15 and from our McCoy
Elkhorn Carnegie 1 Mine in March 2017. In October 2017 we achieved
commercial production of thermal coal from our Deane Mining Access
Energy Mine and from our Deane Mining Razorblade Surface Mine in
May 2018. We believe that we will be able to take advantage of
recent increases in U.S. and global benchmark metallurgical and
thermal coal prices and intend to opportunistically increase the
amount of our projected production that is directed to the export
market to capture favorable differentials between domestic and
global benchmark prices. The Company commenced operations of two
out of four of its internally owned preparation plants in July of
2016 (Bevins #1 and Bevins #2 Prep Plants at McCoy Elkhorn), with a
third preparation plant commencing operation in October 2017 (Mill
Creek Prep Plant at Deane Mining).
Current Projects
Quest
Energy has six coal mining and processing operating subsidiaries:
McCoy Elkhorn Coal LLC (doing business as McCoy Elkhorn Coal
Company, “McCoy Elkhorn”), Knott County Coal LLC
(“Knott County Coal”), Deane Mining LLC (“Deane
Mining”), Wyoming County Coal LLC (“Wyoming County
Coal”), ERC Mining Indiana Corporation (“ERC”),
and Quest Processing LLC (“Quest Processing”), all of
which are located in eastern Kentucky and West Virginia within the
Central Appalachian coal basin, with the exception of ERC Mining
Indiana Corporation, which is located in southwestern Indiana in
the Illinois coal basin. Below is an organizational and ownership
chart of our Company.
The
coal deposits under control by the Company generally comprise of
metallurgical coal (used for steel making), pulverized coal
injections (“PCI”, used in the steel making process)
and high-BTU, low sulfur, low moisture bituminous coal used for a
variety of uses within several industries, including industrial
customers, specialty products and thermal coal used for electricity
generation.
McCoy Elkhorn Coal LLC
General:
Located
primarily within Pike County, Kentucky, McCoy Elkhorn is currently
comprised of two active mines (Mine #15 and the Carnegie 1 Mine),
one mine in “hot idle” status (the PointRock Mine), two
coal preparation facilities (Bevins #1 and Bevins #2), and other
mines in various stages of development or reclamation. McCoy
Elkhorn sells its coal to a variety of customers, both domestically
and internationally, primarily to the steel making industry as a
high-vol “B” coal or blended coal. The coal controlled
at McCoy Elkhorn (along with our other subsidiaries) has not been
classified as either “proven” or “probable”
as defined in the United States Securities and Exchange Commission
Industry Guide 7, and as a result, do not have any
“proven” or “probable” reserves under such
definition and are classified as an “Exploration Stage”
pursuant to Industry Guide 7.
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Mines:
Mine
#15 is an underground mine in the Millard (also known as Glamorgan)
coal seam and located near Meta, Kentucky. Mine #15 is mined via
room-and-pillar mining methods using continuous miners, and the
coal is belted directly from the stockpile to McCoy Elkhorn’s
coal preparation facility. Mine #15 is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine. The coal from Mine #15 is
stockpiled at the mine site and belted directly to the
Company’s nearby coal preparation facilities. Production at
Mine #15 re-commenced under Quest Energy’s ownership in
September 2016. Mine #15 has the
estimated capacity to produce up to approximately 40,000 tons per
month of coal. The Company acquired Mine #15 as an idled mine, and
since acquisition, the primary work completed at Mine #15 by the
Company includes changing working sections within the underground
mine, air ventilation enhancements primarily through brattice work
and the use of overcasts and installing underground mining
infrastructure as the mine advances due to coal extraction. In
2017, Mine #15 produced approximately 247,234 tons and sold the
coal at an average price of $67.23 per ton. In 2016, Mine #15
started production and produced approximately 62,941 tons and sold
the coal at an average price of $82.45 per ton. During 2017 and
2016, 100% and 100%, respectively, of the coal extracted from Mine
#15 was high-vol “B” metallurgical coal quality, of
which 71% and 100%, respectively, was sold into the metallurgical
market, with the balance sold in the thermal
market.
The
Carnegie 1 Mine is an underground mine in the Alma and Upper Alma
coal seams and located near Kimper, Kentucky. In 2011, coal
production from the Carnegie 1 Mine in the Alma coal seam commenced
and then subsequently the mine was idled. Production at the
Carnegie 1 Mine was reinitiated in early 2017 under Quest
Energy’s ownership and is currently being mined via
room-and-pillar mining methods utilizing a continuous miner. The
coal is stockpiled on-site and trucked approximately 7 miles to
McCoy Elkhorn’s preparation facilities. The Carnegie 1 Mine
is currently a “company run” mine, whereby the Company
manages the workforce at the mine and pays all expenses of the
mine. The Carnegie 1 Mine has the
estimated capacity to produce up to approximately 10,000 tons per
month of coal. The Company acquired the Carnegie Mine as an idled
mine, and since acquisition, the primary work completed at the
Carnegie Mine by the Company includes mine rehabilitation work in
preparation for production, changing working sections within the
underground mine, air ventilation enhancements primarily through
brattice work, and installing underground mining infrastructure as
the mine advances due to coal extraction. In 2017, the first year
of the mine’s production, the Carnegie 1 Mine produced
approximately 11,974 tons and sold the coal at an average price of
$59.78. During 2017, 100% of the coal extracted from the Carnegie
Mine was high-vol “B” metallurgical coal quality, of
which 51% was sold into the metallurgical market, with the balance
sold in the thermal market.
The
PointRock Mine is surface mine in a variety of coal seams,
primarily in the Pond Creek, the Lower Alma, the Upper Alma, and
Cedar Grove coal seams and located near Phelps, Kentucky. Coal has
been produced from the PointRock Mine in the past under different
operators. Quest Energy acquired the PointRock Mine in April 2018
and is currently performing reclamation work in advance of
re-starting production, which is expected in later 2018. PointRock
is anticipated to be mined via contour, auger, and highwall mining
techniques. The coal will be stockpiled on-site and trucked
approximately 23 miles to McCoy Elkhorn’s preparation
facilities. The PointRock Mine is anticipated to be operated as a
modified contractor mine, whereby McCoy Elkhorn provides certain
mining infrastructure and equipment for the operations and pays a
contractor a fixed per-ton fee for managing the workforce,
procuring other equipment and supplies, and maintaining the
equipment and infrastructure in proper working order. The
PointRock Mine has the estimated capacity to produce up to
approximately 15,000 tons per month of coal and has not yet started
production under McCoy Elkhorn’s
ownership.
Processing & Transportation:
The
Bevins #1 Preparation Plant is an 800 ton-per hour coal preparation
facility located near Meta, Kentucky, across the road from Mine
#15. Bevins #1 has raw coal stockpile storage of approximately
25,000 tons and clean coal stockpile storage of 100,000 tons of
coal. The Bevins #1 facility has a fine coal circuit and a stoker
circuit that allows for enhance coal recovery and various coal
sizing options depending on the needs of the customer. The Company
acquired the Bevins Preparation Plants as idled facilities, and
since acquisition, the primary work completed at the Bevins
Preparation Plants by the Company includes rehabilitating the
plants’ warehouse and replacing belt lines.
The
Bevins #2 Preparation Plant is on the same permit site as Bevins #1
and is a 500 ton-per-hour processing facility with fine coal
recovery and a stoker circuit for coal sizing options. Bevins #2
has raw coal stockpile storage of 25,000 tons of coal and a clean
coal stockpile storage of 45,000 tons of coal. We are currently
utilizing less than 10% of the available processing capacity of
Bevins #1 and Bevins #2.
Both
Bevins #1 and Bevins #2 have a batch-weight loadout and rail spur
for loading coal into trains for rail shipments. The spur has
storage for 110 rail cars and is serviced by CSX Transportation and
is located on CSX’s Big Sandy, Coal Run Subdivision. Both
Bevins #1 and Bevins #2 have coarse refuse and slurry impoundments
called Big Groundhog and Lick Branch. While the Big Groundhog
impoundment is nearing the end of its useful life, the Lick Branch
impoundment has significant operating life and will be able to
provide for coarse refuse and slurry storage for the foreseeable
future at Bevins #1 and Bevins #2. Coarse refuse from Bevins #1 and
Bevins #2 is belted to the impoundments. Both Bevins #1 and Bevins
#2 are facilities owned by McCoy Elkhorn, subject to certain
restrictions present in the agreement between McCoy Elkhorn and the
surface land owner.
Both Bevins #1 and
Bevins #2, as well as the rail loadout, are operational and any
work required on any of the plants or loadouts would be routine
maintenance. The allocated cost of for the property at McCoy
Elkhorn Coal paid by the company is
$58,681.
Due to
additional coal processing storage capacity at Bevins #1 and Bevins
#2 Preparation Plants, McCoy Elkhorn processes, stores, and loads
coal for other regional coal producers for an agreed-to
fee.
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Additional Permits:
In
addition to the above mines, McCoy Elkhorn holds 11 additional coal
mining permits that are idled operations or in various stages of
reclamation. For the idled coal mining operations, McCoy Elkhorn
will determine which coal mines to bring back into production, if
any, as the coal market changes, and there are currently no other
idled mines within McCoy Elkhorn that are slated to go into
production in the foreseeable future. Any idled mines that are
brought into production would require significant upfront capital
investment and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the material properties at McCoy
Elkhorn:
Knott County Coal LLC
General:
Located
primarily within Knott County, Kentucky (but with additional idled
permits in Leslie County, Perry County, and Breathitt County,
Kentucky), Knott County Coal is comprised of one active mine (the
Wayland Surface Mine) and 22 idled mining permits (or permits in
reclamation), including the permits associated with the idled
Supreme Energy Preparation Plant. The idled mining permits are
either in various stages of planning, idle status or reclamation.
The idled mines at Knott County Coal are primarily underground
mines that utilize room-and-pillar mining. The coal controlled
at Knott County Coal (along with our other subsidiaries) has not
been classified as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7.
69
Mines:
The
Wayland Surface Mine is a surface waste-rock reprocessing mine in a
variety of coal seams (primarily the Upper Elkhorn 1 coal seam)
located near Wayland, Kentucky. The Wayland Surface Mine is mined
via area mining through the reprocessing of previously processed
coal, and the coal is trucked approximately 22 miles to the Mill
Creek Preparation Plant at Deane Mining, where it is processed and
sold. The Wayland Surface Mine is currently a “company
run” mine, whereby the Company manages the workforce at the
mine and pays all expenses of the mine. The Company
acquired the Wayland Surface Mine as an idled mine, and since
acquisition, the primary work completed at the Wayland Surface Mine
has been removing overburden to access the coal. The Wayland Surface Mine has the estimated
capacity to produce up to approximately 15,000 tons per month of
coal and started production in mid-2018 with nominal coal extracted
and sold as thermal coal.
During
June 2018, production at the Wayland Surface Mine commenced under
Quest Energy’s ownership. The associated permit was purchased
during May 2018.
Other
potential customers of Knott County Coal include industrial
customers, specialty customers and utilities for electricity
generation, although no definitive sales have been identified
yet.
Processing & Transportation:
The
idled Supreme Energy Preparation Plant is a 400 ton-per-hour coal
preparation facility with a fine coal circuit located in Kite,
Kentucky. The Bates Branch rail loadout associated with the Supreme
Energy Preparation Plant is a batch-weigh rail loadout with 220
rail car storage capacity and serviced by CSX Transportation in
their Big Sandy rate district. The coarse refuse is trucked to the
Kings Branch impoundment, which is approximately one mile from the
Supreme Energy facility. The slurry from coal processing is piped
from the Supreme Energy facility to the Kings Branch
impoundment.
The
Supreme Energy Preparation Plant is owned by Knott County Coal,
subject to certain restrictions present in the agreement between
Knott County Coal and the surface land owner, Land Resources &
Royalties LLC.
The Company
acquired the Supreme Energy Preparation Plants as an idled
facility, and since acquisition, no work has been performed at the
facility other than minor maintenance. Both the Supreme Energy
Preparation Plant and the rail loadout are idled and would require
an undetermined amount of work and capital to bring them into
operation. The allocated cost of for the property at Knott County
Coal paid by the company is $200,236.
Additional Permits:
In
addition to the above mines, Knott County Coal holds 20 additional
coal mining permits that are in development, idled or in various
stages of reclamation. Any idled mines that are brought into
production would require significant upfront capital investment
and
there is no assurance of the feasibility of any such new
operations..
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Below
is a map showing the location of the idled Supreme Energy Prep
Plant, Raven Prep Plant, Loadouts, and plant impoundments at Knott
County Coal:
Deane Mining LLC
General:
Located
within Letcher County and Knott County, Kentucky, Deane Mining LLC
is comprised of one active underground coal mine (the Access Energy
Mine), one active surface mine (Razorblade Surface) and one active
coal preparation facility called Mill Creek Preparation Plant,
along with 12 additional idled mining permits (or permits in
reclamation). The idled mining permits are either in various stages
of development, reclamation or being maintained as idled, pending
any changes to the coal market that may warrant re-starting
production. . The coal
controlled at Deane Mining (along with our other subsidiaries) has
not been classified as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7.
Mines:
Access
Energy is a deep mine in the Elkhorn 3 coal seam and located in
Deane, Kentucky. Access Energy is mined via room-and-pillar mining
methods using continuous miners, and the coal is belted directly
from the mine to the raw coal stockpile at the Mill Creek
Preparation Plant across the road from Access Energy. Similar to
McCoy Elkhorn’s Carnegie 1 Mine, Access Energy is currently
run as a modified contractor mine, whereby Deane Mining provides
the mining infrastructure and equipment for the operations and pays
the contractor a fixed per-ton fee for managing the workforce,
procuring the supplies, and maintaining the equipment and
infrastructure in proper working order. The Company acquired Access
Energy as an idled mine, and since acquisition, the primary work
completed at Access Energy by the Company includes mine
rehabilitation work in preparation for production, air ventilation
enhancements primarily through brattice work, and installing
underground mining infrastructure as the mine advances due to coal
extraction. Access Energy has the
estimated capacity to produce up to approximately 20,000 tons per
month of coal. In 2017, the first year of the mine’s
production, Access Energy produced approximately 43,286 tons and
sold the coal at an average price of $58.67 per ton. 100% of the
coal sold from Access Energy in 2017 was sold as thermal
coal.
Razorblade Surface
is a surface mine currently mining the Hazard 4 and Hazard 4 Rider
coal seams and located in Deane, Kentucky. Razorblade Surface is
mined via contour, auger, and highwall mining methods, and the coal
is stockpiled on site where it trucked to the Mill Creek
Preparation Plant approximately one mile away for processing.
Razorblade Surface is run as both a contractor mine and as a
“company run” mine for coal extraction and began
extracting coal in spring of 2018. Coal produced from Razorblade
Surface will be trucked approximately one mile to the Mill Creek
Preparation Plant. The Company acquired the Razorblade Surface mine
as a new, undisturbed mine, and since acquisition, the primary work
completed at Razorblade Surface has been some initial engineering
work and removing overburden to access the coal. Razorblade Surface mine has the estimated capacity
to produce up to approximately 8,000 tons per month of coal and
started production in mid-2018 with nominal coal extracted and sold
as thermal coal.
The
coal production from Deane Mining LLC is currently sold a utility
located in southeast United States under a contract that expires
December 2018, along with coal sold in the spot market. Deane
Mining is in discussions with various customers to sell additional
production from Access Energy, Razorblade, and Wayland Surface
mines, combined with other potential regional coal production, as
pulverized coal injection (PCI) to steel mills, industrial coal,
and thermal coal to other utilities for electricity
generation.
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Processing & Transportation:
The
Mill Creek Preparation Plant is an 800 ton-per-hour coal
preparation facility located in Deane, Kentucky. The associated
RapidLoader rail loadout is a batch-weight rail loadout with 110
car storage capacity and services by CSX Transportation in their
Big Sandy and Elkhorn rate districts. The Mill Creek Preparation
Plant is owned by Deane Mining, subject to certain restrictions
present in the agreement between Deane Mining and the surface land
owner, Land Resources & Royalties LLC. We
are currently utilizing less than 10% of the available processing
capacity of the Mill Creek Preparation Plant.
Both the Mill Creek
Preparation Plant and the rail loadout are operational, and any
work required on any of the plant or loadouts would be routine
maintenance. The total cost of for the property at Deane Mining
paid by the company is $2,655,505.
Additional Permits:
In
addition to the above mines and preparation facility, Deane Mining
holds 12 additional coal mining permits that are in development,
idled or in various stages of reclamation. Any idled mines that are
brought into production would require significant upfront capital
investment and there is no
assurance of the feasibility of any such new
operations..
Below
is a map showing the material properties at Deane
Mining:
Wyoming County Coal LLC
General:
Located
within Wyoming County, West Virginia, Wyoming County Coal is
comprised of two idled underground mining permits and the three
permits associated with the idled Pioneer Preparation Plant, the
Hatcher rail loadout, and Simmons Fork Refuse Impoundment. The two
idled mining permits are undisturbed underground mines that are
anticipated to utilize room-and-pillar mining. The coal controlled
at Wyoming County Coal (along with our other subsidiaries) has not
been classified as either “proven” or
“probable” as defined in the United States Securities
and Exchange Commission Industry Guide 7, and as a result, do not
have any “proven” or “probable” reserves
under such definition and are classified as an “Exploration
Stage” pursuant to Industry Guide 7.
Mines:
The
mining permits held by Wyoming County Coal are in various stages of
planning with no mines currently in production.
Potential customers
of Wyoming County Coal would include steel mills in the United
States or international marketplace although no definitive sales
have been identified yet.
Processing & Transportation:
The
idled Pioneer Preparation Plant is a 350 ton-per-hour coal
preparation facility located near Oceana, West Virginia. The
Hatcher rail loadout associated with the Pioneer Preparation Plant
is a rail loadout serviced by Norfolk Southern Corporation. The
refuse from the preparation facility is trucked to the Simmons Fork
Refuse Impoundment, which is approximately 1.0 mile from the
Pioneer Preparation facility. The preparation plant utilizes a belt
press technology which eliminates the need for pumping slurry into
a slurry pond for storage within an impoundment.
The
Company is in the initial planning phase of getting estimates on
the cost to upgrade the preparation facility to a modern 350 ton
per hour preparation facility, although no cost estimates have yet
been received. The Company is also in the initial planning phase of
getting estimates on the cost and timing of upgrading the rail load
out facility to a modern batch weight load out system, although no
cost estimates have yet been received.
The
Company acquired the Pioneer Preparation Plants as an idled
facility, and since acquisition, no work has been performed at the
facility. Both the Pioneer Preparation Plant and the rail loadout
are idled and would require an undetermined amount of work and
capital to bring them into operation, which is currently in the
initial phases of planning and no cost estimates have been
received. The allocated cost for the property at Wyoming County
Coal paid by the Company is $22,926,101.
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Permits:
Wyoming
County Coal holds two coal mining permits that are in the initial
planning phase and three permits associated with the idled Pioneer
Preparation Plant, the Hatcher rail loadout, and Simmons Fork
Refuse Impoundment. Any mine that is brought into production would
require significant upfront capital investment and there is no
assurance of the feasibility of any such new
operations.
Below
is a map showing the location of the idled Pioneer Prep Plant,
Hatcher rail Loadout, and Simmons Fork Refuse Impoundment at
Wyoming County Coal:
Quest Processing LLC
Quest
Energy’s wholly-owned subsidiary, Quest Processing LLC,
manages the assets, operations, and personnel of the certain coal
processing and transportation facilities of Quest Energy’s
various other subsidiaries, namely the Supreme Energy Preparation
Facility (of Knott County Coal LLC), the Raven Preparation Facility
(of Knott County Coal LLC), and the Mill Creek Preparation Facility
(of Deane Mining LLC). Quest Processing LLC was the recipient of a
New Markets Tax Credit loan that allowed for the payment of certain
expenses of these preparation facilities. As part of that financing
transaction, Quest Energy loaned Quest MGMT LLC, an entity owned by
members of Quest Energy, Inc.’s management, $4,120,000 to
facilitate the New Markets Tax Credit loan, of which is all
outstanding as of December 31, 2017.
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ERC Mining Indiana Corporation (the Gold Star Mine)
General:
Quest
Energy, through its wholly-owned subsidiary, ERC Mining Indiana
Corporation (“ERC”), has a management agreement with an
unrelated entity, LC Energy Operations LLC, to manage an
underground coal mine, clean coal processing facility and rail
loadout located in Greene County, Indiana (referred to as the
“Gold Star Mine”) for a monthly cash and per-ton fee.
As part of that management agreement, ERC manages the operations of
the Gold Star Mine, is the holder of the mining permit, provides
the reclamation bonding, is the owner of some of the equipment
located at the Gold Star Mine, and provides the employment for the
personnel located at the Gold Star Mine. LC Energy Operations LLC
owns the remaining equipment and infrastructure, is the lessee of
the mineral (and the owner of some of the mineral and surface), and
provides funding for the operations. Currently the coal mining
operations at the Gold Star Mine are idled. Any cash flow from the
operations of the Gold Star Mine for the foreseeable future will go
to LC Energy Operations LLC to satisfy prior debt advanced to the
Gold Star Mine.
Mine:
The
Gold Star Mine, which is currently the only coal mining operation
within ERC Mining Indiana Corporation (a wholly-owned subsidiary of
Quest Energy Inc.). The Gold Star Mine is an underground mine
located in the Indiana IV (aka Survant) coal seam, which is a low
sulfur coal relative to other coal mining operations in the region.
With a sulfur ranging from 1.0% to 1.5%, the coal has historically
been sold to local power generating facilities that lack more
advanced sulfur capture technologies, as well as to other regional
coal producers to blend their sulfur lower to sell their coal at a
premium.
Processing & Transportation:
Coal
extracted from the Gold Star Mine is belted directly to the
preparation facility on site. The coal can either be loaded to rail
or transported via truck. The rail spur at Gold Star is serviced by
the Indiana Rail Road Company and holds up to 116 rail
cars.
The
Gold Star Mine is currently idled and ARC management is pursuing
potential sales orders for the coal. Any re-initiation of coal
mining operations at the Gold Star Mine would require capital
investment.
In
addition to the current owned permits and controlled coal deposits
described within the above operating subsidiaries, ARC may, from
time to time, and frequently, acquire additional coal mining
permits or coal deposits, or dispose of coal mining permits or coal
deposits currently held by ARC, as management of the Company deems
appropriate.
Mineral and Surface Leases
Coal
mining and processing involves the extraction of coal (mineral) and
the use of surface property incidental to such extraction and
processing. All of the mineral and surface related to the
Company’s coal mining operations is leased from various
mineral and surface owners (the “Leases”). The
Company’s operating subsidiaries, collectively, are parties
to approximately 200 various Leases and other agreements required
for the Company’s coal mining and processing operations. The
Leases are with a variety of Lessors, from individuals to
professional land management firms such as the Elk Horn Coal
Company LLC and Alma Land Company. In some instances, the Company
has leases with Land Resources & Royalties LLC (LRR), a
professional leasing firm that is an entity wholly owned by Quest
MGMT LLC, an entity owned by members of Quest Energy Inc.’s
management.
Production Plans
We
expect to fund our projected capital expenditures primarily with
our current cash and investments, cash flow from operations and the
net proceeds from this offering. However, if needed, we may seek
additional sources of financing, including revolving credit
arrangements. The majority of our capital expenditure budget
through 2018 is focused on the development of our current projects
with a goal to have the projects fully developed by 2020. We are
currently in production at McCoy Elkhorn Coal’s Mine #15,
McCoy Elkhorn Coal’s Carnegie 1 Mine, Deane Mining’s
Access Energy mine, Deane Mining’s Razorblade Surface mine,
and Knott County Coal’s Wayland Surface mine. We are
currently rehabbing or developing new mines at our McCoy
Elkhorn’s Carnegie 2 Mine, McCoy Elkhorn’s PointRock
mine, Deane Mining’s Love Branch mine, and Knott County
Coal’s Topper mine, and we expect to have these projects
fully developed and/or producing by the first half of 2019, pending
successful sales efforts and additional capital
investment.
74
Permitting
From
our various acquisitions from 2015 to 2018, we are the holder of 58
coal mining permits issued by Kentucky Department of Natural
Resources and one coal mining permit issued by Indiana Department
of Natural Resources. The coal mining permits we hold are primarily
located in eastern Kentucky, in the counties of Pike, Knott,
Letcher, Perry, Floyd, Breathitt, and Leslie.
Marketing, Sales and Customers
Coal
prices differ substantially by region and are impacted by many
factors including the overall economy, demand for steel, demand for
electricity, location, market, quality and type of coal, mine
operation costs and the cost of customer alternatives. The major
factors influencing our business are the global economy, the demand
for steel, and the amount of coal being consumed for electricity
generation.
Our
initial marketing strategy is to focus on U.S.- and
internationally-based blast furnace still mills and coke plants,
and other customers where our coal is in demand. Our current sales
are primarily conducted through the use of intermediaries and
brokers who have established relationships with our potential
end-customers, although we may develop and employ an in-house
marketing team in the future.
The
Company sells its coal to domestic and international customers,
some which blend the Company’s coal at east coast ports with
other qualities of coal for export. Coal sales currently come from
the Company’s McCoy Elkhorn’s Mine #15, McCoy
Elkhorn’s Carnegie 1 mine, Deane Mining’s Access Energy
mine, Deane Mining’s Razorblade Surface mine, and Knott
County Coal’s Wayland Surface mine. The Company may, at
times, purchase coal from other regional producers to sell on its
contracts.
Historical
pricing for the two primary types of coal we produce are as
follows:
Historic Metallurgical Coal Prices
|
|
Historic CAPP Thermal Coal Prices
|
||||
Year End
|
|
Hampton Road Index HCC - High
|
|
Year End
|
|
Big Sandy / Kanawha Rate District
|
2013
|
|
$110.30
|
|
2013
|
|
64.09
|
2014
|
|
$100.35
|
|
2014
|
|
56.00
|
2015
|
|
$80.25
|
|
2015
|
|
45.55
|
2016
|
|
$223.00
|
|
2016
|
|
50.65
|
2017
|
|
$210.00
|
|
2017
|
|
60.90
|
Coal
sales at the Company is primarily outsource to third party
intermediaries who act on the Company’s behalf to source
potential coal sales and contracts. The third-party intermediaries
have no ability to bind the Company to any contracts, and all coal
sales are approved by management of the Company.
Development Activities
McCoy Elkhorn Coal LLC:
We are
currently producing at Mine #15 and Carnegie 1 Mine at McCoy
Elkhorn Coal and both of our preparation plants (Bevins 1 and
Bevins 2) are operational, as is the rail loadout facility. Our
PointRock surface mine is currently idled as we interview
contractors for future production. We continue to develop our
Carnegie 2 deep mine in the Alma coal seam and are working on other
permit acquisition and/or development activities in the area of
McCoy Elkhorn.
Knott County Coal LLC:
We are
currently producing at our Wayland Surface mine. The coal from this
mine processed and loaded to rail at the Mill Creek Preparation
Plant and RapidLoader loadout of Deane Mining LLC. We continue
permitting and development work on several other permits, including
the Topper mine.
While
Knott County Coal owns the Supreme Energy Preparation Plant and
Bates Branch rail loadout, those facilities are currently idled and
would require capital to rehabilitate to operational
condition.
Deane Mining LLC:
We are
currently producing at the Access Energy Mine, underground room and
pillar operations, the Razorblade Surface mine, and our Mill Creek
Preparation Plant is operational, as is the rail loadout facility.
We continue to analyze additional coal mines that could be brought
into production, assuming we achieve coal sales for such
operations.
75
Wyoming County Coal LLC:
We
currently do not have any operations at Wyoming County Coal LLC and
do not anticipate having operations for the foreseeable future.
While Wyoming County Coal LLC owns a preparation plan and rail
loadout those facilities are currently idled and would require
capital to rehabilitate to operational condition.
ERC Mining Indiana Corporation:
We have
completed the rehabilitation of the Gold Star underground mine at
ERC Mining Indiana Corp. and are working to obtain sales for this
mine, although no time frame for production is currently
anticipated. The coal will be belted directly to the on-site
processing facility for coal processing and then anticipated to be
loaded to rail or truck, depending on the customer’s
requirements. ERC Mining Indiana Corp. has a management agreement
with an unrelated entity, LC Energy Operations LLC to manage an
underground coal mine, clean coal processing facility and rail
loadout for a monthly cash and per-ton fee. As part of that
management agreement, LC Energy Operations LLC is required to
provide funding for the operations at the Gold Star mine, and any
cash flow from the operations of the Gold Star Mine for the
foreseeable future will go to LC Energy Operations LLC to satisfy
prior debt advanced to the Gold Star Mine.
Trade Names, Trademarks and Patents
We do
not have any registered trademarks or trade names for our products,
services or subsidiaries, and we do not believe that any trademark
or trade name is material to our business. However, the names of
the seams in which we have coal deposits, and attributes thereof,
are widely recognized in the coal markets.
Competition
The
coal industry is intensely competitive. The most important factors
on which the Company competes are coal quality, delivered costs to
the customer and reliability of supply. Our principal domestic
competitors will include Alpha Natural Resources, Ramaco Resources,
Blackhawk Mining, Coronado Coal, Arch Coal, Contura Energy, Warrior
Met Coal, Alliance Resource Partners, and ERP Compliance Fuels.
Many of these coal producers may have greater financial resources
and larger coal deposit bases than we do. We also compete in
international markets directly with domestic companies and with
companies that produce coal from one or more foreign countries,
such as Australia, Colombia, Indonesia and South
Africa.
Suppliers
Supplies used in
our business include petroleum-based fuels, explosives, tires,
conveyance structure, roof support supplies, ventilation supplies,
lubricants and other raw materials as well as spare parts and other
consumables used in the mining process. We use third-party
suppliers for a significant portion of our equipment rebuilds and
repairs, drilling services and construction. We also may utilize
contract miners at our various operations. We believe adequate
substitute suppliers and contractors are available and we are not
dependent on any one supplier or contractor. We continually seek to
develop relationships with suppliers and contractors that focus on
reducing our costs while improving quality and
service.
Environmental and Other Regulatory Matters
Our
operations are subject to federal, state, and local laws and
regulations, such as those relating to matters such as permitting
and licensing, employee health and safety, reclamation and
restoration of mining properties, water discharges, air emissions,
plant and wildlife protection, the storage, treatment and disposal
of wastes, remediation of contaminants, surface subsidence from
underground mining and the effects of mining on surface water and
groundwater conditions. In addition, we may become subject to
additional costs for benefits for current and retired coal miners.
These environmental laws and regulations include, but are not
limited to, SMCRA with respect to coal mining activities and
ancillary activities; the CAA with respect to air emissions; the
CWA with respect to water discharges and the permitting of key
operational infrastructure such as impoundments; RCRA with respect
to solid and hazardous waste management and disposal, as well as
the regulation of underground storage tanks; the Comprehensive
Environmental Response, Compensation and Liability Act
(“CERCLA” or “Superfund”) with respect to
releases, threatened releases and remediation of hazardous
substances; the Endangered Species Act of 1973 (“ESA”)
with respect to threatened and endangered species; and the National
Environmental Policy Act of 1969 (“NEPA”) with respect
to the evaluation of environmental impacts related to any federally
issued permit or license. Many of these federal laws have state and
local counterparts which also impose requirements and potential
liability on our operations.
76
Compliance with
these laws and regulations may be costly and time-consuming and may
delay commencement, continuation or expansion of exploration or
production at our facilities. They may also depress demand for our
products by imposing more stringent requirements and limits on our
customers’ operations. Moreover, these laws are constantly
evolving and are becoming increasingly complex and stringent over
time. These laws and regulations, particularly new legislative or
administrative proposals, or judicial interpretations of existing
laws and regulations related to the protection of the environment
could result in substantially increased capital, operating and
compliance costs. Individually and collectively, these developments
could have a material adverse effect on our operations directly
and/or indirectly, through our customers’ inability to use
our products.
Certain
implementing regulations for these environmental laws are
undergoing revision or have not yet been promulgated. As a result,
we cannot always determine the ultimate impact of complying with
existing laws and regulations.
Due in
part to these extensive and comprehensive regulatory requirements
and ever- changing interpretations of these requirements,
violations of these laws can occur from time to time in our
industry and also in our operations. Expenditures relating to
environmental compliance are a major cost consideration for our
operations and safety and compliance is a significant factor in
mine design, both to meet regulatory requirements and to minimize
long-term environmental liabilities. To the extent that these
expenditures, as with all costs, are not ultimately reflected in
the prices of our products and services, operating results will be
reduced.
In
addition, our customers are subject to extensive regulation
regarding the environmental impacts associated with the combustion
or other use of coal, which may affect demand for our coal. Changes
in applicable laws or the adoption of new laws relating to energy
production, GHG emissions and other emissions from use of coal
products may cause coal to become a less attractive source of
energy, which may adversely affect our mining operations, the cost
structure and, the demand for coal. For example, if the emissions
rates or caps adopted under the CPP on GHGs are upheld or a tax on
carbon is imposed, the market share of coal as fuel used to
generate electricity would be expected to decrease.
We
believe that our competitors with operations in the United States
are confronted by substantially similar conditions. However,
foreign producers and operators may not be subject to similar
requirements and may not be required to undertake equivalent costs
in or be subject to similar limitations on their operations. As a
result, the costs and operating restrictions necessary for
compliance with United States environmental laws and regulations
may have an adverse effect on our competitive position with regard
to those foreign competitors. The specific impact on each
competitor may vary depending on a number of factors, including the
age and location of its operating facilities, applicable
legislation and its production methods.
Surface Mining Control and Reclamation Act
SMCRA
establishes operational, reclamation and closure standards for our
mining operations and requires that comprehensive environmental
protection and reclamation standards be met during the course of
and following completion of mining activities. SMCRA also
stipulates compliance with many other major environmental statutes,
including the CAA, the CWA, the ESA, RCRA and CERCLA. Permits for
all mining operations must be obtained from the United States
Office of Surface Mining (“OSM”) or, where state
regulatory agencies have adopted federally approved state programs
under SMCRA, the appropriate state regulatory authority. Our
operations are located in states which have achieved primary
jurisdiction for enforcement of SMCRA through approved state
programs.
SMCRA
imposes a complex set of requirements covering all facets of coal
mining. SMCRA regulations govern, among other things, coal
prospecting, mine plan development, topsoil or growth medium
removal and replacement, disposal of excess spoil and coal refuse,
protection of the hydrologic balance, and suitable post mining land
uses.
77
From
time to time, OSM will also update its mining regulations under
SMCRA. For example, in December 2016, OSM finalized a new version
of the Stream Protection Rule which became effective in January
2017. The rule would have impacted both surface and underground
mining operations, as it would have imposed stricter guidelines on
conducting coal mining operations, and would have required more
extensive baseline data on hydrology, geology and aquatic biology
in permit applications. The rule also required the collection of
increased pre-mining data about the site of the proposed mining
operation and adjacent areas to establish a baseline for evaluation
of the impacts of mining and the effectiveness of reclamation
associated with returning streams to pre-mining conditions.
However, in February 2017, both the House and Senate passed a
resolution disapproving of the Stream Protection Rule pursuant to
the Congressional Review Act (“CRA”). President Trump
signed the resolution on February 16, 2017 and, pursuant to the
CRA, the Stream Protection Rule “shall have no force or
effect” and cannot be replaced by a similar rule absent
future legislation. On November 17, 2017, OSMRE published a Federal
Register notice that removed the text of the Stream Protection Rule
from the Code of Federal Regulations. Whether Congress will enact
future legislation to require a new Stream Protection Rule remains
uncertain. The existing rules, or other new SMCRA regulations,
could result in additional material costs, obligations and
restrictions upon our operations.
Abandoned Mine Lands Fund
SMCRA
also imposes a reclamation fee on all current mining operations,
the proceeds of which are deposited in the AML Fund, which is used
to restore unreclaimed and abandoned mine lands mined before 1977.
The current per ton fee is $0.280 per ton for surface mined coal
and $0.120 per ton for underground mined coal. These fees are
currently scheduled to be in effect until September 30,
2021.
Mining Permits and Approvals
Numerous
governmental permits and approvals are required for mining
operations. We are required to prepare and present to federal,
state, and local authorities data detailing the effect or impact
that any proposed exploration project for production of coal may
have upon the environment, the public and our employees. The
permitting rules, and the interpretations of these rules, are
complex, change frequently, and may be subject to discretionary
interpretations by regulators. The requirements imposed by these
permits and associated regulations can be costly and time-consuming
and may delay commencement or continuation of exploration,
production or expansion at our operations. The governing laws,
rules, and regulations authorize substantial fines and penalties,
including revocation or suspension of mining permits under some
circumstances. Monetary sanctions and, in certain circumstances,
even criminal sanctions may be imposed for failure to comply with
these laws.
Applications for
permits and permit renewals at our mining operations are also
subject to public comment and potential legal challenges from third
parties seeking to prevent a permit from being issued, or to
overturn the applicable agency’s grant of the permit. Should
our permitting efforts become subject to such challenges, they
could delay commencement, continuation or expansion of our mining
operations. If such comments lead to a formal challenge to the
issuance of these permits, the permits may not be issued in a
timely fashion, may involve requirements which restrict our ability
to conduct our mining operations or to do so profitably, or may not
be issued at all. Any delays, denials, or revocation of these or
other similar permits we need to operate could reduce our
production and materially adversely impact our cash flow and
results of our operations.
In
order to obtain mining permits and approvals from state regulatory
authorities, mine operators must also submit a reclamation plan for
restoring the mined property to its prior condition, productive use
or other permitted condition. The conditions of certain permits
also require that we obtain surface owner consent if the surface
estate has been split from the mineral estate. This requires us to
negotiate with third parties for surface access that overlies coal
we acquired or intend to acquire. These negotiations can be costly
and time-consuming, lasting years in some instances, which can
create additional delays in the permitting process. If we cannot
successfully negotiate for land access, we could be denied a permit
to mine coal we already own.
Finally, we
typically submit necessary mining permit applications several
months, or even years, before we anticipate mining a new area.
However, we cannot control the pace at which the government issues
permits needed for new or ongoing operations. For example, the
process of obtaining CWA permits can be particularly time-consuming
and subject to delays and denials. The EPA also has the authority
to veto permits issued by the Corps under the CWA’s Section
404 program that prohibits the discharge of dredged or fill
material into regulated waters without a permit. Even after we
obtain the permits that we need to operate, many of the permits
must be periodically renewed, or may require modification. There is
some risk that not all existing permits will be approved for
renewal, or that existing permits will be approved for renewal only
upon terms that restrict or limit our operations in ways that may
be material.
78
Financial Assurance
Federal
and state laws require a mine operator to secure the performance of
its reclamation and lease obligations under SMCRA through the use
of surety bonds or other approved forms of financial security for
payment of certain long-term obligations, including mine closure or
reclamation costs. The changes in the market for coal used to
generate electricity in recent years have led to bankruptcies
involving prominent coal producers. Several of these companies
relied on self-bonding to guarantee their responsibilities under
the SMCRA permits including for reclamation. In response to these
bankruptcies, OSMRE issued a Policy Advisory in August 2016 to
state agencies that are authorized under the SMCRA to implement the
act in their states. Certain states, including Virginia, had
previously announced that it would no longer accept self-bonding to
secure reclamation obligations under the state mining laws. This
Policy Advisory is intended to discourage authorized states from
approving self-bonding arrangements and may lead to increased
demand for other forms of financial assurance, which may strain
capacity for those instruments and increase our costs of obtaining
and maintaining the amounts of financial assurance needed for our
operations. In addition, OSMRE announced in August 2016 that it
would initiate a rulemaking under SMCRA to revise the requirements
for self-bonding. Individually and collectively, these revised
various financial assurance requirements may increase the amount of
financial assurance needed and limit the types of acceptable
instruments, straining the capacity of the surety markets to meet
demand. This may delay the timing for and increase the costs of
obtaining the required financial assurance.
We may
use surety bonds, trusts and letters of credit to provide financial
assurance for certain transactions and business activities. Federal
and state laws require us to obtain surety bonds to secure payment
of certain long-term obligations including mine closure or
reclamation costs and other miscellaneous obligations. The bonds
are renewable on a yearly basis. Surety bond rates have increased
in recent years and the market terms of such bonds have generally
become less favorable. Sureties typically require coal producers to
post collateral, often having a value equal to 40% or more of the
face amount of the bond. As a result, we may be required to provide
collateral, letters of credit or other assurances of payment in
order to obtain the necessary types and amounts of financial
assurance. Under our surety bonding program, we are not currently
required to post any letters of credit or other collateral to
secure the surety bonds; obtaining letters of credit in lieu of
surety bonds could result in a significant cost increase. Moreover,
the need to obtain letters of credit may also reduce amounts that
we can borrow under any senior secured credit facility for other
purposes. If, in the future, we are unable to secure surety bonds
for these obligations, and are forced to secure letters of credit
indefinitely or obtain some other form of financial assurance at
too high of a cost, our profitability may be negatively
affected.
Although our
current bonding capacity approved by our surety, Lexon Insurance
Company, is substantial and enough to cover our current and
anticipated future bonding needs, this amount may increase or
decrease over time. As of December 31, 2018, and September 30,
2018, we had outstanding surety bonds at all of our mining
operations totaling approximately$26.66 million.
respectively. As of December 31, 2017 we had outstanding surety
bonds at all of our mining operations totaling approximately $24.80
million. While we anticipate reducing the outstanding surety
bonds through continued reclamation of many of our permits, that
number may increase should we acquire additional mining permits,
acquire additional mining operations, expand our mining operations
that result in additional reclamation bonds, or if any of our sites
encounters additional environmental liability that may require
additional reclamation bonding. While we intend to maintain a
credit profile that eliminates the need to post collateral for our
surety bonds, our surety has the right to demand additional
collateral at its discretion.
Mine Safety and Health
The
Mine Act and the MINER Act, and regulations issued under these
federal statutes, impose stringent health and safety standards on
mining operations. The regulations that have been adopted under the
Mine Act and the MINER Act are comprehensive and affect numerous
aspects of mining operations, including training of mine personnel,
mining procedures, roof control, ventilation, blasting, use and
maintenance of mining equipment, dust and noise control,
communications, emergency response procedures, and other matters.
MSHA regularly inspects mines to ensure compliance with regulations
promulgated under the Mine Act and MINER Act.
79
From
time to time MSHA will also publish new regulations imposing
additional requirements and costs on our operations. For example,
MSHA implemented a rule in August 2014 to lower miners’
exposure to respirable coal mine dust. The rule requires shift dust
to be monitored and reduces the respirable dust standard for
designated occupants and miners. MSHA also finalized a new rule in
January 2015 on proximity detection systems for continuous mining
machines, which requires underground coal mine operators to equip
continuous mining machines, except full-face continuous mining
machines, with proximity detection systems.
Kentucky, West
Virginia, and Virginia all have similar programs for mine safety
and health regulation and enforcement. The various requirements
mandated by federal and state statutes, rules, and regulations
place restrictions on our methods of operation and result in fees
and civil penalties for violations of such requirements or criminal
liability for the knowing violation of such standards,
significantly impacting operating costs and productivity. The
regulations enacted under the Mine Act and MINER Act as well as
under similar state acts are routinely expanded or made more
stringent, raising compliance costs and increasing potential
liability. Our compliance with current or future mine health and
safety regulations could increase our mining costs. At this time,
it is not possible to predict the full effect that new or proposed
statutes, regulations and policies will have on our operating
costs, but any expansion of existing regulations, or making such
regulations more stringent may have a negative impact on the
profitability of our operations. If we were to be found in
violation of mine safety and health regulations, we could face
penalties or restrictions that may materially and adversely impact
our operations, financial results and liquidity.
In
addition, government inspectors have the authority to issue orders
to shut down our operations based on safety considerations under
certain circumstances, such as imminent dangers, accidents,
failures to abate violations, and unwarrantable failures to comply
with mandatory safety standards. If an incident were to occur at
one of our operations, it could be shut down for an extended period
of time, and our reputation with prospective customers could be
materially damaged. Moreover, if one of our operations is issued a
notice of pattern of violations, then MSHA can issue an order
withdrawing the miners from the area affected by any enforcement
action during each subsequent significant and substantial
(“S&S”) citation until the S&S citation or
order is abated. In 2013 MSHA modified the pattern of violations
regulation, allowing, among other things, the use of non-final
citations and orders in determining whether a pattern of violations
exists at a mine.
Workers’ Compensation and Black Lung
We are
insured for workers’ compensation benefits for work related
injuries that occur within our United States operations. We retain
exposure for the first $10,000 per accident for all of our
subsidiaries and are insured above the deductible for statutory
limits. Workers’ compensation liabilities, including those
related to claims incurred but not reported, are recorded
principally using annual valuations based on discounted future
expected payments using historical data of the operating subsidiary
or combined insurance industry data when historical data is
limited. State workers’ compensation acts typically provide
for an exception to an employer’s immunity from civil
lawsuits for workplace injuries in the case of intentional torts.
However, Kentucky’s workers’ compensation act provides
a much broader exception to workers’ compensation immunity.
The exception allows an injured employee to recover against his or
her employer where he or she can show damages caused by an unsafe
working condition of which the employer was aware that was a
violation of a statute, regulation, rule or consensus industry
standard. These types of lawsuits are not uncommon and could have a
significant impact on our operating costs.
The
Patient Protection and Affordable Care Act includes significant
changes to the federal black lung program including an automatic
survivor benefit paid upon the death of a miner with an awarded
black lung claim and the establishment of a rebuttable presumption
with regard to pneumoconiosis among miners with 15 or more years of
coal mine employment that are totally disabled by a respiratory
condition. These changes could have a material impact on our costs
expended in association with the federal black lung program. In
addition to possibly incurring liability under federal statutes, we
may also be liable under state laws for black lung
claims.
80
Clean Air Act
The CAA
and comparable state laws that regulate air emissions affect coal
mining operations both directly and indirectly. Direct impacts on
coal mining and processing operations include CAA permitting
requirements and emission control requirements relating to air
pollutants, including particulate matter such as fugitive dust. The
CAA indirectly affects coal mining operations by extensively
regulating the emissions of particulate matter, sulfur dioxide,
nitrogen oxides, mercury and other compounds emitted by coal-fired
power plants. In addition to the GHG issues discussed below, the
air emissions programs that may materially and adversely affect our
operations, financial results, liquidity, and demand for our coal,
directly or indirectly, include, but are not limited to, the
following:
●
Clean Air Interstate Rule and Cross-State Air
Pollution Rule. the Clean Air Interstate Rule
(“CAIR”) calls for power plants in 28 states and the
District of Columbia to reduce emission levels of sulfur dioxide
and nitrogen oxide pursuant to a cap-and-trade program similar to
the system now in effect for acid rain. In June 2011, the EPA
finalized the Cross-State Air Pollution Rule (“CSAPR”),
a replacement rule to CAIR, which requires 28 states in the Midwest
and eastern seaboard of the U.S. to reduce power plant emissions
that cross state lines and contribute to ozone and/or fine particle
pollution in other states. Following litigation over the rule, the
EPA issued an interim final rule reconciling the CSAPR rule with a
court order, which calls for Phase 1 implementation of CSAPR in
2015 and Phase 2 implementation in 2017. In September 2016, the EPA
finalized an update to CSAPR for the 2008 ozone NAAQS by issuing
the final CSAPR Update. Beginning in May 2017, this rule will
reduce summertime (May—September) nitrogen oxide emissions
from power plants in 22 states in the eastern United States. For
states to meet their requirements under CSAPR, a number of
coal-fired electric generating units will likely need to be
retired, rather than retrofitted with the necessary emission
control technologies, reducing demand for thermal coal. However,
the practical impact of CSAPR may be limited because utilities in
the U.S. have continued to take steps to comply with CAIR, which
requires similar power plant emissions reductions, and because
utilities are preparing to comply with the Mercury and Air Toxics
Standards (“MATS”) regulations, which require
overlapping power plant emissions reductions.
●
Acid Rain. Title IV of the CAA requires
reductions of sulfur dioxide emissions by electric utilities and
applies to all coal-fired power plants generating greater than 25
Megawatts of power. Affected power plants have sought to reduce
sulfur dioxide emissions by switching to lower sulfur fuels,
installing pollution control devices, reducing electricity
generating levels or purchasing or trading sulfur dioxide emission
allowances. These reductions could impact our customers in the
electric generation industry. These requirements are not supplanted
by CSAPR.
●
NAAQS for Criterion Pollutants. The CAA
requires the EPA to set standards, referred to as NAAQS, for six
common air pollutants: carbon monoxide, nitrogen dioxide, lead,
ozone, particulate matter and sulfur dioxide. Areas that are not in
compliance (referred to as non-attainment areas) with these
standards must take steps to reduce emissions levels. The EPA has
adopted more stringent NAAQS for nitrogen oxide, sulfur dioxide,
particulate matter and ozone. As a result, some states will be
required to amend their existing individual state implementation
plans (“SIPs”) to achieve compliance with the new air
quality standards. Other states will be required to develop new
plans for areas that were previously in “attainment,”
but do not meet the revised standards. For example, in October
2015, the EPA finalized the NAAQS for ozone pollution and reduced
the limit to parts per billion (ppb) from the previous 75 ppb
standard. Under the revised ozone NAAQS, significant additional
emissions control expenditures may be required at coal-fired power
plants. The final rules and new standards may impose additional
emissions control requirements on our customers in the electric
generation, steelmaking, and coke industries. Because coal mining
operations emit particulate matter and sulfur dioxide, our mining
operations could be affected when the new standards are implemented
by the states.
●
Nitrogen Oxide SIP Call. The nitrogen
oxide SIP Call program was established by the EPA in October 1998
to reduce the transport of nitrogen oxide and ozone on prevailing
winds from the Midwest and South to states in the Northeast, which
alleged that they could not meet federal air quality standards
because of migrating pollution. The program is designed to reduce
nitrogen oxide emissions by one million tons per year in 22 eastern
states and the District of Columbia. As a result of the program,
many power plants have been or will be required to install
additional emission control measures, such as selective catalytic
reduction devices. Installation of additional emission control
measures will make it costlier to operate coal-fired power plants,
potentially making coal a less attractive fuel.
81
●
Mercury and Hazardous Air Pollutants.
In February 2012, the EPA formally adopted the MATS rule to
regulate emissions of mercury and other metals, fine particulates,
and acid gases such as hydrogen chloride from coal- and oil-fired
power plants. Following a legal challenge to MATS, the EPA issued a
new determination in April 2016 that it is appropriate and
necessary to regulate these pollutants from power plants. Like
CSAPR, MATS and other similar future regulations could accelerate
the retirement of a significant number of coal-fired power plants.
Such retirements would likely adversely impact our
business.
Global Climate Change
Climate
change continues to attract considerable public and scientific
attention. There is widespread concern about the contributions of
human activity to such changes, especially through the emission of
GHGs. There are three primary sources of GHGs associated with the
coal industry. First, the end use of our coal by our customers in
electricity generation, coke plants, and steelmaking is a source of
GHGs. Second, combustion of fuel by equipment used in coal
production and to transport our coal to our customers is a source
of GHGs. Third, coal mining itself can release methane, which is
considered to be a more potent GHG than CO2, directly into the
atmosphere. These emissions from coal consumption, transportation
and production are subject to pending and proposed regulation as
part of initiatives to address global climate change.
As a
result, numerous proposals have been made and are likely to
continue to be made at the international, national, regional and
state levels of government to monitor and limit emissions of GHGs.
Collectively, these initiatives could result in higher electric
costs to our customers or lower the demand for coal used in
electric generation, which could in turn adversely impact our
business.
At
present, we are principally focused on metallurgical coal
production, which is not used in connection with the production of
power generation. However, we may seek to sell greater amounts of
our coal into the power-generation market in the future. The market
for our coal may be adversely impacted if comprehensive legislation
or regulations focusing on GHG emission reductions are adopted, or
if our customers are unable to obtain financing for their
operations. At the international level, the United Nations
Framework Convention on Climate Change released an international
climate agreement in December 2015. The agreement has been ratified
by more than 70 countries, and entered into force in November
2016.Although this agreement does not create any binding
obligations for nations to limit their GHG emissions, it does
include pledges to voluntarily limit or reduce future emissions. In
addition, in November 2014, President Obama announced that the
United States would seek to cut net GHG emissions 26-28 percent
below 2005 levels by 2025 in return for China’s commitment to
seek to peak emissions around 2030, with concurrent increases in
renewable energy.
At the
federal level, no comprehensive climate change legislation has been
implemented to date. The EPA has, however, has determined that
emissions of GHGs present an endangerment to public health and the
environment, because emissions of GHGs are, according to the EPA,
contributing to the warming of the earth’s atmosphere and
other climatic changes. Based on these findings, the EPA has begun
adopting and implementing regulations to restrict emissions of GHGs
under existing provisions of the CAA. For example, in August 2015,
EPA finalized the CPP to cut carbon emissions from existing power
plants. The CPP creates individualized emission guidelines for
states to follow, and requires each state to develop an
implementation plan to meet the individual state’s specific
targets for reducing GHG emissions. The EPA also proposed a federal
compliance plan to implement the CPP in the event that a state does
not submit an approvable plan to the EPA. In February 2016, the
U.S. Supreme Court granted a stay of the implementation of the CPP.
This stay suspends the rule and will remain in effect until the
completion of the appeals process. The Supreme Court’s stay
only applies to EPA’s regulations for CO2 emissions from
existing power plants and will not affect EPA’s standards for
new power plants. If the CPP is ultimately upheld, and depending on
how it is implemented by the states, it could have an adverse
impact on the demand for coal for electric generation.
At the
state level, several states have already adopted measures requiring
GHG emissions to be reduced within state boundaries, including
cap-and-trade programs and the imposition of renewable energy
portfolio standards. Various states and regions have also adopted
GHG initiatives and certain governmental bodies, have imposed, or
are considering the imposition of, fees or taxes based on the
emission of GHGs by certain facilities. A number of states have
also enacted legislative mandates requiring electricity suppliers
to use renewable energy sources to generate a certain percentage of
power.
82
The
uncertainty over the outcome of litigation challenging the CPP and
the extent of future regulation of GHG emissions may inhibit
utilities from investing in the building of new coal-fired plants
to replace older plants or investing in the upgrading of existing
coal-fired plants. Any reduction in the amount of coal consumed by
electric power generators as a result of actual or potential
regulation of GHG emissions could decrease demand for our coal,
thereby reducing our revenues and materially and adversely
affecting our business and results of operations. We or prospective
customers may also have to invest in CO2 capture and storage
technologies in order to burn coal and comply with future GHG
emission standards.
Finally, there have
been attempts to encourage greater regulation of coalbed methane
because methane has a greater GHG effect than CO2. Methane from
coal mines can give rise to safety concerns, and may require that
various measures be taken to mitigate those risks. If new laws or
regulations were introduced to reduce coalbed methane emissions,
those rules could adversely affect our costs of operations by
requiring installation of air pollution controls, higher taxes, or
costs incurred to purchase credits that permit us to continue
operations.
Clean Water Act
The CWA
and corresponding state laws and regulations affect coal mining
operations by restricting the discharge of pollutants, including
dredged or fill materials, into waters of the United States.
Likewise, permits are required under the CWA to construct
impoundments, fills or other structure in areas that are designated
as waters of the United States. The CWA provisions and associated
state and federal regulations are complex and subject to
amendments, legal challenges and changes in implementation. Recent
court decisions, regulatory actions and proposed legislation have
created uncertainty over CWA jurisdiction and permitting
requirements.
Prior
to discharging any pollutants into waters of the United States,
coal mining companies must obtain a National Pollutant Discharge
Elimination System (“NPDES”) permit from the
appropriate state or federal permitting authority. NPDES permits
include effluent limitations for discharged pollutants and other
terms and conditions, including required monitoring of discharges.
Failure to comply with the CWA or NPDES permits can lead to the
imposition of significant penalties, litigation, compliance costs
and delays in coal production. Changes and proposed changes in
state and federally recommended water quality standards may result
in the issuance or modification of permits with new or more
stringent effluent limits or terms and conditions.
For
instance, waters that states have designated as impaired (i.e., as
not meeting present water quality standards) are subject to Total
Maximum Daily Load regulations, which may lead to the adoption of
more stringent discharge standards for our coal mines and could
require more costly treatment. Likewise, the water quality of
certain receiving streams requires an anti-degradation review
before approving any discharge permits. TMDL regulations and
anti-degradation policies may increase the cost, time and
difficulty associated with obtaining and complying with NPDES
permits.
In
addition, in certain circumstances private citizens may challenge
alleged violations of NPDES permit limits in court. While it is
difficult to predict the outcome of any potential or future suits,
such litigation could result in increased compliance costs
following the completion of mining at our operations.
Finally, in June
2015, the EPA and the Corps published a new definition of
“waters of the United States” (“WOTUS”)
that became effective on August 28, 2015. Many groups have filed
suit to challenge the validity of this rule. The U.S. Court of
Appeals for the Sixth Circuit stayed the rule nationwide pending
the outcome of this litigation. On January 22, 2018, the Supreme
Court held that the courts of appeals do not have original
jurisdiction to review challenges to the 2015 Rule. With this final
rule, the agencies intend to maintain the status quo by adding an
applicability date to the 2015 Rule and thus providing continuity
and regulatory certainty for regulated entities, the States and
Tribes, and the public while the agencies continue to consider
possible revisions to the 2015 Rule. In light of this holding, in
February 2018 the agencies published a final rule adding an
applicability date to the 2015 Rule of February 6, 2020. We
anticipate that the WOTUS rules, if upheld in litigation, will
expand areas requiring NPDES or Corps Section 404 permits. If so,
the CWA permits we need may not be issued, may not be issued in a
timely fashion, or may be issued with new requirements which
restrict our ability to conduct our mining operations or to do so
profitably.
83
Resource Conservation and Recovery Act
RCRA
and corresponding state laws establish standards for the management
of solid and hazardous wastes generated at our various facilities.
Besides affecting current waste disposal practices, RCRA also
addresses the environmental effects of certain past hazardous waste
treatment, storage and disposal practices. In addition, RCRA
requires certain of our facilities to evaluate and respond to any
past release, or threatened release, of a hazardous substance that
may pose a risk to human health or the environment.
RCRA
may affect coal mining operations by establishing requirements for
the proper management, handling, transportation and disposal of
solid and hazardous wastes. Currently, certain coal mine wastes,
such as earth and rock covering a mineral deposit (commonly
referred to as overburden) and coal cleaning wastes, are exempted
from hazardous waste management under RCRA. Any change or
reclassification of this exemption could significantly increase our
coal mining costs.
EPA
began regulating coal ash as a solid waste under Subtitle D of RCRA
in 2015. The EPA’s rule requires closure of sites that fail
to meet prescribed engineering standards, regular inspections of
impoundments, and immediate remediation and closure of unlined
ponds that are polluting ground water. The rule also establishes
limits for the location of new sites. However, the rule does not
regulate closed coal ash impoundments unless they are located at
active power plants. These requirements, as well as any future
changes in the management of coal combustion residues, could
increase our customers’ operating costs and potentially
reduce their ability or need to purchase coal. In addition,
contamination caused by the past disposal of coal combustion
residues, including coal ash, could lead to material liability for
our customers under RCRA or other federal or state laws and
potentially further reduce the demand for coal.
Comprehensive Environmental Response, Compensation and Liability
Act
CERCLA
and similar state laws affect coal mining operations by, among
other things, imposing cleanup requirements for threatened or
actual releases of hazardous substances into the environment. Under
CERCLA and similar state laws, joint and several liability may be
imposed on hazardous substance generators, site owners,
transporters, lessees and others regardless of fault or the
legality of the original disposal activity. Although the EPA
excludes most wastes generated by coal mining and processing
operations from the primary hazardous waste laws, such wastes can,
in certain circumstances, constitute hazardous substances for the
purposes of CERCLA. In addition, the disposal, release or spilling
of some products used by coal companies in operations, such as
chemicals, could trigger the liability provisions of CERCLA or
similar state laws. Thus, we may be subject to liability under
CERCLA and similar state laws for coal mines that we currently own,
lease or operate or that we or our predecessors have previously
owned, leased or operated, and sites to which we or our
predecessors sent hazardous substances. These liabilities could be
significant and materially and adversely impact our financial
results and liquidity.
Endangered Species and Bald and Golden Eagle Protection
Acts
The ESA
and similar state legislation protect species designated as
threatened, endangered or other special status. The U.S. Fish and
Wildlife Service (the “USFWS”) works closely with the
OSM and state regulatory agencies to ensure that species subject to
the ESA are protected from mining-related impacts. Several species
indigenous to the areas in which we operate area protected under
the ESA. Other species in the vicinity of our operations may have
their listing status reviewed in the future and could also become
protected under the ESA. In addition, the USFWS has identified bald
eagle habitat in some of the counties where we operate. The Bald
and Golden Eagle Protection Act prohibits taking certain actions
that would harm bald or golden eagles without obtaining a permit
from the USFWS. Compliance with the requirements of the ESA and the
Bald and Golden Eagle Protection Act could have the effect of
prohibiting or delaying us from obtaining mining permits. These
requirements may also include restrictions on timber harvesting,
road building and other mining or agricultural activities in areas
containing the affected species or their habitats.
84
Use of Explosives
Our
surface mining operations are subject to numerous regulations
relating to blasting activities. Due to these regulations, we will
incur costs to design and implement blast schedules and to conduct
pre-blast surveys and blast monitoring, either directly or through
the costs of a contractor we may employ. In addition, the storage
of explosives is subject to various regulatory requirements. For
example, pursuant to a rule issued by the Department of Homeland
Security in 2007, facilities in possession of chemicals of interest
(including ammonium nitrate at certain threshold levels) are
required to complete a screening review. Our mines are low risk,
Tier 4 facilities which are not subject to additional security
plans. In 2008, the Department of Homeland Security proposed
regulation of ammonium nitrate under the ammonium nitrate security
rule. Additional requirements may include tracking and
verifications for each transaction related to ammonium nitrate,
though a final rule has yet to be issued. Finally, in December
2014, the OSM announced its decision to pursue a rulemaking to
revise regulations under SMCRA which will address all blast
generated fumes and toxic gases. OSM has not yet issued a proposed
rule to address these blasts. The outcome of these rulemakings
could materially adversely impact our cost or ability to conduct
our mining operations.
National Environmental Policy Act
NEPA
requires federal agencies, including the Department of Interior, to
evaluate major agency actions that have the potential to
significantly impact the environment, such as issuing a permit or
other approval. In the course of such evaluations, an agency will
typically prepare an environmental assessment to determine the
potential direct, indirect and cumulative impacts of a proposed
project. Where the activities in question have significant impacts
to the environment, the agency must prepare an environmental impact
statement. Compliance with NEPA can be time-consuming and may
result in the imposition of mitigation measures that could affect
the amount of coal that we are able to produce from mines on
federal lands, and may require public comment. Furthermore, whether
agencies have complied with NEPA is subject to protest, appeal or
litigation, which can delay or halt projects. The NEPA review
process, including potential disputes regarding the level of
evaluation required for climate change impacts, may extend the time
and/or increase the costs and difficulty of obtaining necessary
governmental approvals, and may lead to litigation regarding the
adequacy of the NEPA analysis, which could delay or potentially
preclude the issuance of approvals or grant of leases.
The
Council on Environmental Quality recently released guidance
discussing how federal agencies should consider the effects of GHG
emissions and climate change in their NEPA evaluations. The
guidance encourages agencies to provide more detailed discussion of
the direct, indirect, and cumulative impacts of a proposed
action’s reasonably foreseeable emissions and effects. This
guidance could create additional delays and costs in the NEPA
review process or in our operations, or even an inability to obtain
necessary federal approvals for our operations due to the increased
risk of legal challenges from environmental groups seeking
additional analysis of climate impacts.
Other Environmental Laws
We are
required to comply with numerous other federal, state, and local
environmental laws and regulations in addition to those previously
discussed. These additional laws include but are not limited to the
Safe Drinking Water Act, the Toxic Substances Control Act, and the
Emergency Planning and Community Right-to-Know Act. Each of these
laws can impact permitting or planned operations and can result in
additional costs or operational delays.
Seasonality
Our
primary business is not materially impacted by seasonal
fluctuations. Demand for metallurgical coal, thermal coal, and the
other coals we intend to produce is generally more heavily
influenced by other factors such as the general economy, interest
rates and commodity prices.
Employees
The
Company, through its operating subsidiaries, employs a combination
of company employees and contract labor to mine coal, process coal,
and related functions. The Company is continually evaluating the
use of company employees and contract labor to determine the
optimal mix of each, given the needs of the Company. Currently,
McCoy Elkhorn’s Mine #15, Carnegie 1 Mine, and Deane
Mining’s Access Energy mine are primarily run by company
employees, while Deane Mining’s Razorblade Surface mine,
Knott County Coals’ Wayland Surface mine, and McCoy
Elkhorn’s PointRock mine are primarily run (or expected to be
run) by contract labor, and the Company’s various coal
preparation facilities are run by company employees.
85
The
Company currently has approximately 216 employees (excluding personnel hired through
contractors), with a substantial majority based in
eastern Kentucky. The Company is headquartered in Fishers, Indiana
with six members of the Company’s executive team based at
this location.
Results of Operations For The Nine Month Period Ended September 30,
2018
Our
consolidated operations had operating revenues of $9,038,268 and
$23,386,684 for the three-months and nine-months ended September
30, 2018 and $4,351,968 and $15,334,047 operating revenue for the
three-months and nine-months ended September 30, 2017.
For
the three-months and nine-months ended September 30, 2018 we have
incurred net loss attributable to American Resources Corporation
shareholders in the amount of $3,628,226 and $8,245,588. For the
three-months and nine-months ended September 30, 2017 we have
incurred net loss attributable to American Resources Corporation
shareholders in the amount of $1,809,643 and
$9,012,121.
The
primary driver for increased revenue was the commencement of
underground mining operations at the Access Energy Mine in
September 2017 along with more production from McCoy’s Mine
#15 and Carnegie mine. The primary driver for decreased net loss
was an increased gross margin during 2018 and higher revenue
volume. Additionally, more coal was sold into the export market
lowering the taxes paid on customer sales.
From
our inception to-date our activities have been primarily financed
from the proceeds of our acquisitions, Series B equity investments
and loans.
For
the three months ended September 30, 2018 and 2017, coal sales and
processing expenses were $6,690,698 and $2,797,140 respectively,
development costs, including loss on settlement of ARO were
$2,188,833 and$1,065,341,
respectively, and production taxes and royalties $1,041,667 and
$865,950, respectively. Depreciation expense for the same periods
ended September 30, 2018 and 2017 were $649,983 and $697,214
respectively.
For
the nine months ended September, 2018 and 2017, coal sales and
processing expenses were $16,783,801 and $12,307,399 respectively,
development costs, including loss on settlement of ARO were
$5,908,207 and $4,454,666,
respectively, and production taxes and royalties $2,769,584 and
$3,464,611, respectively. Depreciation expense for the same periods
ended September 30, 2018 and 2017 were $1,779,539 and $1,856,442
respectively.
Liquidity and Capital Resources
As
of September 30, 2018, our available cash was $343,782. We expect
to fund our liquidity requirements with cash on hand, future
borrowings and cash flow from operations. If future cash flows are
insufficient to meet our liquidity needs or capital requirements,
we may reduce our mine development and/or fund a portion of our
expenditures through issuance of debt or equity securities, the
entry into debt arrangements for from other sources, such as asset
sales.
For
the nine months ending September 30, 2018 our net cash flow used in
operating activities was $4,076,157 and for the nine months ending
September 30, 2017 the net cash flow used in operating activities
was $951,367.
For
the nine months ending September 30, 2018 and 2017 our net cash
flows used in investing activities were $5,235 and provided by
investing activities $218,048 respectively.
For
the nine months ending September 30, 2018 and 2017 net cash
proceeds from financing activities were $4,039,509 and $479,847,
respectively.
As
a public company, we will be subject to certain reporting and other
compliance requirements of a publicly reporting company. We will be
subject to certain costs for such compliance which private
companies may not choose to make. We have identified such costs as
being primarily for audits, legal services, filing expenses,
financial and reporting controls and shareholder communications and
estimate the cost to be approximately $10,000 monthly if the
activities of our Company remain somewhat the same for the next few
months. We have included such costs in our monthly cash flow needs
and expect to pay such costs from a combination of cash from
operations.
Off Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements that we are required
to disclose pursuant to these regulations. In the ordinary course
of business, we enter into operating lease commitments, purchase
commitments and other contractual obligations. These transactions
are recognized in our financial statements in accordance with
generally accepted accounting principles in the United
States.
Results of Operations for the years ended December 31,
2017 and December 31, 2016.
Revenues.
Revenues
for the period ended December 31, 2017 was $20,820,998 and 2016 was
$7,601,194, respectively. The primary drivers for revenue growth
was a full year of production from the Mine #15 of McCoy Elkhorn
and the beginning of production at the Access Energy mine of Deane
Mining in September 2017. Increase mine production was necessary to
fulfill market demands and customer orders.
86
Expenses.
Total
Operating Expenses for the period ended December 31, 2017 was
$34,839,884 and 2016 was $29,452,263, respectively. The primary
drivers for increase in operating expenses was a full year of
production from the Mine #15 of McCoy Elkhorn and the beginning of
production at the Access Energy mine of Deane Mining in September
2017. Production expenses, such as underground mine roof control,
mining consumables and wages increased as coal mining production
increased. The increased need for production expenses was caused to
the increased demand for the end product due to market demands and
customer orders. If demand from customers for our coal continues to
increase, we anticipate these production expenses will also
increase.
Total
Other Expenses for the period ended December 31, 2017 was $6,580
and 2016 was $238,213, respectively. The primary driver for
decrease in other expenses was an increase in royalty and interest
income from consolidated subsidiaries.
Financial Condition.
Total
Assets as of December 31, 2017 amounted to $18,263,385 and 2016
amounted to $20,273,829, respectively. The primary drivers for
lower asset balance is current year depreciation and lower accounts
receivable balance.
Total
Liabilities as of December 31, 2017 amounted to $58,356,449 and
2016 amounted to $47,781,427, respectively. The primary drivers for
the increase in liability balance is an increase in accounts
payable and equipment and term debt.
Liquidity and Capital Resources.
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern which contemplates,
among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business.
We
are not aware of any trends or known demands, commitments, events
or uncertainties that will result in or that are reasonably likely
to result in material increases or decreases in
liquidity.
Capital Resources.
We
had no material commitments for capital expenditures as of December
31, 2017.
Off-Balance Sheet Arrangements
We
have made no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
DIRECTORS AND EXECUTIVE OFFICERS
The
following sets forth information regarding our directors and
executive officers.
Name
|
|
Age
|
|
Positions
|
|
|
|
|
|
Mark C.
Jensen
|
|
39
|
|
Chief
Executive Officer, Chairman of the Board of Directors
|
|
|
|
|
|
Thomas
M. Sauve
|
|
39
|
|
President,
Director
|
|
|
|
|
|
Kirk P.
Taylor
|
|
39
|
|
Chief
Financial Officer
|
|
|
|
|
|
Tarlis
R. Thompson
|
|
35
|
|
Chief
Operating Officer
|
|
|
|
|
|
Randal
V. Stephenson
|
|
58
|
|
Director
|
|
|
|
|
|
Ian
Sadler
|
|
67
|
|
Director
|
|
|
|
|
|
Courtenay
O. Taplin
|
|
69
|
|
Director
|
87
Mark C. Jensen - Chairman
& Chief Executive Officer: Mark has been an operator,
investor and consultant in various natural resources and energy
businesses.Prior to forming
Quest Energy in 2015, he has been highly involved in the
navigation of numerous growth businesses to mature businesses,
working as a managing member at T Squared Capital LLC since 2007,
an investment firm focused on private equity styled investing in
start-up businesses. Upon the merger
with NGFC, Mark continued his role as Chief Executive
Officer. As Chief Executive
Officer, Mark’s duties include setting overall Company
strategy, acquisition due diligence and communicating on a periodic
basis with the Board of Directors. Mark has significant
experience with major Wall Street firms such as Citigroup and
graduated from the Kelley School of Business at Indiana University
with a BS in Finance and International Studies with a focus on
Business. Mark also studied in Sydney Australia through Boston
University completing his International Studies degree with a focus
on East Asian culture and business. There are no arrangements or
understandings between Mark and any other persons pursuant to which
he was selected as an officer. He has no direct or indirect
material interest in any transaction required to be disclosed
pursuant to Item 404(a) of Regulation S-K.
Thomas M. Sauve - President
& Director: Tom has been involved a number of energy
related businesses. Prior he had been an investor and partner in
various natural resources assets over the last seven years
including coal mining operations and various oil and gas wells
throughout Texas and the Appalachia region. Prior to forming
Quest Energy in 2015, Tom worked as a managing member at T
Squared Capital LLC, an investment firm focused on private equity
styled investing in start-up businesses. Upon the merger
with NGFC, Tom continued his role as President. As President,
Tom’s duties include overseeing day-to-day operations,
acquisition due diligence and communicating on a periodic basis
with the Board of Directors. Tom received his Bachelor's
degree in Economics, magna cum laude, from the University of
Rochester, New York, with additional studies at the Simon Graduate
School of Business. There are no arrangements or understandings
between Tom and any other persons pursuant to which he was selected
as an officer. He has no direct or indirect material interest in
any transaction required to be disclosed pursuant to Item 404(a) of
Regulation S-K.
Kirk P. Taylor, CPA - Chief
Financial Officer: Kirk conducts all tax and financial
accounting roles of the organization, and has substantial
experience in tax credit analysis and financial structure.
Kirk’s main focus over his 13 years in public accounting had
been the auditing, tax compliance, financial modeling and reporting
on complex real estate and business transactions utilizing numerous
federal and state tax credit and incentive programs. Prior to
joining American Resources Corporation, Kirk was Chief Financial
Officer of Quest Energy, Inc., ARC’s wholly-owned subsidiary.
Prior to forming Quest Energy in 2015, he was a Manager at K.B.
Parrish & Co. LLP where he worked since 2014. Prior to that, he
worked at Katz Sapper Miller since 2012 as Manager. Upon the merger
with NGFC, Kirk continued his role as Chief Financial
Officer. As Chief Financial
Officer, Kirk’s duties include overseeing day-to-day
financial operations, financial reporting and communicating on a
periodic basis with regulatory bodies. In addition, Kirk is
an instructor for the CPA examination and has spoken at several
training and industry conferences. He received a BS in Accounting
and a BS in Finance from the Kelley School of Business at Indiana
University, Bloomington Indiana and is currently completing his
Masters of Business Administration from the University of Saint
Francis at Fort Wayne, Indiana. Kirk serves his community in
various ways including as the board treasurer for a community
development corporation in Indianapolis, Indiana. Kirk does not
have any family relationships with any of the Company's directors
or executive officers. There are no arrangements or understandings
between Kirk and any other persons pursuant to which he was
selected as an officer. He has no direct or indirect material
interest in any transaction required to be disclosed pursuant to
Item 404(a) of Regulation S-K.
Tarlis R. Thompson - Chief
Operating Officer: Tarlis overseas all operations at
American Resources’ Central Appalachian subsidiaries, which
includes McCoy Elkhorn, Deane Mining, and Knott County Coal. In
this role, Tarlis manages the activities at the company’s
various coal processing facilities and loadout, coordinates coal
production at the company’s various mines, manages
environmental compliance and reclamation, and is responsible for
coal quality control and shipments to customers. Tarlis graduated
from Millard High School in Kentucky in 2001 and subsequently
worked for Commercial Testing and Engineering, working underground,
performing surveying services and coal sampling. In 2002 he joined
SGS Minerals, working as a Quality Control Manager. Shortly
thereafter, he joined Massey Energy, working as logistics manager
for coal shipments via truck and train, as well as a coal quality
manager, working under Jim Slater and Mike Smith. After several
years at Massey, Tarlis joined Central Appalachian Mining (CAM), in
charge of lab analysis and environmental compliance at CAM’s
various processing plants and loadouts. Tarlis graduated from
Millard High School and has additional courses in Mining
Engineering from Virginia Tech (Training), Business Administration
Management from National College in Pikeville, and LECO Certified
Course from West Virginia Training Institute. Tarlis does not have
any family relationships with any of the Company's directors or
executive officers. There are no arrangements or understandings
between Tarlis and any other persons pursuant to which he was
selected as an officer. He has no direct or indirect material
interest in any transaction required to be disclosed pursuant to
Item 404(a) of Regulation S-K.
Randal V. Stephenson -
Director: Randal serves as Director of American Resources
Corporation. He was previously co-founder and CEO of a boutique
FINRA-licensed broker dealer focused in the natural resources
industry from 2012 to 2018 and has started and expanded several
successful investment banking platforms previously at Merrill Lynch
(from 2000 to 2002), Jefferies (from 2002 to 2006), CIT Group (from
2006 to 2007) and Duff & Phelps (from 2010 to 2012). Randal
started and managed a mining & metals equity investment
subsidiary of a global trading company, acquiring over $1.0 billion
in operating businesses and assets starting from just a corporate
development plan. He has worldwide relationships with corporations,
financial sponsors, entrepreneurs and governments and has closed
over 200 transactions valued in excess of $40 billion. Randal
graduated with a Bachelor of Arts degree from the University of
Michigan, Ann Arbor and has a Master of Business Administration
degree from Harvard University in 1990 and his Juris Doctorate
(with honors) from Boston College Law School in 1986. He is an
attorney admitted to practice in New York, and holds the Series 7,
79, 63 and 24 securities licenses. The Board nominated Randal to
serve as a director because of his leadership experience and
leadership in the finance industry and assisting companies with
capital raising.
Ian Sadler -
Director: Ian serves as Director of American Resources
Corporation. He brings decades of direct leadership and experience
in the steel industry and has demonstrated expertise in
successfully leading rapidly-growing companies, optimizing
operational efficiencies and performance enhancements. He has
experience in due diligence, joint ventures and mergers and
acquisitions with a history of successfully assimilating acquired
businesses into value creating enterprises. Prior to retirement, in
2002 Ian was the President and CEO of Miller Centrifugal Casting
International in Cecil, PA. He has a history of leadership with the
Pennsylvania Foundry Group from 2001 to 2002, Shenango LLC from
1994 to 2001, Johnstown Corporation from 1989 to 1994, Blaw-Knox
Corp. from 1988 to 1989, and National Roll Company from 1984 to
1988. He received his Bachelor’s Degree, with First Class
Honors, and Master’s Degree in Metallurgy from Cambridge
University in 1972 and 1976, respectively and was a prior President
of the American Institute of Mining, Metallurgical and Petroleum
Engineers (AIME) and previously served as President of the Iron and
Steel Society. The Board nominated Ian to serve as a director
because of his executive management experience and experience with
growing companies in an efficient and cost-effective
manner.
88
Courtenay O. Taplin -
Director: Courtenay serves as Director of American Resources
Corporation. He brings over 40 years of experience of sourcing and
supplying iron ore, coke and metallurgical coal to the steel
industry to assist American Resources with their supply chain,
logistics, customers, overall corporate strategy. He has a vast
knowledge of both the global and domestic marketplace where he
works with both suppliers and consumers. Courtenay is currently
Managing Director of Compass Point Resources, LLC which he founded
in 2007. His prior experience includes Crown Coal & Coke
Company from 1989 to 2007 and Pickands Mather & Company out of
Cleveland, OH from 1974 to 1989. Mr. Taplin attended Hobart College
from 1968 to 1971 and received his degree from Case Western Reserve
University in 1974. The Board nominated Courtenay to serve as a
director because of his experience and relationships in the raw
materials and coking sector and his experience in managing growing
businesses.
None of
the officers and directors have been involved in any legal
proceedings that would require a disclosure under Item 401 of
Regulation SK.
Board of Directors
Our
board of directors currently consists of five members, including
our Chairman and Chief Executive Officer, our President, and three
independent directors.
In
evaluating director candidates, we will assess whether a candidate
possesses the integrity, judgment, knowledge, experience, skills
and expertise that are likely to enhance the board of
directors’ ability to manage and direct our affairs and
business, including, when applicable, to enhance the ability of the
committees of the board of directors to fulfill their duties. Our
directors hold office until the earlier of their death,
resignation, retirement, disqualification or removal or until their
successors have been duly elected and qualified.
Director Compensation
We
currently have not established standard compensation arrangements
for our directors and the compensation payable to each individual
for their service on our Board will be determined from time to time
by our board of directors based upon the amount of time expended by
each of the directors on our behalf. Currently, executive officers
of our company who are also members of the board of directors do
not receive any compensation specifically for their services as
directors.
89
Director Independence
Currently our board
of directors consist of Mark C. Jensen, our Chief Executive
Officer, Thomas M. Sauve, our President, Randal V. Stephenson, Ian
Sadler, and Courtenay O. Taplin, of which Messrs Stephenson,
Sadler, and Taplin are considered independent in accordance under
the requirements of the NASDAQ, NYSE and SEC.
Committees of the Board of Directors
Currently, our
board of directors has three committee: an Audit Committee, a
Compensation Committee, and a Safety and Environmental Committee.
The Audit Committee and Compensation Committee are both comprised
of the three in independent directors of the company. The Safety
and Environmental Committee is comprised of Thomas M. Sauve and
Mark C. Jensen. The composition and responsibilities of the three
committees are described below.
Audit Committee
As
required by the rules of the SEC, the audit committee consists
solely of independent directors, which is Messrs
Stephenson, Sadler, and Taplin. SEC rules also require that
a public company disclose whether or not its audit committee has an
“audit committee financial expert” as a member. An
“audit committee financial expert” is defined as a
person who, based on his or her experience, possesses the
attributes outlined in such rules.
This
committee oversees, reviews, acts on and reports on various
auditing and accounting matters to our board of directors,
including: the selection of our independent accountants, the scope
of our annual audits, fees to be paid to the independent
accountants, the performance of our independent accountants and our
accounting practices. In addition, the audit committee oversees our
compliance programs relating to legal and regulatory requirements.
We have adopted an audit committee charter defining the
committee’s primary duties in a manner consistent with the rules
of the SEC and applicable stock exchange or market
standards.
Compensation Committee
As
required by the rules of the SEC, the compensation committee
consists solely of independent directors, which is Messrs
Stephenson, Sadler, and Taplin. The purpose of this committee shall
be to (i) assist the board of directors in the oversight of the
Company’s executive officer and director compensation
programs, (ii) discharge the board of director’s duties
relating to administration of the Company’s incentive
compensation and any other stock- based plans, and (iii) act on
specific matters within its delegated authority, as determined by
the board of directors from time to time.
Safety and Environmental Committee
The
board of directors formed a Safety and Environmental Committee,
which is comprised of Messrs Jensen and Sauve. The purpose of this
committee is to assist the board in fulfilling its responsibilities
by providing oversight and support in assessing the effectiveness
of the Company’s environmental, health, and safety policies,
programs and initiatives. This committee will monitor the continued
effectiveness of these policies and procedures by periodically
reviewing the applicable environmental, health and safety laws,
rules and regulations. The Committee will also perform such other
functions as the Board may assign to the Committee from time to
time.
Code of Business Conduct and Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to all
of our employees, officers and directors. In addition to the Code
of Business Conduct and Ethics, our principal executive officer,
principal financial officer and principal accounting officer are
also subject to written policies and standards that are reasonably
designed to deter wrongdoing and to promote: honest and ethical
conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships; full, fair, accurate, timely and understandable
disclosure in reports and documents that are filed with, or
submitted to the SEC and in other public communications made by us;
compliance with applicable government laws, rules and regulations;
the prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
accountability for adherence to the code. We have posted the text
of our Code of Business Conduct and Ethics on our internal network.
We intend to disclose future amendments to, or waivers from,
certain provisions of our Code of Business Conduct and Ethics as
applicable.
90
EXECUTIVE COMPENSATION
Summary
Compensation Table - Officers
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i) |
(j)
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive plan
Compensation
($)
|
Nonqualified deferred compensation earnings
($)
|
All other
Compensation
($)
|
Total
($)
|
I. Andrew
Weeraratne,
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
(1) CEO,
CFO
|
2017
|
5,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Mark C. Jensen, (2)
CEO
|
2018
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
16,326
|
172,326
|
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Sauve,
(3) President
|
2018
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
16,326
|
172,326
|
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
|
Kirk P. Taylor, (4)
CFO
|
2018
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
20,006
|
179,006
|
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
|
Tarlis R Thompson,
(5) COO
|
2018
|
117,055
|
-0-
|
-0-
|
76,624
|
-0-
|
-0-
|
-0-
|
193,679
|
|
2017
|
111,280
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
111,280
|
_______________
(1)
|
The
amount of value for the services of Mr. Weeraratne was determined
by agreement for shares in which he received as a founder for (1)
control, (2) willingness to serve on the Board of Directors and (3)
participation in the foundational days of the corporation. Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(2)
|
Of the
2017 salary amount listed in this table, $32,000 was accrued and
unpaid in 2017. On January 2, 2018, the Company entered into an
employment agreement with Mr. Jensen, at an annual salary rate of
$156,000. The Company also has provided for a discretionary
quarterly performance bonus of up to $.64 per clean ton of coal
mined. The payment of such bonus shall be in the sole discretion of
the Company’s management and/or applicable Board of
Directors. Other compensation totaling $16,326 included $16,326
health insurance reimbursement.
|
|
|
(3)
|
Of the
2017 salary amount listed in this table, $32,000 was accrued and
unpaid in 2017. On January 2, 2018, the Company entered into an
employment agreement with Mr. Sauve, at an annual salary rate of
$156,000. The Company also has provided for a discretionary
quarterly performance bonus of up to $.54 per clean ton of coal
mined. The payment of such bonus shall be in the sole discretion of
the Company’s management and/or applicable Board of
Directors. Other compensation totaling $16,326 included $16,326
health insurance reimbursement.
|
|
|
(4)
|
Of the
2017 salary amount listed in this table, $26,293 was accrued and
unpaid in 2017. On January 2, 2018, the Company entered into an
employment agreement with Mr. Taylor, at an annual rate of
$156,000. The Company also has provided for a discretionary
quarterly performance bonus of up to $.20 per clean ton of coal
mined. The payment of such bonus shall be in the sole discretion of
the Company’s management and/or applicable Board of
Directors. Other compensation totaling $20,006 included $18,200
health insurance reimbursement and $4,806 of 2017 accrued
salary.
|
(5)
|
There
is no employment agreement in place for Mr. Thompson. In 2018, Mr.
Thompson was awarded 136,830 options as part of the company’s
2018 stock option plan. The options to Mr. Thompson vest equally
over the course of three years, and as of December 31, 2018, none
of the options have vested.
|
91
(a)
|
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
|
Fees Earned or Paid in
Cash
|
Stock Awards
|
Option Awards
|
Non-Equity Incentive Plan
Compensation
|
Nonqualified deferred compensation
earnings
|
All Other
Compensation
|
Total
|
Name and
principal position
|
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
Mark C. Jensen
(1)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Thomas M. Sauve
(2)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Randal V.
Stephenson (3)
|
2018
|
-0-
|
-0-
|
120,450
|
-0-
|
-0-
|
1,496
|
121,946
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Ian Sadler
(4)
|
2018
|
-0-
|
-0-
|
120,450
|
-0-
|
-0-
|
-0-
|
120,450
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Courtenay O. Taplin
(5)
|
2018
|
-0-
|
-0-
|
120,450
|
-0-
|
-0-
|
-0-
|
120,450
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
James C. New
(6)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
I. Andrew
Weeraratne (7)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Eugene Nichols
(8)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Bo G. Engberg
(9)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
William D. Bishop
(10)
|
2018
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|
2017
|
-0-
|
-0-
|
50,000
|
-0-
|
-0-
|
-0-
|
50,000
|
____________
(1)
Mr.
Jensen was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Jensen, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.64 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Jensen is not paid separately
for his services as a director for the Company.
(2)
Mr.
Sauve was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Sauve, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.54 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Sauve is not paid separately for
his services as a director for the Company.
(3)
Mr.
Stephenson was appointed as a director on November 15, 2018. In
2018, Mr. Stephenson was awarded 15,000 options for services
rendered as a director. The options to Mr. Stephenson vest equally
over the course of three years, and as of December 31, 2018, none
of the options have vested. Other Compensation includes $1,496 of
health insurance premiums paid by the Company.
(4)
Mr.
Sadler was appointed as a director on November 15, 2018. In 2018,
Mr. Sadler was awarded 15,000 options for services rendered as a
director. The options to Mr. Sadler vest equally over the course of
three years, and as of December 31, 2018, none of the options have
vested.
(5)
Mr.
Taplin was appointed as a director on November 15, 2018. In 2018,
Mr. Taplin was awarded 15,000 options for services rendered as a
director. The options to Mr. Taplin vest equally over the course of
three years, and as of December 31, 2018, none of the options have
vested.
(6)
Mr. New
submitted his resignation to the Company on February 7, 2017 in
connection with a change of control of the Company.
(7)
Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
(8)
Mr.
Nichols submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
(9)
Mr.
Engberg submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
(10)
Mr.
Bishop was appointed as director on May 10, 2017 and as
compensation to Bill Bishop for his service on the Board of
Directors, the Company issued Mr. Bishop a three-year option to
purchase up to 8,334 common shares of our company at an exercise
price of $3.60 per share, subject to certain price adjustments and
other provisions found within the option issued to Mr. Bishop.
Effective November 8, 2017, Mr. Bishop resigned as a director of
the Company and Mr. Bishop’s resignation from the Board of
Directors did not result from any disagreement with the
Company.
No
retirement, pension, profit sharing, stock option or insurance
programs or other similar programs have been adopted by the Company
for the benefit of its employees.
There
are no understandings or agreements regarding compensation our
management will receive after a business combination that is
required to be included in this table, or otherwise.
92
Employment Agreements
Except
for our Chief Operating Officer, we have employment agreements with
the Named Executive Officers that provide for the base salaries and
a discretionary annual performance bonus of up to three times their
annual base salary, plus potential participation in the
Company’s Employee Incentive Stock Option Plan. The payment
of such bonus and/or incentive stock options shall be in the sole
discretion of the Company’s Board of Directors.
Outstanding Equity Awards
None of our current
executive officers received any equity awards, including, options,
restricted stock or other equity incentives from the Company as of
the date hereof, other than our Chief Operating Officer, who was
issued options under our Employee Incentive Stock Option Plan on
September 12, 2018 to purchase up to 136,830 shares of our company
at $1.00 per share. Those options vest equally over the course of
three years.
DESCRIPTION OF SECURITIES
General
Upon
completion of this offering, the authorized capital stock of
American Resources Corporation will consist of 230,000,000 shares
of Class A Common Stock, $0.0001 par value per share, of which
23,298,530 Class A Common Shares will be issued and outstanding
post this offering (assuming the full underwriter’s
Over-Allotment of 15%), 5,000,000 shares of Series A Preferred
shares, $0.0001 par value per share, of which no Series A Preferred
shares will be issued and outstanding, 20,000,000 shares of Series
C Preferred shares, $0.0001 par value per share, 50,000 of which
will be issued and outstanding (see “Series C Preferred
Stock” below), and 5,000,000 “blank check”
preferred, of which none will be issued and
outstanding.
The
following summary of the capital stock and certificate of
incorporation and bylaws of American Resources Corporation does not
purport to be complete and is qualified in its entirety by
reference to the provisions of applicable law and to our
certificate of incorporation and by-laws, which are filed as
exhibits to the registration statement of which this prospectus is
a part.
Common Stock
Voting Rights. Holders of shares of
common stock are entitled to one vote per share held of record on
all matters to be voted upon by the stockholders. The holders of
common stock do not have cumulative voting rights in the election
of directors.
Dividend Rights. Holders of shares of
our common stock are entitled to ratably receive dividends when and
if declared by our board of directors out of funds legally
available for that purpose, subject to any statutory or contractual
restrictions on the payment of dividends and to any prior rights
and preferences that may be applicable to any outstanding preferred
stock. Please read “Dividend Policy.”
Liquidation Rights. Upon our
liquidation, dissolution, distribution of assets or other winding
up, the holders of common stock are entitled to receive ratably the
assets available for distribution to the stockholders after payment
of liabilities and the liquidation preference of any of our
outstanding shares of preferred stock.
Other Matters. The shares of common
stock have no preemptive or conversion rights and are not subject
to further calls or assessment by us. There are no redemption or
sinking fund provisions applicable to the common stock. All
outstanding shares of our common stock, including the common stock
offered in this offering, are fully paid and
non-assessable.
Series A Preferred Stock
Our
certificate of incorporation authorizes our board of directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
our Series A Preferred stock, par value $0.0001 per share, covering
up to an aggregate of 5,000,000 shares of Series A Preferred stock.
The Series A Preferred stock will cover the number of shares and
will have the powers, preferences, rights, qualifications,
limitations and restrictions determined by the board of directors,
which may include, among others, dividend rights, liquidation
preferences, voting rights, conversion rights, preemptive rights
and redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
stockholders. As of the date of this offering, no shares of Series
A Preferred stock are outstanding. See “Security Ownership of
Certain Beneficial Owners and Management” for more detail on
the Series A Preferred stock holders.
Voting Rights. Holders of Series A
Preferred shares are entitled to three hundred and thirty three and
one-third (333 (1/3)) votes, on an “as-converted”
basis, per each Series A Preferred share held of record on all
matters to be voted upon by the stockholders.
Dividend Rights. The holders of the
Series A Preferred stock are not entitled to receive
dividends.
93
Conversion Rights. The holders of the
Series A Preferred stock are entitled to convert into common
shares, at the holder’s discretion, at a rate of one Series A
Preferred share for three and one-third Common shares. Any
fractional common shares created by the conversion is rounded to
the nearest whole common share.
Liquidation Rights. Upon our
liquidation, dissolution, distribution of assets or other winding
up, the holders of the Series A Preferred shares shall be entitled
to receive in preference to the holders of the Common Stock a per
share amount equal to $1.65 per share.
Anti-Dilution Protections. The Series A
Preferred stock shall have full anti-dilution protection until
March 1, 2020, such that, when the sum of the shares of the common
stock plus the Series A Convertible stock that are held by the
Series A Preferred stock holders as of the date of the Articles of
Amendment are summed (the sum of which is defined as the
“Series A Holdings”, and the group defined as the
“Series A Holders”), the Series A Holdings held by the
Series A Holders shall be convertible into, and/or equal to, no
less than Seventy-Two Percent (72.0%) of the fully-diluted common
stock outstanding of the company (inclusive of all outstanding
“in-the-money” options and warrants). Any amount that
is less than Seventy-Two Percent (72.0%) shall be adjusted to
Seventy-Two Percent (72.0%) through the immediate issuance of
additional common stock to the Series A Holders to cure the
deficiency, which shall be issued proportionally to each respective
Series A Holder’s share in the Series A Holdings at the time
of the adjustment. This anti-dilution protection shall include the
effect of any security, note, common stock equivalents, or any
other derivative instruments or liability issued or outstanding
during the anti-dilution period that could potential cause dilution
during the anti-dilution period or in the future.
Other Matters. The shares of common
stock have no preemptive or conversion rights and are not subject
to further calls or assessment by us. There are no redemption or
sinking fund provisions applicable to the common stock. All
outstanding shares of our common stock, including the common stock
offered in this offering, are fully paid and
non-assessable.
Series C Preferred Stock
Our
certificate of incorporation authorizes our board of directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
our Series C Preferred stock, par value $0.0001 per share, covering
up to an aggregate of 20,000,000 shares of Series C Preferred
stock. The Series C Preferred stock will cover the number of shares
and will have the powers, preferences, rights, qualifications,
limitations and restrictions determined by the board of directors,
which may include, among others, dividend rights, liquidation
preferences, voting rights, conversion rights, preemptive rights
and redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
stockholders. As of the date of this prospectus, 50,000 shares of
Series C Preferred stock have been issued or are outstanding. See
“Security Ownership of Certain Beneficial Owners and
Management” for more detail on the Series C Preferred stock
holders.
Voting Rights. The holders of Series C
Preferred shares are entitled to vote on an "as-converted" basis of
one share of Series C Preferred Stock voting one vote of common
stock.
Dividend Rights. The holders of the
Series C Preferred shall accrue a dividend based on an 10.0% annual
percentage rate, compounded annually in arrears, for any Series C
Preferred stock that is outstanding at the end of such prior
year.
Conversion Rights. The holders of the
Series C Preferred stock are entitled to convert into common
shares, at the holder’s discretion, at a conversion price of
Six Dollars ($6.00) per share of common stock, subject to certain
price adjustments found in the Series C Preferred stock purchase
agreements. Should the company complete an equity offering
(including any offering convertible into equity of the Company) of
greater than Five Million Dollars ($5,000,000) (the
“Underwritten Offering”), then the Series C Preferred
stock shall be automatically and without notice convertible into
Common Stock of the company concurrently with the subsequent
Underwritten Offering at the same per share offering price of the
Underwritten Offering. If the Underwritten Offering occurs within
twelve months of the issuance of the Series C Preferred stock to
the holder, the annual dividend of 10.0% shall become immediately
accrued to the balance of the Series C Preferred stock and
converted into the Underwritten Offering.
Liquidation Rights. Upon our
liquidation, dissolution, distribution of assets or other winding
up, the holders of Series C Preferred shares shall have a
liquidation preference to the Common shares at an amount equal to
$1.00 per share.
“Blank Check” Preferred Stock
Our
certificate of incorporation authorizes our board of directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
up to an aggregate of 70,000,000 shares of preferred stock that is
considered “blank check”. The blank check preferred
stock shall be designed by the board of directors at the time of
classification
Outstanding Options or Warrants
Pursuant to our
previously-completed Series B Preferred stock offering, investors
in the Series B Preferred stock received options (also referred to
as “warrants”) to purchase additional common shares at
exercise prices stated within such option. The options have an
expiration date of two or three years post the date of the
investment in the Series B Preferred stock by the
investor.
On
October 24, 2018, one of the holders of the options issued pursuant
to the Series B Preferred stock financing exercised 69,445 of his
options through a cashless exercise and received 69,420 Class A
Common shares as a result. Should all the remaining Series B
Preferred stock option holders fully exercise their right to
purchase shares, for cash, the Company will receive $1,700,006
proceeds from such exercises and will increase the common shares
outstanding by 236,112 shares.
On June
27, 2017 we entered into a settlement agreement with Oscaleta
Partners LLC, a company we engaged on February 20, 2017 to perform
consulting services to AREC, and as part of that settlement, we
issued to Oscaleta Partners LLC the amount of 13,333 restricted
shares of the company’s common stock, and a three-year
warrant to purchase up to 33,333 common shares of stock of the
company at an exercise price of $3.60 per share. Should Oscaleta
Partners LLC exercise all of its shares under the warrant, the
company will receive $119,999 cash proceeds.
94
On May
10, 2017, as compensation to Bill Bishop for his service on the
Board of Directors of the company, we issued Mr. Bishop a
three-year option to purchase up to 8,334 common shares of our
company at an exercise price of $3.60 per share, subject to certain
price adjustments and other provisions found within the option
issued to Mr. Bishop. Should Mr. Bishop be elected as a board
member of the company for additional term(s), the option contains a
cashless exercise provision that will allow Mr. Bishop to exercise
his option without any cash consideration to the company, as
described within the option. Should Mr. Bishop exercise the option
through a cash payment to the company, the Company will receive up
to $30,002 from Mr. Bishop and he will receive up to 8,334
restricted common shares of the Company. There are no registration
rights associated with this warrant that require the Company to
register the shares.
On
October 4, 2017, we entered into a financing transaction with
Golden Properties Ltd., a British Columbia company based in
Vancouver, Canada (“Golden Properties”) that involved a
series of loans made by Golden Properties to the Company. As part
of that financing, we issued to Golden Properties the following
warrants:
●
|
Warrant
B-4, for the purchase of 3,417,006 shares of common stock at $0.01
per share, as adjusted from time to time, expiring on October 2,
2020, and providing the Company with up to $34,170 in cash proceeds
should all the warrants be exercised;
|
●
|
Warrant
C-1, for the purchase of 400,000 shares of common stock at $3.55
per share, as adjusted from time to time, expiring on October 2,
2019, and providing the Company with up to $1,420,000 in cash
proceeds should all the warrants be exercised;
|
●
|
Warrant
C-2, for the purchase of 400,000 shares of common stock at $7.09
per share, as adjusted from time to time, expiring on October 2,
2019, and providing the Company with up to $2,836,000 in cash
proceeds should all the warrants be exercised;
|
●
|
Warrant
C-3, for the purchase of 400,000 shares of common stock at $8.58
per share, as adjusted from time to time, expiring October 2, 2020,
and providing the Company with up to $3,432,000 in cash proceeds
should all the warrants be exercised; and
|
●
|
Warrant
C-4, for the purchase of 400,000 shares of common stock at $11.44
per share, as adjusted from time to time, expiring October 2, 2020,
and providing the Company with up to $4,576,000 in cash proceeds
should all the warrants be exercised.
|
None of
the warrants resulting from the agreement with Golden Properties
have been exercised as of the date of this prospectus.
On
September 12, 2018, pursuant to the Company’s Employee
Incentive Stock Option Plan, we issued a total of 636,830 options
to certain employees. The options have an expiration date of
September 10, 2025 and have an exercise price of $1.00 per share.
Of the total options issued, 25,000 vested immediately, with the
balance of 611,830 options vesting equally over the course of three
years, subject to restrictions regarding the employee’s
continued employment by the Company.
On
September 14, 2018, we entered into a consulting agreement with
Redstone Communications, LLC, an Indiana limited liability company
based in Carmel, Indiana, to provide for public relations with
existing shareholders, broker dealers, and other investment
professionals. As compensation under that agreement, for the first
six months we issued to Redstone Communications a five-year option
to purchase up to 175,000 common shares of our Company at an
exercise price of $1.00 per share and issued to Mr. Marlin Molinaro
a five-year option to purchase up to 75,000 common shares of our
Company at an exercise price of $1.00 per share. Should Redstone
Communications, LLC and Mr. Molinaro exercise the options received
under the first six months of engagement, the Company will receive
up to $175,000 and $75,000, respectively. On January 25,
2019, Redstone Communications and the Company agreed to renew the
consulting agreement, and as a result, we issued 105,000
restricted common shares to Redstone Communications LLC and 45,000
restricted common shares to Mr. Marlin Molinaro, and to Redstone
Communications another five-year option to purchase up to 175,000
common shares of our Company at an exercise price of $1.50 per
share and issued to Mr. Marlin Molinaro another five-year option to
purchase up to 75,000 common shares of our Company at an exercise
price of $1.50 per share. Should Redstone Communications, LLC and
Mr. Molinaro receive and exercise the options received under the
second six months of engagement, the Company will receive up to
$262,500 and $112,500, respectively.
95
On
November 15, 2018, as compensation to Randal V. Stephenson, Ian
Sadler, and Courtenay O. Taplin for their service on the Board of
Directors of the Company, we issued to each of them a three-year
warrant to purchase up to 15,000 common shares of our company at an
exercise price of $6.00 per share, subject to certain price
adjustments and other provisions found within the respective
warrants. Should each of the three directors exercise the option
through a cash payment to the Company, the Company will receive up
to $90,000 from each director, and each director will receive up to
15,000 restricted common shares of the Company. There are no
registration rights associated with this warrant that require the
Company to register the shares.
On
December 3, 2018, pursuant to a consulting agreement with a
non-related entity, we issued a two-year option to purchase up to
417 common shares of our company at an exercise price of $6.00 per
share. The option can be exercised via a cashless exercise by the
holder at any time during its term.
Please
see “Underwriting” for a description of warrants to be
issued to the representative of the underwriters.
During
the period the options are outstanding, we will reserve from our
authorized and unissued common stock a sufficient number of shares
to provide for the issuance of shares of common stock underlying
the options upon the exercise of the options. No fractional shares
will be issued upon the exercise of the options. The options are
not listed on any securities exchange. Except as otherwise provided
within the option, the option holders have no rights or privileges
as members of the Company until they exercise their
options.
Transfer Agent and Registrar
The
transfer agent and registrar for our common stock is Vstock
Transfer, LLC located at 18 Lafayette Place Woodmere, NY 11598,
phone number 212-828-8436.
Listing
Currently we are
trading on the OTC Pink markets under the symbol
“AREC”. We have applied to list on the NASDAQ Capital
Market under the symbol “AREC”.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table lists, as of the date of this Prospectus, the
number of shares of our Common Stock and Series A Convertible
Preferred Stock that are beneficially owned by (i) each person or
entity known to us to be the beneficial owner of more than 5% of
our common stock; (ii) each executive officer and director of our
company; and (iii) all executive officers and directors as a group.
Information relating to beneficial ownership of Common Stock and
our Convertible Preferred Stock by our principal shareholders and
management is based upon information furnished by each person using
“beneficial ownership” concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is
deemed to be a beneficial owner of a security if that person has or
shares voting power, which includes the power to vote or direct the
voting of the security, or investment power, which includes the
power to vote or direct the voting of the security. The person is
also deemed to be a beneficial owner of any security of which that
person has a right to acquire beneficial ownership within 60 days
under any contract, option or warrant. Under the Securities and
Exchange Commission rules, more than one person may be deemed to be
a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she
may not have any pecuniary beneficial interest. Except as noted
below, each person has sole voting and investment power. Unless
otherwise specified, the address of each beneficial owner listed in
the tables is c/o American Resources Corporation, 9002 Technology
Lane, Fishers, IN 46038.
Name and
Address
of
Shareholder
|
Number of Shares of
Common
Stock
Beneficially
Owned (1)
|
Percent of Common
Stock Owned (2)
|
Golden Properties,
Ltd. (3)
|
2,122,878
|
9.99%
|
________________
(1)
|
A
person is deemed to be the beneficial owner of securities that can
be acquired by such a person within 60 days upon exercise of
options, warrants or convertible securities. Each beneficial
owner’s percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such
a person (but not those held by any other person) and are
exercisable within 60 days from that date have been
exercised;
|
|
|
(2)
|
Based
on 21,492,281
shares of Common Stock deemed to be outstanding as if one or more
warrants were exercised up to the maximum amount of 9.99%
(or2,122,878
shares) of the issued and outstanding number of shares at December
31, 2018, including the common shares issuable from the conversion
of the Series A Preferred to common and the conversion of the
Series C Preferred to common. This percentage has been rounded for
convenience;
|
|
|
(3)
|
Golden
Properties, Ltd. is the owner of several Company common stock
warrants for the purchase of shares of our Common Stock, which
warrants are exercisable at such company’s discretion,
subject to the following limitation on amount. The warrant
agreements provide that at no time may Golden Properties, Ltd. or
its affiliates exercise any warrant that would result in their
ownership of more than 9.99% of the issued and outstanding shares
of our Common Stock on the date of exercise. Additionally,
as of
December 31, 2018 Alexander Lau, who is a principal of
Golden Properties and a beneficial owner through Golden Properties,
is a holder of 5,913 Series
A Preferred shares and 177,400 Class A
Common shares. Accordingly, Golden Properties, Ltd. is
presently deemed the beneficial owner of 2,122,878
shares of our Common Stock pursuant to Securities and Exchange
Commission Rule 13d-3, promulgated under the Securities Exchange
Act of 1934. The full number of shares that Golden Properties'
beneficially owns (including all shares underlying all the warrants
owned by Golden Properties and excluding those Series A Preferred
shares owned by Alexander Lau stated above) is 5,017,006
shares.
|
96
Name
|
Number of
Shares of
Series A Preferred
Stock Beneficially
Owned (4)
|
Percent of
Series A Preferred Stock
Owned (5)
|
Common Stock
Beneficially
Owned (6)
|
Percent of
Common Stock Beneficially Owned (7)
|
|
|
|
|
|
Officers
and Directors
|
|
|
|
|
|
|
|
|
|
Mark C. Jensen,
(8) Chief Executive Officer,
Director
|
158,045
|
32.80%
|
5,316,994
|
27.45%
|
|
|
|
|
|
Thomas M. Sauve,
(9) President, Director
|
136,014
|
28.23%
|
4,336,010
|
22.99%
|
|
|
|
|
|
Kirk P. Taylor,
Chief Financial Officer
|
48,612
|
10.09%
|
1,620,383
|
8.37%
|
|
|
|
|
|
Tarlis R. Thompson,
Chief Operating Officer
|
4,895
|
1.02%
|
163,170
|
0.84%
|
All
Directors and Officers as a Group (4 persons)
|
347,566
|
69.09%
|
11,552,851
|
59.65%
|
|
|
|
|
|
5%
Holders
|
|
|
|
|
|
|
|
|
|
Gregory Q.
Jensen
|
48,612
|
10.09%
|
1,620,383
|
8.37%
|
|
|
|
|
|
Adam B.
Jensen
|
48,612
|
10.09%
|
1,620,383
|
8.37%
|
|
|
|
|
|
All
Directors, Officers and 5% Holders as a Group (5
persons)
|
444,790
|
89.27%
|
14,793,617
|
84.57%
|
(4)
|
A
person is deemed to be the beneficial owner of securities that can
be acquired by such a person within 60 days from December 31, 2018,
upon exercise of options, warrants or convertible securities. Each
beneficial owner’s percentage ownership is determined by
assuming that options, warrants and convertible securities that are
held by such a person (but not those held by any other person) and
are exercisable within 60 days from that date have been
exercised;
|
|
|
(5)
|
Based
on 481,780
shares of Series A Convertible Preferred Stock outstanding as of
December 31, 2018. These percentages have been rounded for
convenience;
|
|
|
(6)
|
Assuming
the Series A Preferred Stock is converted to Class A Common Stock
and
including the Class A Common Stock owned by each respective
person;
|
|
|
(7)
|
Based
on 17,763,469
Class A Common Stock outstanding as of December 31, 2018. These
percentages have been rounded for convenience;
|
|
|
(8)
|
Mr.
Jensen beneficially owns 5,934 shares
of our Series A Convertible Preferred Stock and 178,017 Class A
Common Stock through his equity ownership in T Squared
Partners, LP, which shares are included in the table
above;
|
|
|
(9)
|
Mr.
Sauve beneficially owns 3,876 shares
of our Series A Convertible Preferred Stock and 116,294 Class A
Common Stock through his equity ownership in T Squared
Partners, LP, which shares are included in the table
above;
|
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, DIRECTOR
INDEPENDENCE
Transactions with Related Persons, Promoters and Certain Control
Persons
On June
12, 2015, the Company executed a consulting agreement with an
entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615 relating to services
rendered under this agreement. The amount outstanding and payable
as of December 31, 2017 and 2016, was $17,840,615 and $17,840,615,
respectively. The amount is due on demand and does not accrue
interest. On May 25, 2018, the related party agreed to terminate
and extinguish the entire $17,840,615 payable.
On
January 1, 2016, the Company awarded stock options for 827,862
shares in exchange for consulting efforts to an entity with common
ownership. No stock options were awarded to related parties during
2017.
During
2015, equipment purchasing was paid by an affiliate resulting in a
note payable. The balance of the note was $74,000 as of December
31, 2017 and 2016, respectively.
On
April 30, 2017, the Company purchased $250,000 of secured debt that
had been owed to that party, by an operating subsidiary of a
related party. As a result of the transaction, the Company is now
the creditor on the notes. The first note in the amount of $150,000
is dated March 13, 2013, carries an interest rate of 12% and was
due on September 13, 2015. The second note in the amount of
$100,000 is dated July 17, 2013, carries an interest rate of 12%
and was due January 17, 2016. Both notes are in default and have
been fully impaired due to collectability uncertainty.
During
July 2017 and October 2018, an officer of the Company advanced
$50,000 and $13,500, respectively, to the Company. The advance is
non-secured, non-interest bearing and due on demand.
97
The Company,
through its subsidiaries, leases property and mineral from a
related entity, LRR. During the three month period ended September
30, 2018, the Company incurred royalty expense in the amount of
$64,537 to a related entity formally consolidated as a variable
interest entity. As of September 30, 2018, the company owed the
related entity a total of $512,378 for unpaid royalties and
advances.
Director Independence.
We are
not listed on a national securities exchange; however, we have
elected to use the definition of independence under the Nasdaq
listing requirements in determining the independence of our
directors and nominees for director. In 2018, our Board undertook a
review of director independence, which included a review of each
director and director nominee’s responses to questionnaires
inquiring about any relationships with us. This review was designed
to identify and evaluate any transactions or relationships between
a director, or director nominee or any member of his or her
immediate family and us, or members of our senior management or
other members of our Board, and all relevant facts and
circumstances regarding any such transactions or relationships.
Based on its review, our Board determined that Messrs. Stephenson,
Sadler, and Taplin are independent. Messrs. Jensen and Sauve are
not independent under Nasdaq’s independence standards, its
audit committee independence standards or compensation committee
independence standards.
To the
extent required by the trading market on which our shares are
listed, we will ensure that the overall composition of our Board
complies with the Sarbanes-Oxley Act, and the rules thereunder, and
the listing requirements of the trading market, including the
requirement that one member of the Board qualifies as a
“financial expert.”
98
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representative, Maxim Group
LLC, located at 405 Lexington Avenue, New York, NY 10174, referred
to herein as Maxim, have severally agreed to purchase from us on a
firm commitment basis the following respective number of shares of
Class A common stock at a public offering price less the
underwriting discounts and commissions set forth on the cover page
of this prospectus:
Underwriter
|
Number of Shares
|
Maxim
Group LLC
|
1,000,000
|
Total
|
1,000,000
|
The
underwriting agreement provides that the obligations of the
underwriters to purchase all of the shares being offered to the
public is subject to specific conditions, including the absence of
any material adverse change in our business or in the financial
markets and the receipt of certain legal opinions, certificates and
letters from us, our counsel and the independent auditors. Subject
to the terms of the underwriting agreement, the underwriters will
purchase all of the shares of Class A common stock being offered to
the public, other than those covered by the over-allotment option
described below, if any of these shares are purchased.
Over-Allotment Option
The Company has granted to the underwriters an
option, exercisable not later than 45 days after the effective date
of the registration statement, to purchase up to 150,000
additional shares of Class A common
stock (equivalent to 15% of the total number of shares of Class A
common stock sold in this offering) at the public offering price
less the underwriting discounts and commissions set forth on the
cover of this prospectus. The underwriters may exercise this option
only to cover over-allotments made in connection with the sale of
the shares in this offering. To the extent that the underwriters
exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the
same percentage of these additional shares of Class A common stock
as the number of shares to be purchased by it in the above table
bears to the total number of shares offered by this prospectus. We
will be obligated, pursuant to the option, to sell these additional
shares of Class A common stock to the underwriters to the extent
the option is exercised. If any additional shares are purchased,
the underwriters will offer the additional shares on the same terms
as those on which the other shares are being offered
hereunder.
Discounts, Commissions and Expenses
The underwriting discounts and commissions are
7.0% of the public offering price. The Company has agreed to pay
the underwriters the discounts and commissions set forth below,
assuming either no exercise or full exercise by the underwriters of
the underwriters’ over-allotment option. We have been advised
by Maxim that the underwriters propose to offer the shares of Class
A common stock to the public at the public offering price set forth
on the cover of this prospectus and to dealers at a price that
represents a concession not in excess of $0.28 per share under the public offering price of
$4.00 per share. The
underwriters may allow, and these dealers may re-allow, a
concession of not more than $0.28 per share to other dealers. After the public
offering, the representative of the underwriters may change the
offering price and other selling terms.
The
following table summarizes the underwriting discounts and
commissions and proceeds, before expenses, to us assuming both no
exercise and full exercise by the underwriters of their 15%
over-allotment option:
|
|
Total
|
|
|
Per Share(1)
|
Without
Option
|
With
Option
|
Public offering
price
|
$ 6.00
|
$ 6,000,000
|
$ 6,900,000
|
Underwriting
discounts and commissions (7%)
|
$ 0.42
|
$ 420,000
|
$ 483,000
|
Proceeds, before
expenses, to us
|
$ 5.58
|
$ 5,580,000
|
$ 6,417,000
|
(1) The
fees do not include the Representative’s Warrants or expense
reimbursement as described below.
In
addition, we have agreed to reimburse Maxim for up to $125,000 of
out-of-pocket expenses it incurs in connection with this offering,
including, but not limited to, filing offering materials with the
Financial Industry Regulatory Authority, or FINRA, background
checks, “road show” expenses, costs of book-building,
prospectus tracking and compliance software and the fees and
disbursements of its counsel. We have paid $5,000 to Maxim as an
advance to be applied towards reasonable out-of-pocket expenses
(the “Advance”). Any portion of the Advance shall be
returned back to us to the extent not actually
incurred.
We
estimate the expenses of this offering payable by us, not including
underwriting discounts and commissions, will be approximately
$205,000.
99
Representative Warrants
We
have also agreed to issue to Maxim (or its permitted assignees) the
warrants to purchase a number of our shares of Class A common stock
equal to an aggregate of 7% of the total number of shares sold in
this offering (“Representative’s Warrants”). The
Representative’s Warrants will have an exercise price equal
to 110% of the offering price of the shares sold in this offering
and may be exercised on a cashless basis. The
Representative’s Warrants are exercisable commencing 180 days
after the effective date of the registration statement related to
this offering, and will be exercisable for three years after the
effective date. The Representative’s Warrants are not
redeemable by us. The Representative’s Warrants also provide
for unlimited “piggyback” registration rights at our
expense with respect to the underlying shares during the three year
period commencing from the effective date of the registration
statement related to this offering. The Representative’s
Warrants and the shares underlying the Representative’s
Warrants, have been deemed compensation by FINRA and are therefore
subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA.
The underwriters (or permitted assignees under the Rule) may not
sell, transfer, assign, pledge or hypothecate the
Representative’s Warrants or the securities underlying the
Representative’s Warrants, nor will they engage in any
hedging, short sale, derivative, put or call transaction that would
result in the effective economic disposition of the
Representative’s Warrants or the underlying securities for a
period of 12 months from the effective date of this offering,
except to any FINRA member participating in the offering and their
bona fide officers or partners. The Representative’s Warrants
will provide for adjustment in the number and price of such
Representative’s Warrants (and the shares underlying such
Representative’s Warrants) in the event of recapitalization,
merger or other structural transaction to prevent mechanical
dilution or in the event of a future financing undertaken by
us.
Right of First Refusal
We have
agreed to grant Maxim for the twelve (12) month period following
the effective date of the registration statement, a right of first
refusal to act as lead managing underwriter and book runner or
minimally as a co-lead manager and co-book runner and/or lead
placement agent with at least 80.0% of the economics for any and
all future public or private equity, equity-linked or debt
(excluding commercial bank debt) offerings during such twelve (12)
month period of the Company, or any successor to or any subsidiary
of the Company.
Indemnification
We
have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act and
liabilities arising from breaches of representations and warranties
contained in the underwriting agreement, or to contribute to
payments that the underwriters may be required to make in respect
of those liabilities.
Lock-up Agreements
We
and certain of our directors, executive officers and shareholders
have agreed that, for a period of 180 days after the date of this
prospectus, subject to certain limited exceptions, not to directly
or indirectly, without the prior written consent of the
representative of the underwriters, (1) offer, sell, agree to offer
or sell, solicit offers to purchase, grant any call option or
purchase any put option with respect to, pledge, encumber, assign,
borrow or otherwise dispose of or transfer any shares of Class A
common stock, warrant to purchase such shares or any other security
of the company or any other entity that is convertible into, or
exercisable or exchangeable for, such shares or any other equity
security of the company owned beneficially or otherwise as of the
date of this prospectus, which we refer to as relevant securities,
or otherwise publicly disclose the intention to do so, (2)
establish or increase any “put equivalent position” or
liquidate or decrease any “call equivalent position”
(in each case within the meaning of Section 16 of the Exchange Act)
with respect to any relevant security or otherwise enter into any
swap, derivative or other transaction or arrangement that transfers
to another, in whole or in part, any economic consequence of
ownership of relevant securities, whether or not such transaction
is to be settled by the delivery of relevant securities, other
securities, cash or other consideration, or otherwise publicly
disclose the intention to do so, (3) file or participate in the
filing with the SEC of any registration statement or circulate or
participate in the circulation of any preliminary or final
prospectus or other disclosure document, in each case with respect
to any proposed offering or sale of relevant securities or (4)
exercise any rights to require registration with the SEC of any
proposed offering or sale of relevant securities.
100
Price Stabilization, Short Positions and Penalty Bids
In
connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act:
|
●
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
|
|
●
|
Over-allotment involves sales by the underwriters of shares of
Class A common stock in excess of the number of shares the
underwriters are obligated to purchase, which creates a syndicate
short position. The short position may be either a covered short
position or a naked short position. In a covered short position,
the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of
shares involved is greater than the number of shares in the
over-allotment option. Maxim may close out any covered short
position by either exercising their over-allotment option and/or
purchasing shares in the open market.
|
|
●
|
Syndicate covering transactions involve purchases of shares of
Class A common stock in the open market after the distribution has
been completed in order to cover syndicate short positions. In
determining the source of shares to close out the short position,
Maxim will consider, among other things, the price of shares
available for purchase in the open market as compared to the price
at which they may purchase shares through the over-allotment
option. If the underwriters sell more shares than could be covered
by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked
short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares of Class A common stock in the open market after pricing
that could adversely affect investors who purchase in the
offering.
|
|
●
|
Penalty bids permit Maxim to reclaim a selling concession from a
syndicate member when the shares originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
|
These
stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our shares of Class A common stock or preventing or
retarding a decline in the market price of our securities. As a
result, the price of our shares may be higher than the price that
might otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of our shares of Class A
common stock. In addition, neither we nor the underwriters make any
representation that the underwriters will engage in these
transactions or that any transaction, if commenced, will not be
discontinued without notice.
Electronic Distribution
This
prospectus in electronic format may be made available on websites
or through other online services maintained by Maxim or by its
affiliates. Other than this prospectus in electronic format, the
information on Maxim’s website and any information contained
in any other websites maintained by it is not part of this
prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or Maxim
in its capacity as an underwriter, and should not be relied upon by
investors.
101
Other Terms
Until
twelve (12) months from the effective date of this registration
statement, the representative shall have an irrevocable right of
first refusal to act as lead managing underwriter and book-runner
(or minimally as a co-lead manager and co-book runner and/or
co-lead placement agent with at least 80% of the economics), at the
representative’s sole discretion, for each and every future
public and private equity and debt offerings (other than commercial
bank debt) for the Company, or any successor to or any subsidiary
of the Company, including all equity linked financings, on terms
customary to the representative. The representative shall have the
sole right to determine whether or not any other broker-dealer
shall have the right to participate in any such offering and the
economic terms of any such participation. The representative will
not have more than one opportunity to waive or terminate the right
of first refusal in consideration of any payment or
fee.
Offers
Outside the United States
Other than in the United States, no action has been taken by us or
the underwriters that would permit a public offering of the
securities offered by this prospectus in any jurisdiction where
action for that purpose is required. The securities offered by this
prospectus may not be offered or sold, directly or indirectly, nor
may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such
securities be distributed or published in any jurisdiction, except
under circumstances that will result in compliance with the
applicable rules and regulations of that jurisdiction. Persons into
whose possession this prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the
offering and the distribution of this prospectus. This prospectus
does not constitute an offer to sell or a solicitation of an offer
to buy any securities offered by this prospectus in any
jurisdiction in which such an offer or a solicitation is
unlawful.
DETERMINATION OF OFFERING PRICE
Before
this offering, there has been a very limited public trading market
for our shares of Class A Common Stock, and we cannot give any
assurance to you that an active secondary market might develop or
will be sustained after this offering. The price of the shares of
Common Stock we are offering, and the price at which those shares
can be sold in the future to potential buyers, has been determined
solely by us, after consultation with our underwriter and advisors,
and, as such, may be arbitrary in that the price does not
necessarily bear any relationship to our assets, earnings, book
value or other criteria of value, and may not be indicative of the
price that may prevail in the public market, or such share price
may be the result of a private negotiation between us and the buyer
of the shares and may differ substantially from any prior share
price or the market price of our shares. No third-party valuation
or appraisal has ever been prepared for our business. Among the
factors we considered in setting a price were, without one factor
being materially more important than the others):
●
|
our limited operating history, as well as the other numerous
obstacles we face in operating and expanding our business, as
described in the “Risk Factors” section of this
prospectus;
|
●
|
our current company capitalization and our internal future
expectations of our operations and financial performance;
and
|
●
|
our cash requirements to run our business over the next 12 to 60
months.
|
●
|
the information included in this prospectus and otherwise available
to the representative;
|
102
●
|
the valuation multiples of publicly traded companies that the
representative believes to be comparable to us;
|
●
|
our financial information;
|
●
|
our ability to negotiate the sale price of our shares with
potential buyers of our shares;
|
●
|
our prospects and our history, and the prospects of the industry in
which we compete;
|
●
|
an assessment of our management, its past and present operations,
and the prospects for, and timing of, our future revenues;
and
|
●
|
the above factors in relation to market values and various
evolution measures of other companies engaged in activities similar
to ours.
|
INTERESTS OF NAMED EXPERTS AND COUNSEL
No
expert or counsel named in this prospectus as having prepared or
certified any part of this prospectus or having given an opinion
upon the validity of the securities being registered or upon other
legal matters in connection with the registration or offering of
the common stock was employed on a contingency basis, or had, or is
to receive, in connection with the offering, a substantial
interest, direct or indirect, in the registrant or any of its
parents or subsidiaries. Nor was any such person connected with the
registrant or any of its parents or subsidiaries as a promoter,
managing or principal underwriter, voting trustee, director,
officer, or employee.
Our
financial statements as of December 31, 2017 and 2016, included in
this prospectus have been audited by MaloneBailey, LLP of Houston,
Texas, independent registered public accounting firm, as indicated
in their report with respect thereto, and have been so included in
reliance upon the report of such firm given on their authority as
experts in accounting and auditing. Our audited financial
statements as of December 31, 2017 and 2016, included in this
prospectus have been prepared by the management of the
Company.
The
validity of the securities offered by this prospectus will be
passed upon for us by Law Office of Clifford J. Hunt, P.A. The law
firm’s principal, Clifford J. Hunt, Esquire, is the
beneficial owner of 1,721 shares of our common stock. Certain legal
matters will be passed upon for the underwriters by Loeb & Loeb
LLP.
103
WHERE YOU CAN FIND MORE INFORMATION
We have
filed with the SEC a registration statement on Form S-1 (including
the exhibits, schedules and amendments thereto) under the
Securities Act, with respect to the shares of our common stock
offered hereby.
This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For
further information with respect to the common stock offered
hereby, we refer you to the registration statement and the exhibits
and schedules filed therewith. Statements contained in this
prospectus as to the contents of any contract, agreement or any
other document are summaries of the material terms of such
contract, agreement or other document and are not necessarily
complete. With respect to each of these contracts, agreements or
other documents filed as an exhibit to the registration statement,
reference is made to the exhibits for a more complete description
of the matter involved. A copy of the registration statement, and
the exhibits and schedules thereto, may be inspected without charge
at the public reference facilities maintained by the SEC at 100 F
Street NE, Washington, D.C. 20549. Copies of these materials may be
obtained, upon payment of a duplicating fee, from the Public
Reference Room of the SEC at 100 F Street NE, Washington, D.C.
20549.Please call the SEC at 1-800-SEC-0330 for further information
on the operation of the Public Reference Room. The SEC maintains a
website that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the SEC. The address of the SEC’s website is
www.sec.gov.
As a
result of this offering, we will become subject to full information
requirements of the Exchange Act. We will fulfill our obligations
with respect to such requirements by filing periodic reports and
other information with the SEC. We intend to furnish our
stockholders with annual reports containing financial statements
certified by an independent registered public accounting
firm.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Our
directors and officers are indemnified as provided by Florida law
and our bylaws. We have agreed to indemnify each of our directors
and certain officers against certain liabilities, including
liabilities under the Securities Act. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted
to our directors, officers and controlling persons pursuant to the
provisions described above, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than our payment of expenses
incurred or paid by our director, officer or controlling person in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
We have
been advised that in the opinion of the SEC indemnification for
liabilities arising under the Securities Act is against public
policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities is asserted by one of our directors,
officers, or controlling persons in connection with the securities
being registered, we will, unless in the opinion of our legal
counsel the matter has been settled by controlling precedent,
submit the question of whether such indemnification is against
public policy to a court of appropriate jurisdiction. We will then
be governed by the court’s decision.
Limitation on Liability
The
Florida Business Corporation Act permits, but does not require,
corporations to indemnify a director, officer or control person of
the corporation for any liability asserted against such person and
liability and expenses incurred by that person in their capacity as
a director, officer, employee or agent, or arising out of their
status as such, if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, unless the articles of
incorporation provide otherwise, whether or not the corporation has
provided for indemnification in its articles of incorporation. Our
articles of incorporation have no separate provision for
indemnification of directors, officers, or control
persons.
Insofar
as the limitation of, or indemnification for, liabilities arising
under the Securities Act of 1933, as amended (the “Securities
Act”), may be permitted to directors, officers, or persons
controlling us pursuant to the foregoing, or otherwise, we have
been advised that, in the opinion of the SEC, such limitation or
indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
104
INDEX TO FINANCIAL STATEMENTS
For the Period Ended September 30, 2018
|
Page
|
|
|
Consolidated
Balance Sheets as of September 30, 2018 (unaudited) and December
31, 2017
|
F-2
|
|
|
Consolidated
Statements of Operations for the three and nine months ended
September 30, 2018 and 2017 (unaudited)
|
F-3
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30,
2018 and 2017 (unaudited)
|
F-4
|
|
|
Notes
to Unaudited Consolidated Financial Statements for the nine months
ended September 30, 2018
|
F-5
|
December 31, 2017 and 2016 and for the Years Ended December 31,
2017 and 2016
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-13
|
|
|
Consolidated
Balance Sheets at December 31, 2017 and 2016
|
F-14
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2017 and
2016
|
F-15
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) for
the years ended December 31, 2017 and 2016
|
F-16
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2017 and
2016
|
F-17
|
|
|
Notes
to Consolidated Financial Statements
|
F-18
|
F-1
AMERICAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
UNAUDITED
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|||
ASSETS
|
|
||||||||
|
|
|
|
|
|
|
|||
CURRENT
ASSETS
|
|
|
|
|
|
|
|||
Cash
|
|
$
|
57,739
|
|
|
$
|
186,722
|
|
|
Accounts Receivable
|
|
|
2,801,040
|
|
|
|
1,870,562
|
|
|
Inventory
|
|
|
426,725
|
|
|
|
615,096
|
|
|
Prepaid fees
|
|
|
147,826
|
|
|
|
-
|
|
|
Accounts Receivable - Other
|
|
|
102,994
|
|
|
|
30,021
|
|
|
Total Current Assets
|
|
|
3,536,324
|
|
|
|
2,702,401
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash - restricted
|
|
|
286,043
|
|
|
|
198,943
|
|
|
Processing and rail facility
|
|
|
2,802,855
|
|
|
|
2,914,422
|
|
|
Underground equipment
|
|
|
9,346,692
|
|
|
|
8,887,045
|
|
|
Surface equipment
|
|
|
4,532,724
|
|
|
|
3,957,603
|
|
|
Mining rights (net of amortization of $181,385
and $0)
|
|
|
2,036,567
|
|
|
|
-
|
|
|
Less Accumulated Depreciation
|
|
|
(6,600,108
|
)
|
|
|
(4,820,569
|
)
|
|
Land
|
|
|
-
|
|
|
|
178,683
|
|
|
Accounts Receivable - Other
|
|
|
-
|
|
|
|
127,718
|
|
|
Note Receivable
|
|
|
4,117,139
|
|
|
|
4,117,139
|
|
|
Total Other Assets
|
|
|
16,521,912
|
|
|
|
15,560,984
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
20,058,236
|
|
|
$
|
18,263,385
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
|||||||||
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,813,924
|
|
|
$
|
5,360,537
|
|
|
Accrued management fee
|
|
|
-
|
|
|
|
17,840,615
|
|
|
Accrued interest
|
|
|
624,209
|
|
|
|
336,570
|
|
|
Accrued dividend on Series B
|
|
|
104,157
|
|
|
|
-
|
|
|
Funds held for others
|
|
|
63,767
|
|
|
|
82,828
|
|
|
Due to affiliate
|
|
|
636,378
|
|
|
|
124,000
|
|
|
Current portion of long term-debt (net of
issuance costs and debt discount of $387,442 and
$35,000)
|
|
|
14,625,099
|
|
|
|
9,645,154
|
|
|
Current portion of reclamation
liability
|
|
|
2,275,848
|
|
|
|
2,033,862
|
|
|
Total Current Liabilities
|
|
|
25,143,382
|
|
|
|
35,423,566
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Long-term portion of note payable (net of
issuance costs of $420,293 and $440,333)
|
|
|
5,072,493
|
|
|
|
5,081,688
|
|
|
Reclamation liability
|
|
|
20,289,527
|
|
|
|
17,851,195
|
|
|
Total Other Liabilities
|
|
|
25,362,020
|
|
|
|
22,932,883
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
50,505,402
|
|
|
|
58,356,449
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
AREC - Class A Common stock: $.0001 par value;
230,000,000 shares authorized, 1,192,044 and 892,044 shares issued
and outstanding for the period end
|
|
|
118
|
|
|
|
89
|
|
|
AREC - Series A Preferred stock: $.0001 par
value; 5,000,000 shares authorized, 4,817,792 shares issued and
outstanding
|
|
|
482
|
|
|
|
482
|
|
|
AREC - Series B Preferred stock: $.001 par
value; 20,000,000 shares authorized, 850,000 shares issued and
outstanding
|
|
|
850
|
|
|
|
850
|
|
|
AREC- Series C Preferred stock: $.0001 par
value; 20,000,000 shares authorized, 0 shares issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Additional paid-in capital
|
|
|
19,816,567
|
|
|
|
1,527,254
|
|
|
Accumulated deficit
|
|
|
(50,265,183
|
)
|
|
|
(42,019,595
|
)
|
|
Total American Resources Corporation's
Shareholders' Deficit
|
|
|
(30,447,166
|
)
|
|
|
(40,490,920
|
)
|
|
Non controlling interest
|
|
|
-
|
|
|
|
397,856
|
|
|
Total Stockholders' Deficit
|
|
|
(30,447,166
|
)
|
|
|
(40,093,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
|
$
|
20,058,236
|
|
|
$
|
18,263,385
|
|
The accompanying footnotes are integral to the unaudited
consolidated financial statements
F-2
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the
Three and Nine Months Ended September 30, 2018 and
2017
|
3-Month
|
3-Month
|
9-Month
|
9-Month
|
|
September 30,
2018
|
September 30,
2017
|
September 30,
2018
|
September 30,
2017
|
|
|
|
|
|
Coal Sales
|
$ 8,890,322
|
$ 4,192,244
|
$ 23,219,222
|
$ 13,770,183
|
Processing Services Income
|
147,946
|
159,724
|
167,462
|
1,563,864
|
|
|
|
|
|
Total Revenue
|
9,038,268
|
4,351,968
|
23,386,684
|
15,334,047
|
|
|
|
|
|
|
|
|
|
|
Cost of Coal Sales and Processing
|
(6,690,698)
|
(2,797,140)
|
(16,783,801)
|
(12,307,399)
|
Accretion Expense
|
(539,771)
|
(339,288)
|
(1,435,295)
|
(1,181,055)
|
Loss on settlement
|
-
|
(30,055)
|
-
|
(281,907)
|
Depreciation
|
(649,983)
|
(697,214)
|
(1,779,539)
|
(1,856,442)
|
Amortization of mining rights
|
(181,385)
|
-
|
(181,385)
|
-
|
General and Administrative
|
(1,142,522)
|
(26,940)
|
(2,175,794)
|
(189,604)
|
Professional Fees
|
(784,922)
|
(144,712)
|
(1,222,937)
|
(565,995)
|
Production Taxes and Royalties
|
(1,041,667)
|
(865,950)
|
(2,769,584)
|
(3,464,611)
|
Development Costs
|
(2,188,833)
|
(1,035,286)
|
(5,908,207)
|
(4,172,759)
|
|
|
|
|
|
Total Expenses from Operations
|
(13,219,781)
|
(5,936,585)
|
(32,256,542)
|
(24,019,772)
|
|
|
|
|
|
Net Loss from Operations
|
(4,181,513)
|
(1,584,617)
|
(8,869,858)
|
(8,685,725)
|
|
|
|
|
|
Other Income
|
875,942
|
67,844
|
1,295,065
|
309,418
|
Gain on cancelation of debt
|
-
|
-
|
315,000
|
-
|
Receipt of previously impaired
receivable
|
-
|
117,657
|
92,573
|
241,574
|
Interest Income
|
-
|
-
|
41,171
|
-
|
Interest expense
|
(305,655)
|
(342,683)
|
(864,104)
|
(567,970)
|
|
|
|
|
|
Net Loss
|
(3,611,226)
|
(1,741,799)
|
(7,990,153)
|
(8,702,703)
|
|
|
|
|
|
Less: Series B dividend requirement
|
(17,000)
|
-
|
(104,157)
|
-
|
|
|
|
|
|
Less: Net income attributable to Non Controlling
Interest
|
-
|
(67,844)
|
(151,278)
|
(309,418)
|
|
|
|
|
|
Net loss attributable to American Resources
Corporation Shareholders
|
$ (3,628,226)
|
$ (1,809,643)
|
$ (8,245,588)
|
$ (9,012,121)
|
|
|
|
|
|
Net loss per share - basic and
diluted
|
$ (2.49)
|
$ (2.03)
|
$ (8.76)
|
$ (11.87)
|
|
|
|
|
|
Weighted average shares outstanding
|
1,038,783
|
891,180
|
941,495
|
759,397
|
The accompanying
footnotes are integral to the unaudited consolidated financial
statements
F-3
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the
9 Months Ended September 30, 2018 and
For the
9 Months Ended September 30, 2017
|
September 30,
2018
|
September 30,
2017
|
Cash Flows from
Operating activities:
|
|
|
Net loss
|
$ (7,990,153)
|
$ (8,702,703)
|
Adjustments to
reconcile net income (loss) to net cash
|
|
|
Depreciation
|
1,779,539
|
1,856,442
|
Amortization of mining rights
|
181,385
|
-
|
Accretion expense
|
1,435,295
|
1,181,055
|
Cancelation of debt
|
(315,000)
|
-
|
Loss on reclamation settlements
|
-
|
281,907
|
Assumption of note payable in reverse
merger
|
-
|
50,000
|
Gain on disposition
|
(807,591)
|
-
|
Recovery of previously impaired
receipts
|
(92,573)
|
(241,574)
|
Amortization of debt discount
|
420,134
|
284,406
|
Warrant expense
|
234,067
|
-
|
Option expense
|
13,410
|
-
|
Stock compensation expense
|
201,250
|
10,000
|
Change in current
assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(930,478)
|
2,123,881
|
Inventory
|
188,371
|
-
|
Prepaid expenses and other assets
|
(147,826)
|
-
|
Accounts payable
|
973,057
|
2,824,351
|
Funds held for others
|
(19,061)
|
-
|
Due to affiliates
|
512,378
|
-
|
Accrued interest
|
287,639
|
90,000
|
Reclamation liability settlements
|
-
|
(709,132)
|
Cash used in operating activities
|
(4,076,157)
|
(951,367)
|
|
|
|
Cash Flows from
Investing activities:
|
|
|
|
|
|
Advances made in connection with management
agreement
|
(99,582)
|
(75,000)
|
Advance repayment in connection with management
agreement
|
222,304
|
469,645
|
Cash paid for PPE, net
|
(127,957)
|
(176,597)
|
Cash (used in) provided by investing
activities
|
(5,235)
|
218,048
|
|
|
|
Cash Flows from
Financing activities:
|
|
|
|
|
|
Principal payments on long term
debt
|
(2,064,902)
|
(318,576)
|
Proceeds from long term debt
|
5,316,977
|
1,670,000
|
Proceeds from related party
|
-
|
50,000
|
Net proceeds from (payments to) factoring
agreement
|
787,434
|
(1,521,577)
|
Proceeds from sale of Series B Preferred
Stock
|
-
|
600,000
|
Cash provided by financing
activities
|
4,039,509
|
479,847
|
|
|
|
Decrease in cash and restricted
cash
|
(41,883)
|
(253,472)
|
|
|
|
Cash and restricted cash, beginning of
period
|
385,665
|
784,525
|
|
|
|
Cash and restricted
cash, end of period
|
$ 343,782
|
$ 531,053
|
|
|
|
Supplemental Information
|
|
|
Non-cash investing and financing
activities
|
|
|
Assumption of net assets and liabilities for
asset acquisitions
|
$ 2,217,952
|
$ -
|
Equipment for notes payable
|
$ 906,660
|
$ 1,222,500
|
Purchase of related party note receivable in
exchange for Series B Equity
|
$ -
|
$ 250,000
|
Preferred Series B dividends
|
$ 104,157
|
$ -
|
Conversion of note payable to common
stock
|
$ -
|
$ 50,000
|
Beneficial conversion feature on note
payable
|
$ -
|
$ 50,000
|
Forgiveness of accrued management
fee
|
$ 17,840,615
|
$ -
|
Relative fair value debt discount on warrant
issue
|
$ -
|
$ 300,000
|
|
|
|
Cash paid for interest
|
$ 156,331
|
$ 193,564
|
Cash paid for income taxes
|
$ -
|
$ -
|
The accompanying
footnotes are integral to the unaudited consolidated financial
statements
F-4
AMERICAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(UNAUDITED)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
American Resources Corporation (ARC or the
Company) operates through subsidiaries that were acquired in 2016
and 2015 for the purpose of acquiring, rehabilitating and operating
various natural resource assets including coal, oil and natural
gas.
Basis of Presentation and
Consolidation:
The consolidated financial statements include
the accounts for the nine months ended September 30, 2018 and 2017
of the Company and its wholly owned subsidiaries Quest Energy Inc
(QEI), Deane Mining, LLC (Deane), Quest Processing LLC (Quest
Processing), ERC Mining Indiana Corp (ERC), McCoy Elkhorn Coal LLC
(McCoy) and Knott County Coal LLC (KCC). All significant
intercompany accounts and transactions have been
eliminated.
As of July 1, 2018, the accounts of Land
Resources & Royalties, LLC have been deconsolidated from the
financial statements based upon the ongoing review of its status as
a variable interest entity.
On August 23, 2018, KCC disposed of certain
non-operating assets totaling $111,567 and the corresponding asset
retirement obligation totaling $919,158 which resulted in a gain of
$807,591.
The accompanying Consolidated Financial
Statements are unaudited and have been prepared in accordance with
accounting principles generally accepted in the United States
(“U.S. GAAP”)
Interim Financial
Information
Certain information and footnote disclosures
normally included in annual financial statements prepared in
accordance with U.S. GAAP have been omitted. In the opinion of
management, these interim unaudited Consolidated Financial
Statements reflect all normal and recurring adjustments necessary
for a fair presentation of the results for the periods presented.
Results of operations for the three and nine months ended September
30, 2018 are not necessarily indicative of the results to be
expected for the year ending December 31, 2018 or any other period.
These financial statements should be read in conjunction with the
Company’s 2017 audited financial statements and notes thereto
which were filed on Form 10K on April 23, 2018.
Going Concern: The Company has
suffered recurring losses from operations and currently has a
working capital deficit. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern.
We plan to generate profits by expanding current coal operations as
well as developing new coal operations. However, we will need to
raise the funds required to do so through sale of our securities or
through loans from third parties. We do not have any commitments or
arrangements from any person to provide us with any additional
capital. If additional financing is not available when needed, we
may need to cease operations. We may not be successful in raising
the capital needed to expand or develop operations. Management
believes that actions presently being taken to obtain additional
funding provide the opportunity for the Company to continue as a
going concern. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern; no
adjustments to the financial statements have been made to account
for this uncertainty.
F-5
Convertible Preferred
Securities: We account for hybrid contracts that
feature conversion options in accordance with generally accepted
accounting principles in the United States. ASC 815, Derivatives and Hedging Activities
(“ASC 815”) requires companies to bifurcate conversion
options from their host instruments and account for them as free
standing derivative financial instruments according to certain
criteria. The criteria includes circumstances in which (a) the
economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid
instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under
otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a
separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative
instrument.
We also follow ASC 480-10, Distinguishing Liabilities from Equity
(“ASC 480-10”) in its evaluation of the accounting for
a hybrid instrument. A financial instrument that embodies an
unconditional obligation, or a financial instrument other than an
outstanding share that embodies a conditional obligation, that the
issuer must or may settle by issuing a variable number of its
equity shares shall be classified as a liability (or an asset in
some circumstances) if, at inception, the monetary value of the
obligation is based solely or predominantly on any one of the
following: (a) a fixed monetary amount known at inception; (b)
variations in something other than the fair value of the
issuer’s equity shares; or (c) variations inversely related
to changes in the fair value of the issuer’s equity shares.
Hybrid instruments meeting these criteria are not further evaluated
for any embedded derivatives and are carried as a liability at fair
value at each balance sheet date with remeasurements reported as a
component of other income/expense in the accompanying Consolidated
Statements of Operations.
Cash is maintained in bank
deposit accounts which, at times, may exceed federally insured
limits. To date, there have been no losses in such
accounts.
Restricted cash: As part of the
Kentucky New Markets Development Program an asset management fee
reserve was set up in the amount of $116,115. The funds are held to
pay annual asset management fees to an unrelated party through
2021. The balance as of September 30, 2018 and December 31, 2017
was $73,730 and $116,115, respectively. A lender of the Company
also required a reserve account to be established. The balance as
of September 30, 2018 and December 31, 2017 was $148,546 and $0,
respectively. The total balance of restricted cash also includes
amounts held under the management agreement in the amount of
$63,767 and $82,828, respectively. See note 5 for terms of the
management agreement.
The balance as of September 30, 2018 and
December 31, 2017 was $286,043 and $198,943,
respectively.
The following table sets forth a reconciliation
of cash, cash equivalents, and restricted cash reported in the
consolidated balance sheet that agrees to the total of those
amounts as presented in the consolidated statement of cash flows
for the nine months ended September 30, 2018 and September 30,
2017.
|
September 30,
2018
|
September 30,
2017
|
Cash
|
$ 57,739
|
$ 342,041
|
Restricted Cash
|
286,043
|
189,012
|
Total cash and restricted cash presented in the
consolidated statement of cash flows
|
$ 343,782
|
$ 531,053
|
F-6
Asset Acquisitions:
On April 21, 2018, McCoy acquired certain assets
known as the Point Rock Mine (Point Rock) in exchange for assuming
certain liabilities of the seller. The fair values of the
liabilities assumed were $53,771 for prior vendors and $2,098,052
for asset retirement obligation totaling $2,151,823. The
liabilities assumed do not require fair value readjustments. In
addition, McCoy entered into a surface and mineral sub-lease in the
amount of up to $4,000,000 to be paid only upon coal extraction at
$2 per extracted ton of coal. McCoy will also pay a portion of the
sales price as a royalty with an annual minimum payment of $60,000
starting in January 2019. The acquired assets have an anticipated
life of 5 years. Capitalized mining rights will be amortized based
on productive activities over the anticipated life of 5 years.
Amortization expense for the 3 months ended September 30, 2018 and
2017 amounted to $179,318 and $0, respectively. The assets will be
measured for impairment when an event occurs that questions the
realization of the recorded value.
The assets acquired of Point Rock do not
represent a business as defined in FASB AS 805-10-20 due to their
classification as a single asset. Accordingly, the assets acquired
are initially recognized at the consideration paid, which was the
liabilities assumed, including direct acquisition costs, of which
there were none. The cost is allocated to the group of assets
acquired based on their relative fair value. The assets acquired
and liabilities assumed of Point Rock were as follows at the
purchase date:
Assets
|
|
Mining Rights
|
$ 2,151,823
|
Liabilities
|
|
Vendor Payables
|
$ 53,771
|
Asset Retirement Obligation
|
$ 2,098,052
|
On May 10, 2018, KCC acquired certain assets
known as the Wayland Surface Mine (Wayland) in exchange for
assuming certain liabilities of the seller. The fair values of the
liabilities assumed were $66,129 for asset retirement obligation.
The liabilities assumed do not require fair value readjustments. In
addition, KCC entered into a royalty agreement with the seller to
be paid only upon coal extraction in the amount of $1.50 per
extracted ton of coal. The acquired assets have an anticipated life
of 7 years. Capitalized mining rights will be amortized based on
productive activities over the anticipated life of 7 years.
Amortization expense for the 3 months ended September 30, 2018 and
2017 amounted to $2,067 and $0, respectively. The assets will be
measured for impairment when an event occurs that questions the
realization of the recorded value.
The assets acquired of Wayland do not represent
a business as defined in FASB AS 805-10-20 due to their
classification as a single asset. Accordingly, the assets acquired
are initially recognized at the consideration paid, which was the
liabilities assumed, including direct acquisition costs, of which
there were none. The cost is allocated to the group of assets
acquired based on their relative fair value. The assets acquired
and liabilities assumed of Wayland were as follows at the purchase
date:
Assets
|
|
Mining Rights
|
$ 66,129
|
Liabilities
|
|
Asset Retirement Obligation
|
$ 66,129
|
Asset Retirement Obligations (ARO) –
Reclamation: At the time they are incurred, legal
obligations associated with the retirement of long-lived assets are
reflected at their estimated fair value, with a corresponding
charge to mine development. Obligations are typically incurred when
we commence development of underground and surface mines, and
include reclamation of support facilities, refuse areas and slurry
ponds or through acquisitions.
Obligations are reflected at the present value
of their future cash flows. We reflect accretion of the obligations
for the period from the date they incurred through the date they
are extinguished. The asset retirement obligation assets are
amortized using the units-of-production method over estimated
recoverable (proved and probable) reserves. We are using a discount
rate of 10%. Federal and State laws require that mines be reclaimed
in accordance with specific standards and approved reclamation
plans, as outlined in mining permits. Activities include
reclamation of pit and support acreage at surface mines, sealing
portals at underground mines, and reclamation of refuse areas and
slurry ponds.
F-7
We assess our ARO at least annually and reflect
revisions for permit changes, change in our estimated reclamation
costs and changes in the estimated timing of such costs. During the
periods ending September 30, 2018 and 2017, $0 and $281,907 were
incurred for loss on settlement on ARO, respectively.
The table below reflects the changes to our
ARO:
Balance at December 31, 2017
|
$ 19,885,057
|
Accretion – nine months September 30,
2018
|
1,435,295
|
Reclamation work – nine months September
30, 2018
|
(0)
|
Asset disposition
|
(919,158)
|
Point Rock Acquisition
|
2,098,052
|
Wayland Acquisition
|
66,129
|
Balance at September 30, 2018
|
$ 22,565,375
|
Allowance For Doubtful Accounts:
The Company recognizes an allowance for losses on trade and other
accounts receivable in an amount equal to the estimated probable
losses net of recoveries. The allowance is based on an analysis of
historical bad debt experience, current receivables aging and
expected future write-offs, as well as an assessment of specific
identifiable amounts considered at risk or
uncollectible.
Allowance for trade receivables as of September
30, 2018 and December 31, 2017 amounted to $0, for both periods.
Allowance for other accounts receivables as of September 30, 2018
and December 31, 2017 amounted to $0 and $92,573,
respectively.
Trade and loan receivables are carried at
amortized cost, net of allowance for losses. Amortized cost
approximated book value as of September 30, 2018 and December 31,
2017.
Reclassifications:
Reclassifications of prior periods have been made to conform with
current year presentation.
New Accounting
Pronouncements:
|
-
|
ASU 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities, effective for years
beginning after December 15, 2017. ASU 2016-01 was adopted on
January 1, 2018 and the standard did not have a material effect on
the consolidated financial statements or related
disclosures
|
|
-
|
ASU 2016-02, Leases, effective for years beginning
after December 15, 2019. We expect to adopt ASU 2016-02 beginning
January 1, 2019 and are in the process of assessing the impact that
this new guidance is expected to have on our consolidated financial
statements and related disclosures.
|
|
-
|
ASU 2017-09, Compensation – Stock
Compensation, effective beginning after December 31, 2017.
ASU 2017-09 was adopted on January 1, 2018 and the standard did not
have a material effect on the consolidated financial statements or
related disclosures
|
|
-
|
ASU 2017-11, Earnings Per Share, effective beginning
after December 15, 2018. We expect to adopt ASU 2017-11 beginning
January 1, 2019 and are in the process of assessing the impact that
this new guidance is expected to have on our consolidated financial
statements and related disclosures.
|
|
-
|
ASU 2018-05, Income Taxes, effective beginning after
December 15, 2017, was adopted on January 1, 2018 with no effect on
our consolidated financial statements and related
disclosures.
|
|
-
|
ASU 2018-07, Compensation-Stock Compensation (Topic
718), effective beginning after December 15, 2018 was
adopted on July 1, 2018 and the standard did not have a material
effect on the consolidated financial statements or related
disclosures.
|
F-8
Management has elected to early adopt ASU
2017-01, Business Combinations
(Topic 805): Clarifying the Definition of a Business
effective at inception.
ASU 2016-18, Statement of Cash Flows: Restricted Cash
(Topic 230). Topic 230 addressed how restricted cash was
presented in the statement of cash flows. We adopted Topic 230 as
of January 1, 2018 resulting in modifications as to the manner in
which restricted cash transactions are presented in the statement
of cash flows.
ASU 2014-09, Revenue from Contracts with Customers (Topic
606). Topic 606 supersedes the revenue recognition
requirements in Topic 605 and requires entities to recognize
revenues when control of the promised goods or services is
transferred to customers at an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or services. The Company’s primary
source of revenue is from the sale of coal through both short-term
and long-term contracts with utilities, industrial customers and
steel producers whereby revenue is currently recognized when risk
of loss has passed to the customer. During the fourth quarter of
2017, the Company finalized its assessment related to the new
standard by analyzing certain contracts representative of the
majority of the Company’s coal sales and determined that the
timing of revenue recognition related to the Company’s coal
sales will remain consistent between the new standard and the
previous standard. The Company also reviewed other sources of
revenue, and concluded the current basis of accounting for these
items is in accordance with the new standard. The Company adopted
ASU 2014-09 effective January 1, 2018 using the modified
retrospective method, and there was no cumulative adjustment to
retained earnings.
NOTE 2 - PROPERTY AND
EQUIPMENT
At September 30, 2018 and December 31, 2017,
property and equipment were comprised of the
following:
|
September 30,
2018
|
December 31,
2017
|
Processing and rail facility
|
$ 2,802,855
|
$ 2,914,422
|
Underground equipment
|
9,346,692
|
8,887,045
|
Surface equipment
|
4,532,724
|
3,957,603
|
Mining rights (Less: accumulated amortization of
$181,385)
|
2,036,567
|
-
|
Land
|
-
|
178,683
|
Less: Accumulated depreciation
|
(6,600,108)
|
(4,820,569)
|
|
|
|
Total Property and Equipment, Net
|
$ 12,118,730
|
$ 11,117,184
|
Depreciation expense amounted to $649,983 and
$697,214 for the three month periods September 30, 2018 and
September 30, 2017, respectively. Depreciation expense amounted to
$1,779,539 and $1,856,442 for the nine month periods September 30,
2018 and September 30, 2017, respectively.
The estimated useful lives are as
follows:
Processing and Rail Facilities
|
20 years
|
|
Surface Equipment
|
7 years
|
|
Underground Equipment
|
5 years
|
|
Mining Rights
|
5 years
|
|
F-9
NOTE 3 - NOTES
PAYABLE
The net increase in debt includes the
following:
Total debt balance as of December 31,
2017
|
$ 14,726,842
|
|
|
During the nine-month period ended September 30,
2018, $2,450 ,000 was drawn from the ARC business loan which
carries annual interest at 7%, is due within two months of
advancement and is secure by all company assets. On June 4, 2018,
$30,000 and September 28, 2018, $75,000 of this note was
repaid.
|
2,450,000
|
|
|
On January 25, 2018, QEI entered into an
equipment loan agreement with an unrelated party in the amount of
$346,660. The agreement calls for monthly payments of $11,360 until
maturity date of December 24, 2020 and carries an interest rate of
9%. The loan is secured by the underlying surface equipment
purchased by the loan. Loan proceeds were used directly to purchase
equipment.
|
346,660
|
|
|
On March 28, 2018, QEI entered into an equipment
loan agreement with an unrelated party in the amount of $135,000.
The agreement called for payments of $75,000 and $60,000 are due on
April 6, 2018 and April 13, 2018, respectively, at which date the
note was repaid in full. Loan proceeds were used directly to
purchase equipment.
|
135,000
|
|
|
On May 9, 2018, QEI entered into a loan
agreement with an unrelated party in the amount of $1,000,000 with
a maturity date of September 24, 2018 with monthly payments of
$250,000 due beginning June 15, 2018. The note is secured by the
assets and equity of the company and carries an interest rate of
0%. Proceeds of the note were split between receipt of
$575,000 cash and $425,000 payment for new equipment. No payments
have been made on the note which is in default.
|
1,000,000
|
|
|
During May 2018, the company entered into a
financing arrangement with two unrelated parties. The notes totaled
$2,859,500, carried an original issue discount of $752,535,
interest rate of 33% and have a maturity date of January 2019 and
are secured by future receivables as well as personal guarantees of
two officers of the company.
|
2,963,958
|
|
|
During the nine-month period ended September 30,
2018 net additions to the factoring agreement totaled
$787,435.
|
787,435
|
|
|
Total increases to debt
|
7,683,053
|
|
|
Less cash payments
|
(2,064,902)
|
|
|
In May 2018, an unrelated party forgave $315,000
of the $540,000 equipment loan agreement dated September 30,
2016.
|
(315,000)
|
|
|
Issuance discount
|
(752,535)
|
|
|
Amortization of issuance cost and loan
discounts
|
420,134
|
|
|
Ending debt balance at September 30,
2018
|
$ 19,697,592
|
|
|
Less current portion:
|
$ 14,625,099
|
|
|
Total long term debt at September 30,
2018
|
$ 5,072,493
|
F-10
NOTE 4 - RELATED PARTY
TRANSACTIONS
On June 12, 2015, the Company executed a
consulting agreement with an entity with common ownership. No fees
or repayments have occurred during the nine-month period September
30, 2018 and 2017, respectively.
The amount outstanding and payable as of
September 30, 2018 and December 31, 2017, was $0 and $17,840,615,
respectively. The amount was due on demand and did not accrue
interest. The amounts under the agreement were cancelled and
forgiven on May 31, 2018. The forgiveness was accounted for as an
increase in additional paid in capital.
On April 30, 2017, the Company purchased
$250,000 of secured debt that had been owed to a third party, by an
operating subsidiary of a related party. As a result of the
transaction, the Company is now the creditor on the notes. The
first note in the amount of $150,000 is dated March 13, 2013,
carries an interest rate of 12% and was due on September 13, 2015.
The second note in the amount of $100,000 is dated July 17, 2013,
carries an interest rate of 12% and was due January 17, 2016. Both
notes are in default and have been fully impaired due to
collectability uncertainty.
During the three month period ended September
30, 2018, the Company incurred royalty expense in the amount of
$64,537 to a related entity formally consolidated as a variable
interest entity. As of September 30, 2018 the company owed the
related entity a total of $512,378 for unpaid royalties and
advances.
NOTE 5 –
MANAGEMENT AGREEMENT
On April 13, 2015, ERC entered into a mining and
management agreement with an unrelated entity, to operate a coal
mining and processing facility in Jasonville, Indiana. Under the
management agreement, net funds advanced for the nine-month period
ended September 30, 2018 and 2017 are $99,582 and $75,000,
respectively and the amounts repaid totaled $127,957 and $394,645,
respectively. During the nine-month period ended September 30, 2018
and 2017, fees paid under the agreement amounted $313,114 and $0,
respectively which has been recorded in other income.
NOTE 6 – EQUITY
TRANSACTIONS
On July 18, 2018, we issued 150,000 common
shares valued at $165,000 to Sylva International LLC for an
agreement to provide digital marketing services to the Company. The
agreement was subsequently terminated by the Company for breach of
contract. The Company fully recognized $165,000 of stock based
compensation for the nine months September 30, 2018.
On September 12, 2018, pursuant to the
Company’s Employee Incentive Stock Option Plan, we issued a
total of 636,830 options to certain employees. The options have an
expiration date of September 10, 2025 and have an exercise price of
$1.00 per share. Of the total options issued, 25,000 vested
immediately, with the balance of 611,830 options vesting equally
over the course of three years, subject to restrictions regarding
the employee’s continued employment by the Company. The fair
value of the options is $482,751. The Company recognized $13,410 as
option expense for the nine months September 30, 2018. The
unamortized expense at September 30, 2018 is $469,342.
On September 14,
2018, we issued 105,000 common shares valued at $152,250 and
175,000 warrants to Redstone Communications LLC and 45,000 common
shares valued at $65,250 and 75,000 warrants to Mr. Marlin
Molinaro as compensation for the first six months of an agreement
to provide for public relations with existing shareholders, broker
dealers, and other investment professionals for the Company. The
warrants fair value was determined to be $234,067. The warrants
granted are non-refundable and vest immediately and have an
expiration date of September 14, 2023. Stock based compensation of
$36,205 for the common shares issued and $234,067 for the warrant
granted was expensed during the nine months September 30, 2018. As
of September 30, 2018, the unamortized expense for the common
shares issued is $181,250.
The Company has
Series A Preferred stock outstanding, which has the following key
provisions: par value of $0.0001, voting rights of 33(1/3) votes of
Class A Common stock for each Series A Preferred stock, conversion
to Class A Common stock at a rate 3(1/3) Class A Common stock,
liquidation rights at $1.65 per share, and anti-dilution protection
through March 21, 2020 for conversion into Class A Common Stock at
no less than 72.0% of the fully-diluted Class A Common stock
outstanding. The Company evaluated the embedded conversion option
under ASC 815. The conversion option was deemed clearly and closely
related to its equity host instrument and as such was not
bifurcated.
Total preferred dividend requirement for the
nine-month period ending September 30, 2018 and 2017 amounted to
$104,157 and $0, respectively.
Total stock, warrant and option compensation
expense for the nine-month period ending September 30, 2018 and
2017 amounted to $448,727 and $0, respectively.
The price of the above stock, warrants and
options were determined using the closing stock price at the date
of the grant and the Black-Sholes Option Pricing
Model.
F-11
|
|
9/30/2018
|
|
Expected Dividend Yield
|
|
0%
|
|
Expected volatility
|
|
120%
|
|
Risk-free rate
|
|
1.4%
|
|
Expected life of warrants
|
|
3-7 Years
|
|
|
|
Weighted
|
Weighted
|
|
|
|
Average
|
Average
|
Aggregate
|
|
Number of
|
Exercise
|
Contractual
|
Intrinsic
|
|
Warrants
|
Price
|
Life in Years
|
Value
|
Outstanding - December 31, 2017
|
5,364,230
|
$ 2.638
|
2.835
|
$ 138,069
|
Exercisable - December 31, 2017
|
5,364,230
|
$ 2.638
|
2.835
|
$ 138,069
|
Granted
|
886,830
|
$ 1.000
|
6.388
|
$ 5,386,975
|
Forfeited or Expired
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
$ -
|
-
|
-
|
Outstanding - September 30, 2018
|
6,251,060
|
$ 2.432
|
2.474
|
$ 31,556,641
|
Exercisable - September 30, 2018
|
5,639,230
|
$ 2.590
|
1.982
|
$ 27,836,687
|
NOTE 7 -
CONTINGENCIES
In the course of normal operations, the Company
is involved in various claims and litigation that management
intends to defend. The range of loss, if any, from potential claims
cannot be reasonably estimated. However, management believes the
ultimate resolution of matters will not have a material adverse
impact on the Company’s business or financial
position.
Should the Company
decide to renew the consulting agreement with Redstone
Communication, LLC, as compensation for the following six months of
engagement, we will issue to Redstone Communications another
five-year option to purchase up to 175,000 common shares of our
Company at an exercise price of $1.50 per share, another 105,000
common shares, and a cash payment of $10,000 per month for the
second six-month term (with the first two months payable in advance
upon renewal of the second term). Furthermore, we will issue to Mr.
Marlin Molinaro another five-year option to purchase up to 75,000
common shares of our Company at an exercise price of $1.50 per
share and another 45,000 common shares. Should Redstone
Communications, LLC and Mr. Molinaro receive and exercise the
options received under the second six months of engagement, the
Company will receive up to $262,500 and $112,500,
respectively.
NOTE 8 - SUBSEQUENT
EVENTS
During October 2018, an officer of the company
advanced an additional $13,500. The advance is non-interest
bearing, non-secured and due on demand.
On October 25, 2018, Wyoming County Coal LLC was
formed as a wholly owned subsidiary of Quest Energy
Inc.
On November 7, 2018, Wyoming County Coal LLC,
acquired 5 permits, coal processing and loading facilities, surface
ownership, mineral ownership, and coal refuse storage facilities
from unrelated entities. Consideration for the acquired assets was
the assumption of reclamation bonds totaling $234,240, 1,727,273
shares of common stock of the company priced at $12.79
per share of common stock, a seller note of $350,000 and a
seller note of $250,000. Management is still gathering the
information needed to complete the allocation of the purchase price
to the assets acquired and liabilities assumed.
On October 24, 2018, options totaling 69,420
common shares of the company were exercised by a non-affiliated
shareholder. The exercise was a cashless exercise.
F-12
On November 5, 2018, 4,336,012 Series A
preferred shares were converted into 14,453,373 common shares of
the company in a cashless conversion under the terms of the
agreement.
On November 7, 2018, 964,290 Series B preferred
shares were converted into 267,859 common shares of the company in
a cashless conversion.
On November 7, 2018, $36,000 worth of trade
payables were settled with 6,000 common shares of the
company.
On November 8,
2018, the Company's Board of Directors elected to amend its
Articles of Incorporation, canceled its Series B Preferred Stock,
designated 20,000,000 shares of a newly created Series C Preferred
Stock, and amended its Series A Preferred stock for the following
key provisions: voting rights of 333(1/3) votes of Class A Common
stock for each Series A Preferred stock, and anti-dilution
protection through March 1, 2020 at no less than 72.0% of the
fully-diluted Class A Common stock. The newly created Series C
Preferred Stock carries the following key provisions: automated
conversion to Class A Common Stock upon the completion of a
underwritten equity offering totaling $5,000,000 or more and a paid
in kind annual dividend with a 10% annual percentage
rate.
On November 13, 2018, $300,000 was advanced
under the ARC business loan which carries annual interest at 7%, is
due within two months of advancement and is secure by all company
assets.
On
November 14, $225,000 of debt to an unrelated entity, was converted
into 37,500 shares of Class A Common stock.
On
November 15, three independent directors were appointed.
As compensation for their services,
each of the directors were issued a three-year warrant to purchase
up to 15,000 common shares of our company at an exercise price of
$6.00 per share, subject to certain price adjustments and other
provisions found within the respective warrants. Should each of the
three directors exercise the option through a cash payment to the
Company, the Company will receive up to $90,000 from each director,
and each director will receive up to 15,000 restricted common
shares of the Company. There are no registration rights associated
with this warrant that require the Company to register the
shares.
On
November 27, 2018, 50,000 shares of Series C preferred shares were
sold at $1.00 per share resulting in proceeds of $50,000 for the
Company.
On
December 3, 2018, 10,000 shares of Class A Common stock and an
option to purchase 417 shares of the company were issued to an
unrelated firm for consulting services. The option has a strike
price of $6.00 per share, has a two-year term, and can be exercised
via a cashless exercise by the holder at any time during its term.
The agreement also carries the commitment that a cash fee of
$10,000 will be payable under the agreement at the time the company
closes a financing of greater than $1.0 million. An additional
15,000 shares will be issued on June 1, 2019 if the agreement is
still in effect.
On
December 24, 2018, the ARC business loan was amended to reflect the
proper state of incorporation for the Company.
On
December 31, 2018, the Company entered into a loan agreement with
an unrelated party. The loan is for an amount up to
$6,500,000 of which $3,000,000 was advanced on December 31, 2018
and $2,000,000 was advanced on February 1, 2019. The
promissory agreement carries interest at 5% annual interest rate
and payments of principal and interest shall be repaid at a per-ton
rate of coal sold to the lender. The outstanding amount of
the note has a maturity of April 1, 2020. The note is secured
by the assets of the Company.
On
January 16, 2019, an affiliate of the Company converted its
remaining 29,051 shares of Series A Preferred into 96,837 Class A
Common shares
On
January 17, 2019, a non-affiliated shareholder partially exercised
300,000 shares of a warrant they held in the Company. The exercise
was cashless, and the shareholder received 299,697 shares of common
stock as a result of the conversion.
On
January 25, 2019, the Company extended its consulting agreement
with Redstone Communications, LLC for an additional six-month term,
and as a result, we issued 105,000 restricted common shares to
Redstone Communications LLC and 45,000 restricted common shares to
Mr. Marlin Molinaro, another five-year option to purchase up to
175,000 common shares of our Company at an exercise price of $1.50
per share and issued to Mr. Marlin Molinaro another five-year
option to purchase up to 75,000 common shares of our Company at an
exercise price of $1.50 per share as compensation for the second
six months of an agreement. Should Redstone Communications, LLC and
Mr. Molinaro receive and exercise the options received under the
second six months of engagement, the Company will receive up to
$262,500 and $112,500, respectively. These common shares have not
been physically issued.
On
January 27, 2019, the Company issued 1,000 shares of Class A Common
Stock to an unrelated party for the consideration of $5,000 cash to
the Company.
On
January 28, 2019, the Company issued a total of 400 shares of Class
A Common Stock to two unrelated parties for the total consideration
of $2,000 cash to the Company.
On
January 30, 2019, the Company entered into an Investor Relations
Agreement with American Capital Ventures, Inc. (“American
Capital”) whereby American Capital will provide, among other
services, assistance to the Company in planning, reviewing and
creating corporate communications, press releases, and
presentations and consulting and liaison services to the Company
relating to the conception and implementation of its corporate and
business development plan. The term of the agreement is six months
and American Capital was immediately issued 9,000 shares of Class A
Common stock as compensation under the agreement.
On
February 1, 2019, the Company issued a total of 1,000 shares of
Class A Common Stock to two unrelated parties for the total
consideration of $5,000 cash to the Company.
On
February 4, 2019, the ARC business loan was amended to allow
conversion of outstanding amounts to Class A Common shares at a
price per share of $5,25.
On
February 12,
2019,McCoy signed a
contract with an unrelated party for the acquisition of
stock and membership interests of entities with non-operating
assets consisting of surface and mineral ownership and other
related agreements. The transaction is expected to close
simultaneous with this offering. Consideration is expected to be in
the form of 2,000,000 Class A common shares, priced at $12.79
per share of common stock, as as well as $500,000 cash and a
promissory note totaling $2,000,000 with a maturity of less than 1
year. The note is secured by a land contract on the acquired
property.
On
February 6, 2019, a non-affiliated shareholder partially exercised
300,000 shares of a warrant they held in the Company. The exercise
was cashless, and the shareholder received 299,730 shares of common
stock as a result of the conversion.
On
February 4 through February 8, 2019, the Company issued a total of
17,800 shares of Class A Common Stock to sixteen unrelated parties
for the total consideration of $89,000 cash to the
Company.
On
February 10, 2019, $3,000 worth of trade payables were settled with
500 common shares of the company.
On
February 14, 2019, 452,729 Series A preferred shares were converted
into 1,509,097 common shares of the company in a cashless
conversion under the terms of the agreement. This resulted in no
more Series A Preferred stock being outstanding.
F-13
Report of Independent Registered Public Accounting
Firm
To the
shareholders and board of directors of
American
Resources Corporation
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of American
Resources Corporation and its subsidiaries (collectively, the
“Company”) as of December 31, 2017 and 2016, and the
related consolidated statements of operations, changes in
stockholders’ deficit, and cash flows for the years then
ended, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the
results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Going Concern Matter
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the entity's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
MaloneBailey, LLP
www.malonebailey.com
We have
served as the Company’s auditor since 2017
Houston,
Texas
April
20, 2018
F-14
AMERICAN RESOURCES CORPORATION
CONSOLIDATED BALANCE
SHEETS
|
December
31,
|
|
|
2017
|
2016
|
|
|
|
ASSETS
|
||
CURRENT
ASSETS
|
|
|
Cash
|
$186,722
|
$784,525
|
Accounts
Receivable
|
1,870,562
|
2,753,199
|
Inventory
|
615,096
|
-
|
Intercompany
|
-
|
-
|
Accounts Receivable
- Other
|
30,021
|
199,701
|
Total Current
Assets
|
2,702,401
|
3,737,425
|
|
|
|
OTHER
ASSETS
|
|
|
Cash -
restricted
|
198,943
|
141,102
|
Processing and rail
facility
|
2,914,422
|
2,914,422
|
Underground
equipment
|
8,887,045
|
7,500,512
|
Surface
equipment
|
3,957,603
|
3,751,054
|
Less Accumulated
Depreciation
|
(4,820,569)
|
(2,262,855)
|
Land
|
178,683
|
178,683
|
Accounts Receivable
- Other
|
127,718
|
196,347
|
Note
Receivable
|
4,117,139
|
4,117,139
|
Total Other
Assets
|
15,560,984
|
16,536,404
|
|
|
|
TOTAL
ASSETS
|
$18,263,385
|
$20,273,829
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable
|
$5,360,537
|
$2,196,060
|
Accrued management
fee
|
17,840,615
|
17,840,615
|
Accrued
interest
|
336,570
|
122,945
|
Funds held for
others
|
82,828
|
24,987
|
Due to
affiliate
|
124,000
|
74,000
|
Current portion of
long term-debt (net of unamortized discount of $35,000 and
$0)
|
9,645,154
|
4,431,006
|
Current portion of
reclamation liability
|
2,033,862
|
519,489
|
Total Current
Liabilities
|
35,423,566
|
25,209,102
|
|
|
|
OTHER
LIABILITIES
|
|
|
Long-term portion
of note payable (net of issuance costs $440,333 and
$451,389)
|
5,081,688
|
4,964,941
|
Reclamation
liability
|
17,851,195
|
17,607,384
|
Total Other
Liabilities
|
22,932,883
|
22,572,325
|
|
|
|
Total
Liabilities
|
58,356,449
|
47,781,427
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
AREC - Class A
Common stock: $.0001 par value; 230,000,000 shares authorized,
892,044 and 0 shares issued and outstanding for the period
end
|
89
|
-
|
AREC - Series A
Preferred stock: $.0001 par value; 4,817,792 shares authorized,
4,817,792 shares issued and outstanding
|
482
|
482
|
AREC - Series B
Preferred stock: $.001 par value; 20,000,000 shares authorized,
850,000 shares issued and outstanding
|
850
|
-
|
Additional paid-in
capital
|
1,527,254
|
88,193
|
Accumulated
deficit
|
(42,019,595)
|
(27,651,030)
|
Total American
Resources Corporation Shareholders' Equity
|
(40,490,920)
|
(27,562,355)
|
Non controlling
interest
|
397,856
|
54,757
|
Total Stockholders'
Deficit
|
(40,093,064)
|
(27,507,598)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$18,263,385
|
$20,273,829
|
The accompanying footnotes are integral to the consolidated
financial statements
F-15
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Years ended
December 31,
|
|
|
2017
|
2016
|
|
|
|
Coal
Sales
|
$19,231,249
|
$5,345,145
|
Processing Services
Income
|
1,589,749
|
2,256,049
|
|
|
|
Total
Revenue
|
20,820,998
|
7,601,194
|
|
|
|
Cost of Coal Sales
and Processing
|
(16,344,567)
|
(8,961,653)
|
Accretion
Expense
|
(1,791,051)
|
(1,664,774)
|
Loss on reclamation
settlement
|
-
|
(71,245)
|
Depreciation
|
(2,557,714)
|
(2,262,855)
|
General and
Administrative
|
(1,378,111)
|
(237,601)
|
Professional
Fees
|
(694,366)
|
(391,659)
|
Consulting Fees -
Related Party
|
-
|
(12,340,615)
|
Production Taxes
and Royalties
|
(4,974,013)
|
(1,250,365)
|
Impairment Loss
from notes receivable from related party
|
(250,000)
|
(510,902)
|
Development
Costs
|
(6,850,062)
|
(1,760,594)
|
|
|
|
Total Expenses from
Operations
|
(34,839,884)
|
(29,452,263)
|
|
|
|
Net Loss from
Operations
|
(14,018,886)
|
(21,851,069)
|
|
|
|
Other
Income
|
343,100
|
54,757
|
Amortization of
debt discount and debt issuance costs
|
(477,056)
|
(9,406)
|
Interest
Income
|
298,721
|
-
|
Receipt of
previously impaired receivables
|
387,427
|
-
|
|
|
|
Interest
|
(558,772)
|
(283,564)
|
|
|
|
Net
Loss
|
(14,025,466)
|
(22,089,282)
|
|
|
|
Less: Preferred
dividend requirement
|
(53,157)
|
-
|
|
|
|
Less: Net income
attributable to Non Controlling Interest
|
(343,099)
|
(54,757)
|
|
|
|
Net loss
attributable to American Resources Corporation
Shareholders
|
$(14,421,722)
|
$(22,144,039)
|
|
|
|
Net loss per share
- basic and diluted
|
$(18.20)
|
$-
|
|
|
|
Weighted average
shares outstanding
|
792,391
|
-
|
The accompanying footnotes are integral to the consolidated
financial statements
F-16
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS OF EQUITY
|
|
|
|
|
|
|
Additional
|
|
Non-
|
|
|
Common
|
Common
|
Preferred
|
Preferred
|
Preferred
|
Preferred
|
Paid-In
|
Retained
|
Controlling
|
|
|
Shares
|
Stock
|
A
Shares
|
A
Stock
|
B
Shares
|
B
Stock
|
Capital
|
Earnings
|
Interest
|
Total
|
Balance
January 1, 2016
|
-
|
$-
|
2,550,430
|
$-
|
-
|
$-
|
$-
|
$(5,506,991)
|
$-
|
$(5,506,991)
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
2,267,362
|
482
|
-
|
-
|
88,193
|
-
|
-
|
88,675
|
|
|
|
|
|
|
|
|
|
|
|
New issuances
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(22,144,039)
|
54,757
|
(22,089,282)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2016
|
-
|
$-
|
4,817,792
|
$482
|
-
|
$-
|
$88,193
|
$(27,651,030)
|
$54,757
|
$(27,507,598)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Non-
|
|
|
Common
|
Common
|
Preferred
|
Preferred
|
Preferred
|
Preferred
|
Paid-In
|
Retained
|
Controlling
|
|
|
Shares
|
Stock
|
A
Shares
|
A
Stock
|
B
Shares
|
B
Stock
|
Capital
|
Earnings
|
Interest
|
Total
|
Balance
January 1, 2017
|
-
|
$-
|
4,817,792
|
$482
|
-
|
$-
|
88,193
|
(27,651,030)
|
54,757
|
(27,507,598)
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
845,377
|
85
|
-
|
-
|
-
|
-
|
(85)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Preferred Series B
Stock
|
-
|
-
|
-
|
-
|
850,000
|
850
|
849,150
|
-
|
-
|
850,000
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
Debt
|
33,334
|
3
|
-
|
-
|
-
|
-
|
49,997
|
-
|
-
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion
feature
|
-
|
-
|
-
|
-
|
-
|
-
|
50,000
|
-
|
-
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to
consultant
|
13,333
|
1
|
-
|
|
|
|
9,999
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
40,000
|
-
|
-
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
Relative fair value debt
discount
|
|
|
|
|
|
|
|
|
|
|
on warrants
issued
|
-
|
-
|
-
|
-
|
-
|
-
|
440,000
|
-
|
-
|
440,000
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(14,358,565)
|
343,099
|
(14,025,466)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2017
|
892,044
|
$89
|
4,817,792
|
$482
|
850,000
|
$850
|
1,527,254
|
(42,019,595)
|
397,856
|
(40,093,064)
|
The accompanying footnotes are integral to the consolidated
financial statements
F-17
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Years ended
December 31,
|
|
|
2017
|
2016
|
Cash
Flows from Operating activities:
|
|
|
Net
loss
|
$(14,025,466)
|
$(22,089,282)
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
Depreciation
|
2,557,714
|
2,262,855
|
Accretion
expense
|
1,791,051
|
1,664,774
|
Loss on reclamation
settlements
|
-
|
71,245
|
Assumption of note
payable in reverse merger
|
50,000
|
-
|
Amortization of
debt discount and debt issuance costs
|
477,056
|
9,406
|
Impairment
(recovery) of advances receivable
|
(387,427)
|
510,902
|
Impairment of
related party note receivable
|
250,000
|
-
|
Stock compensation
expense
|
50,000
|
88,675
|
Change
in current assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
882,637
|
(2,753,199)
|
Prepaid expenses
and other assets
|
-
|
920
|
Inventory
|
(615,096)
|
-
|
Restricted cash
used to pay interest expense
|
14,981
|
13,984
|
Accounts
payable
|
3,096,351
|
2,196,060
|
Accrued
expenses
|
-
|
12,340,615
|
Accrued
interest
|
213,625
|
122,945
|
Reclamation
liability settlements
|
-
|
(256,892)
|
Cash used in
operating activities
|
(5,644,574)
|
(5,816,992)
|
|
|
|
Cash
Flows from Investing activities:
|
|
|
|
|
|
Note
receivable
|
-
|
(4,117,139)
|
Increase in
restricted cash
|
(57,841)
|
(116,115)
|
Restricted cash
used to pay down debt
|
65,604
|
54,421
|
Advances made in
connection with management agreement
|
(77,800)
|
(1,845,902)
|
Advance repayment
in connection with management agreement
|
625,227
|
1,175,000
|
Cash paid for PPE,
net
|
(173,432)
|
(34,200)
|
Cash received from
acquisitions, net of $0 and $100 cash paid
|
-
|
5,315,700
|
Cash provided by
investing activities
|
381,758
|
431,765
|
|
|
|
Cash
Flows from Financing activities:
|
|
|
|
|
|
Principal payments
on long term debt
|
(392,002)
|
(303,706)
|
Proceeds from long
term debt (net of issuance costs $0 and $460,795)
|
4,440,000
|
4,857,391
|
Proceeds from
related party
|
50,000
|
-
|
Net (payments)
proceeds from factoring agreement
|
(32,985)
|
1,616,067
|
Proceeds from
private placements
|
600,000
|
-
|
Cash provided by
financing activities
|
4,665,013
|
6,169,752
|
|
|
|
Increase(decrease)
in cash
|
(597,803)
|
784,525
|
|
|
|
Cash, beginning of
year
|
784,525
|
-
|
|
|
|
Cash,
end of year
|
$186,722
|
$784,525
|
|
|
|
Supplemental
Information
|
|
|
|
|
|
Assumption of net
assets and liabilities for asset acquisitions
|
$-
|
$2,745,582
|
Equipment for notes
payable
|
$1,419,650
|
$904,425
|
Purchase of related
party note receivable in exchange for Series B Equity
|
$250,000
|
$-
|
Affiliate note for
equipment
|
$-
|
$63,000
|
Conversion of note
payable to common stock
|
$50,000
|
$-
|
Beneficial
conversion feature on note payable
|
$50,000
|
$-
|
Relative fair value
debt discount on warrant issue
|
$440,000
|
$-
|
|
|
|
Cash paid for
interest
|
$345,147
|
$160,619
|
The
accompanying footnotes are integral to the consolidated financial
statements
F-18
AMERICAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
American Resources Corporation (ARC or the Company) operates
through subsidiaries that were acquired in 2016 and 2015 for the
purpose of acquiring, rehabilitating and operating various natural
resource assets including coal, oil and natural gas.
Basis of Presentation and Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Quest Energy Inc (QEI),
Deane Mining, LLC (Deane), Quest Processing LLC (Quest Processing),
ERC Mining Indiana Corp (ERC), McCoy Elkhorn Coal LLC (McCoy) and
Knott County Coal LLC (KCC). All significant intercompany accounts
and transactions have been eliminated.
On January 5, 2017, QEI entered into a share exchange agreement
with NGFC Equities, Inc (NGFC). Under the agreement, the
shareholders of QEI exchanged 100% of its common stock to NGFC for
4,817,792 newly created Series A Preferred shares that is
convertible into approximately 95% of outstanding common stock of
NGFC. The previous NGFC shareholders retained 845,377 common shares
as part of the agreement. The conditions to the agreement were
fully satisfied on February 7, 2017, at which time the Company took
full control of NGFC. NGFC has been renamed to American Resources
Corporation (ARC). The transaction was accounted for as a
recapitalization. QEI was the accounting acquirer and ARC will
continue the business operations of QEI, therefore, the historical
financial statements presented are those of QEI and its
subsidiaries. The equity and share information reflect the results
of the recapitalization. On May 15, 2017 ARC initiated a
one-for-thirty reverse stock split. The financial statements have
been retrospectively restated to give effect to this
split.
Entities for which ownership is less than 100% a determination is
made whether there is a requirement to apply the variable interest
entity (VIE) model to the entity. Where the company holds current
or potential rights that give it the power to direct the activities
of a VIE that most significantly impact the VIE’s economic
performance, combined with a variable interest that gives the
Company the right to receive potentially significant benefits or
the obligation to absorb potentially significant losses, the
Company would be deemed to have a controlling
interest.
The Company is the primary beneficiary of ERC Mining, LLC, which
qualifies as a variable interest entity. Accordingly, the assets,
liabilities, revenue and expenses of ERC Mining, LLC have been
included in the accompanying consolidated financial statements. The
Company has no ownership in ERC Mining, LLC. Determination of the
Company as the primary beneficiary is based on the power
through its management functions to direct the activities that most
significantly impact the economic performance of ERC Mining,
LLC. On March 18, 2016, the company lent ERC Mining, LLC $4,117,139
to facilitate the transaction described in Note 6, which represent
amounts that could be significant to ERC. No further support has
been provided. The Company has ongoing involvement in the
management of ERC Mining, LLC to ensure their fulfillment of the
transaction described in Note 6.
The Company is the primary beneficiary of Land Resources &
Royalties LLC (LRR) which qualifies as a variable interest entity.
Accordingly, the assets, liabilities, revenue and expenses of Land
Resources & Royalties have been included in the accompanying
consolidated financial statements. The Company has no ownership in
LRR. Determination of the Company as the primary beneficiary is
based on the power through its management functions to direct
the activities that most significantly impact the economic
performance of LRR. On October 24, 2016, the company issued
LRR a note in the amount of $178,683 to facilitate the transaction
described in Note 5, which represent amounts that could be
significant to LRR. No further support has been provided. The
Company has ongoing involvement in the management of LRR to ensure
their fulfillment of the transaction described in Note
5.
Deane was formed in November 2007 for the purpose of operating
underground coal mines and coal processing facilities. Deane was
acquired on December 31, 2015 and as such no operations are
presented prior to the acquisition date.
Quest Processing was formed in November 2014 for the purpose of
operating coal processing facilities and had no operations before
March 8, 2016.
F-19
ERC was formed in April 2015 for the purpose managing an
underground coal mine and coal processing facility. Operations
commenced in June 2015.
McCoy was formed in February 2016 for the purpose of operating
underground coal mines and coal processing facilities. The assets
of McCoy were acquired on February 17, 2016 and as such no
operations are presented prior to the acquisition
date.
KCC was formed in September 2004 for the purpose of operating
underground coal mines and coal processing facilities. KCC was
acquired on April 14, 2016 and as such no operations are presented
prior to the acquisition date.
On February 17, 2016, McCoy Elkhorn Coal LLC (McCoy) acquired
certain assets in exchange for $100 and for assuming certain
liabilities of Fortress Resources, LLC. The fair values of the
asset retirement obligation liabilities assumed were determined to
be $3,561,848 respectively. The liabilities assumed do not require
fair value readjustments.
The assets acquired of McCoy do not represent a business as defined
in FASB AS 805-10-20. McCoy does not have an integrated set of
activities and assets that that is capable of being conducted and
managed for the purpose of providing a return or other economic
benefit to their investors, members or participants. Accordingly,
the assets acquired are initially recognized at the consideration
paid, which was the liabilities assumed, including direct
acquisition costs, of which there were none. The cost is allocated
to the group of assets acquired based on their relative fair value.
The assets acquired and liabilities assumed of McCoy were as
follows at the purchase date:
Assets
|
|
Cash
|
$2,935,800
|
Underground Mining
Equipment
|
531,249
|
Surface Mining
Equipment
|
36,218
|
Coal Preparation
and Loading Facilities
|
58,681
|
Liabilities
|
|
Asset Retirement
Obligation
|
$3,561,848
|
On April 14, 2016, the Company acquired 100% of the membership
interests of ICG Knott County, LLC, subsequently renamed Knott
County Coal LLC. The fair values of the asset retirement obligation
liabilities assumed were determined to be $4,499,434 respectively.
The liabilities assumed do not require fair value
readjustments.
The assets acquired of ICG Knott County do not represent a business
as defined in FASB AS 805-10-20. IGC Knott County does not have an
integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return or
other economic benefit to their investors, members or participants.
Accordingly, the assets acquired and liabilities assumed are
initially recognized at the consideration paid, including direct
acquisition costs. The cost is allocated to the group of assets
acquired and liabilities assumed based on their relative fair
value. The assets and liabilities assumed of ICG Knott County were
as follows on the purchase date:
Assets
|
|
Cash
|
$2,380,000
|
Underground Mining
Equipment
|
1,533,937
|
Surface Mining
Equipment
|
206,578
|
Land
|
178,683
|
Coal Preparation
and Loading Facilities
|
200,236
|
Liabilities
|
|
Asset Retirement
Obligation
|
$4,499,434
|
As a result of the KCC and McCoy acquisitions during 2016,
$8,061,282 of ARO was assumed for net cash of $5,315,700 and
property, equipment and land of $2,745,582.
Going Concern: The Company has
suffered recurring losses from operations and currently a working
capital deficit. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. We plan to
generate profits by expanding current coal operations as well as
developing new coal operations. However, we will need to raise the
funds required to do so through sale of our securities or through
loans from third parties. We do not have any commitments or
arrangements from any person to provide us with any additional
capital. If additional financing is not available when needed, we
may need to cease operations. We may not be successful in raising
the capital needed to expand or develop operations. Management
believes that actions presently being taken to obtain additional
funding provide the opportunity for the Company to continue as a
going concern. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern; no
adjustments to the financial statements have been made to account
for this uncertainty.
F-20
Estimates: Management uses estimates and assumptions in
preparing financial statements in accordance with accounting
principles generally accepted in the United States of America.
Those estimates and assumptions affect the reported amounts of
assets, liabilities, revenues, expenses and the disclosure of
contingent assets and liabilities. Actual results could vary from
those estimates.
Convertible Preferred Securities: We account for hybrid contracts that feature
conversion options in accordance with generally accepted accounting
principles in the United States. ASC 815, Derivatives and Hedging
Activities (“ASC
815”) requires companies to bifurcate conversion options from
their host instruments and account for them as free standing
derivative financial instruments according to certain criteria. The
criteria includes circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are
not clearly and closely related to the economic characteristics and
risks of the host contract, (b) the hybrid instrument that
embodies both the embedded derivative instrument and the host
contract is not re-measured at fair value under otherwise
applicable generally accepted accounting principles with changes in
fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative
instrument would be considered a derivative
instrument.
We also follow ASC 480-10, Distinguishing Liabilities
from Equity (“ASC
480-10”) in its evaluation of the accounting for a hybrid
instrument. A financial instrument that embodies an unconditional
obligation, or a financial instrument other than an outstanding
share that embodies a conditional obligation, that the issuer must
or may settle by issuing a variable number of its equity shares
shall be classified as a liability (or an asset in some
circumstances) if, at inception, the monetary value of the
obligation is based solely or predominantly on any one of the
following: (a) a fixed monetary amount known at inception; (b)
variations in something other than the fair value of the
issuer’s equity shares; or (c) variations inversely related
to changes in the fair value of the issuer’s equity shares.
Hybrid instruments meeting these criteria are not further evaluated
for any embedded derivatives, and are carried as a liability at
fair value at each balance sheet date with remeasurements reported
in interest expense in the accompanying Consolidated Statements of
Operations.
Related Party Policies: In
accordance with FASB ASC 850 related parties are defined as either
an executive, director or nominee, greater than 10% beneficial
owner, or an immediate family member of any of the proceeding.
Transactions with related parties are reviewed and approved by the
directors of the Company, as per internal
policies.
Advance Royalties: Coal leases
that require minimum annual or advance payments and are recoverable
from future production are generally deferred and charged to
expense as the coal is subsequently produced.
Cash is maintained in bank
deposit accounts which, at times, may exceed federally insured
limits. To date, there have been no losses in such
accounts.
As of December 31, 2017 and 2016 total cash, including restricted
cash, amounted to $385,665 and $925,627, respectively. Restricted
cash as of December 31, 2017 and 2016 amounted to $198,943 and
$141,102, respectively.
Restrictions to cash include funds held for the benefit other
parties in the amount of $82,828 and $24,987 as of December 31,
2017 and 2016, respectively. The use of these funds are in
conjunction with the management of the property owned by this party
and the duration of the restrictions matches the duration of the
management agreement. (See Note 7)
As part of the Kentucky New Markets Development Program (See Note
3) an asset management fee reserve was set up in the amount of
$116,115. The funds are held to pay annual asset management fees to
an unrelated party through 2021. (See Note 6)
Concentration: As of December
31, 2017 and 2016 63% and 78% of revenue and 99% and 97% of
outstanding accounts receivable came from three and two customers,
respectively.
F-21
Coal Property and Equipment are
recorded at cost. For equipment, depreciation is calculated using
the straight-line method over the estimated useful lives of the
assets, generally ranging from three to seven years. Amortization
of the equipment under capital lease is included with depreciation
expense.
Property and equipment and amortizable intangible assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of the
carrying amount to the future net undiscounted cash flows expected
to be generated by the related assets. If these assets are
determined to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount exceeds the
fair market value of the assets.
Costs related to maintenance and repairs which do not prolong the
asset’s useful life are expensed as incurred.
Mine Development: Costs of
developing new coal mines, including asset retirement obligation
assets, or significantly expanding the capacity of existing mines,
are capitalized and amortized using the units-of-production method
over estimated coal deposits. Costs not incurred for development of
existing coal deposits are expensed as
incurred.
Asset Retirement Obligations (ARO) – Reclamation:
At the time they are incurred, legal
obligations associated with the retirement of long-lived assets are
reflected at their estimated fair value, with a corresponding
charge to mine development. Obligations are typically incurred when
we commence development of underground and surface mines, and
include reclamation of support facilities, refuse areas and slurry
ponds or through acquisitions.
Obligations are reflected at the present value of their future cash
flows. We reflect accretion of the obligations for the period from
the date they incurred through the date they are extinguished. The
asset retirement obligation assets are amortized using the
units-of-production method over estimated coal deposits. We are
using a discount rate of 10%,
risk free rate of .23% and inflation rate of 1.5%. Federal
and State laws require that mines be reclaimed in accordance with
specific standards and approved reclamation plans, as outlined in
mining permits. Activities include reclamation of pit and support
acreage at surface mines, sealing portals at underground mines, and
reclamation of refuse areas and slurry ponds.
We assess our ARO at least annually and reflect revisions for
permit changes, change in our estimated reclamation costs and
changes in the estimated timing of such costs. During 2017 and
2016, $0 and $71,245 were incurred for loss on settlement on
ARO.
The table below reflects the changes to our ARO:
|
2017
|
2016
|
Beginning
Balance
|
$18,126,873
|
$8,586,464
|
Accretion
|
1,791,051
|
1,664,774
|
Reclamation
work
|
(32,867)
|
(185,647)
|
McCoy
Acquisition
|
-
|
3,561,848
|
KCC
Acquisition
|
-
|
4,499,434
|
Ending
balance
|
$19,885,057
|
$18,126,873
|
Current portion of
reclamation liability
|
$2,033,862
|
$519,489
|
Long-term portion
of reclamation liability
|
$17,851,195
|
$17,607,384
|
Income Taxes include U.S.
federal and state income taxes currently payable and deferred
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the period of enactment. Deferred income tax expense represents the
change during the year in the deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax asset will not be
realized.
F-22
The Company filed an initial tax return in 2015. Management
believes that the Company’s income tax filing positions will
be sustained on audit and does not anticipate any adjustments that
will result in a material change. Therefore, no reserve for
uncertain income tax positions has been recorded. The
Company’s policy for recording interest and penalties, if
any, associated with income tax examinations will be to record such
items as a component of income taxes.
Revenue Recognition: The
Company recognizes revenue in accordance with ASC 605 when the
terms of the contract have been satisfied; generally, this occurs
when delivery has been rendered, the fee is fixed or determinable,
and collectability is reasonably assured. Revenue is measured as
the amount of consideration we expect to receive in exchange for
transferring goods or providing services.
Our revenue is comprised of sales of mined coal and services for
processing coal. All of the activity is undertaken in eastern
Kentucky.
We recognize revenue from coal sales at the time risk of loss
passes to the customer at contracted amounts and amounts are deemed
collectible. Revenue from coal processing and loading are
recognized when services have been performed according to the
contract in place.
Leases: Leases are reviewed by
management based on the provisions of ASC 840 and examined to see
if they are required to be categorized as an operating lease, a
capital lease or a financing transaction.
The Company leases certain equipment and other assets under
noncancelable operating leases, typically with initial terms of 3
to 7 years. Minimum rent on operating leases is expensed on a
straight-line basis over the term of the lease. In addition to
minimum rental payments, certain leases require additional payments
based on sales volume, as well as reimbursement of real estate
taxes, which are expensed when incurred. Capital leases are
recorded at the present value of the future minimum lease payments
at the inception of the lease. The
gross amount of assets recorded under capital lease amounted to
$333,875, all of which is classified as surface
equipment.
Loan Issuance Costs and Discounts are amortized using the effective interest method.
Amortization expense amounted to $477,056 and $9,406 as of December
31, 2017 and 2016, respectively. Amortization expense for the next
five years is expected to be $11,520, annually.
Allowance For Doubtful Accounts: The Company recognizes an allowance for losses on
trade and other accounts receivable in an amount equal to the
estimated probable losses net of recoveries. The allowance is based
on an analysis of historical bad debt experience, current
receivables aging and expected future write-offs, as well as an
assessment of specific identifiable amounts considered at risk or
uncollectible.
Allowance for trade receivables as of December 31, 2017 and 2016
amounted to $0 and $0, respectively. Allowance for other accounts
receivables as of December 31, 2017 and 2016 amounted to $92,573
and $640,000, respectively.
Trade and loan receivables are carried at amortized cost, net of
allowance for losses. Amortized cost approximated book value as of
December 31, 2017 and 2016.
Inventory: Inventory consisting
of mined coal is stated at the lower of cost (first in, first out
method) or net realizable value.
Stock-based Compensation: Stock-based compensation is measured at the grant
date based on the fair value of the award and is recognized as
expense over the applicable vesting period of the stock award
(generally 0 to 5 years) using the straight-line method. Stock
compensation to employees is accounted for under ASC 718 and stock
compensation to non-employees is accounted for under ASC
505.
Earnings Per Share: The
Company’s basic earnings per share (EPS) amounts have been
computed based on the average number of shares of common stock
outstanding for the period and include the effect of any
participating securities as appropriate. Diluted EPS includes the
effect of the Company’s outstanding stock options, restricted
stock awards, restricted stock units and performance-based stock
awards if the inclusion of these items is
dilutive.
For the years ended December 31, 2017 and 2016, the Company had
5,364,230 and 0 outstanding stock warrants, respectively. For the
years ended December 31, 2017 and 2016, the Company did not have
any restrictive stock awards, restricted stock units, or
performance-based awards.
F-23
Reclassifications: Reclassifications have been made to conform with
current year presentation.
New Accounting Pronouncements: Management has determined that the impact of the
following recent FASB pronouncements will not have a material
impact on the financial statements.
|
·
|
Accounting
Standards Update (ASU) 2014-09, Revenue from Contracts with Customers,
effective for years beginning after December 15, 2017
|
|
·
|
ASU
2015-11, Simplifying the
Measurement of Inventory, effective for years beginning
after December 15, 2016. Adoption of ASU 2015-11 did not have a
material effect on the consolidated financial
statements.
|
|
·
|
ASU
2015-17, Balance Sheet
Classification of Deferred Taxes, effective for years
beginning after December 15, 2016. Adoption of ASU 2015-17 did not
have a material effect on the consolidated financial statements or
related disclosures.
|
|
·
|
ASU
2016-01, Recognition and
Measurement of Financial Assets and Financial Liabilities,
effective for years beginning after December 15, 2017
|
|
·
|
ASU
2016-02, Leases, effective
for years beginning after December 15, 2019. We expect to adopt ASU
2016-02 beginning January 1, 2019 and are in the process of
assessing the impact that this new guidance is expected to have on
our consolidated financial statements and related
disclosures.
|
|
·
|
ASU
2016-18, Statement of Cash Flows:
Restricted Cash, effective beginning after December 15,
2017
|
|
·
|
ASU
2017-01, Business
Combinations, effective beginning after December 15,
2017
|
|
·
|
AUS
2017-09, Compensation –
Stock Compensation, effective beginning after December 31,
2017
|
|
·
|
ASU
2017-11, Earnings Per
Share, effective beginning after December 15,
2018
|
|
·
|
ASU
2018-05, Income Taxes,
effective beginning after December 15, 2017. We expect to adopt ASU
2018-05 beginning January 1, 2018 and are in the process of
assessing the impact that this new guidance is expected to have on
our consolidated financial statements and related
disclosures.
|
Management has elected to early adopt ASU 2017-01,
Business
Combinations (Topic 805): Clarifying the Definition of a
Business effective at
inception. See above in Note 1.
ASU 2014-09, Revenue from Contracts with
Customers (Topic 606). Topic
606 supersedes the revenue recognition requirements in Topic 605
and requires entities to recognize revenues when control of the
promised goods or services is transferred to customers at an amount
that reflects the consideration to which the entity expects to be
entitled to in exchange for those goods or services. We adopted
Topic 606 as of January 1, 2018 using the modified retrospective
method of adoption. Implementation of Topic 606 caused no change in
previously recognized revenue.
NOTE 2 – PROPERTY AND EQUIPMENT
At December 31, 2017 and 2016, property and equipment were
comprised of the following:
|
2017
|
2016
|
Processing and rail
facility
|
$2,914,422
|
$2,914,422
|
Underground
equipment
|
8,887,045
|
7,500,512
|
Surface
equipment
|
3,957,603
|
3,751,054
|
Land
|
178,683
|
178,683
|
Less: Accumulated
depreciation
|
(4,820,569)
|
(2,262,855)
|
|
|
|
Total Property and
Equipment, Net
|
$11,117,184
|
$12,081,816
|
Depreciation expense amounted to $2,557,714 and $2,262,855 for the
years of December 31, 2017 and 2016, respectively.
The estimated useful lives are as follows:
Processing
and Rail Facilities
|
|
20
years
|
Surface
Equipment
|
|
7
years
|
Underground
Equipment
|
|
5
years
|
F-24
NOTE 3 – NOTES PAYABLE
During the year ended December 31, 2017 and 2016, principal
payments on long term debt totaled $392,002 and $303,706,
respectively. During the year ended December 31, 2017 and 2016, new
debt issuances totaled $5,909,650 and $5,824,816, respectively,
primarily from $4,490,000 of working capital loans and $1,419,650
of equipment loans in 2017 and $4,688,152 from the Kentucky New
Markets Development program and $967,425 in equipment loans in
2016. (See Note 5). During the year ended December 31, 2017 and
2016, net proceeds from our factoring agreement totaled $32,985 and
$1,616,067, respectively.
During the year ended December 31, 2017 and 2016, discounts on debt
issued amounted to $490,000 and $-, respectively related to the ARC
business loan discussed below and the note payable discussed in
note 9. During 2017 and 2016, $455,000 and $- was amortized into
expense with $35,000 and $- remaining as unamortized
discount.
Long-term debt consisted of the following at December 31, 2017 and
2016:
|
2017
|
2016
|
|
|
|
Equipment Loans -
QEI
|
|
|
|
|
|
Note payable to an
unrelated company in monthly installments of $2,064, with interest
at 8.75%, through maturity in March 2019, when the note is due in
full. The note is secured by equipment and a personal guarantee by
an officer of the Company.
|
$30,962
|
$50,235
|
|
|
|
Note payable to an
unrelated company in monthly installments of $1,468, With interest
at 6.95%, through maturity in March 2021, when the note is due in
full. The note is secured by equipment and a personal guarantee by
an officer of the Company
|
57,290
|
64,175
|
|
|
|
On September 8,
2017, Quest entered into an equipment purchase agreement with an
unaffiliated entity, to purchase certain underground mining
equipment for $600,000. The agreement provided for $80,000 paid
upon execution, $30,000 monthly payments until the balance is paid
in full.
|
460,000
|
-
|
|
|
|
On October 19,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$90,400. The agreement calls for monthly payments until maturity of
October 19, 2019 and interest of 9.95%.
|
88,297
|
-
|
|
|
|
On October 20,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$50,250. The agreement calls for monthly payments until maturity of
October 20, 2019 and interest of 10.60%.
|
51,320
|
-
|
|
|
|
On December 4,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$56,900. The agreement calls for monthly payments until maturity of
January 7, 2021.
|
56,900
|
-
|
|
|
|
Business Loan -
ARC
|
|
|
|
|
|
On October 4, 2017,
ARC entered into a consolidated loan agreement with an unaffiliated
entity. $5,444,632 has been advanced under the note. $1,300,000 of
the note was advanced after December 31, 2017. The agreement calls
for interest of 7% and with all outstanding amounts due on demand.
The note is secured by all assets of Quest and subsidiaries. In
conjunction with the loan, a warrants for up to 5,017,006 common
shares were issued at an exercise price ranging from $.01 to $11.44
per share and with an expiration date of October 2, 2020. The loan
consolidation was treated as a loan modification for accounting
purposes giving rise to a discount of $140,000. The discount was
amortized over the life of the loan with $105,000 included as
interest expense and $35,000 included as a note discount as of
December 31, 2017.
|
4,444,632
|
175,000
|
|
|
|
Equipment Loans
– ERC
|
|
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $771 with
an interest rate of 5.25% with a balloon payment at maturity of
June 30, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
27,288
|
35,644
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $3,304 with
an interest rate of 5.25% with a balloon payment at maturity of
June 30, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
128,254
|
161,738
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $2,031 with
an interest rate of 5.25% with a balloon payment at maturity of
August 13, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
36,890
|
60,541
|
F-25
Equipment Loans -
McCoy
|
|
|
|
|
|
Equipment note
payable to an unrelated company, with monthly payments of $150,000
in September 2016, October 2016, November 2016 and a final payment
of $315,000 due in December 2016. No extensions have been entered
into subsequent to December 31, 2017 resulting in the note being in
default.
|
540,000
|
540,000
|
|
|
|
On May 2, 2017,
Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $250,000. Full payment was due September 12,
2017.
|
135,000
|
-
|
|
|
|
On June 12, 2017,
Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $22,500. Full payment was due September 12,
2017.
|
22,500
|
-
|
|
|
|
On September 25,
2017, Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $350,000. The agreement provided for $20,000 monthly
payments until the balance is paid in full.
|
330,000
|
-
|
|
|
|
Business Loans -
McCoy
|
|
|
|
|
|
Business loan
agreement with Crestmark Bank in the amount of $200,000, with
monthly payments of 23,000, with an interest rate of 12%, through
maturity in January 1, 2018. The note is secured by a corporate
guaranty by the Company and a personal guaranty.
|
66,667
|
-
|
|
|
|
Seller Note -
Deane
|
|
|
|
|
|
Deane Mining -
promissory note payable to an unrelated company, with monthly
interest payments of $10,000, at an interest rate of 6%, beginning
June 30, 2016. The note is due December 31, 2017. No payments have
been made on the note and no extensions have been entered into
subsequent to December 31, 2017, resulting in the note being in
default.
|
2,000,000
|
2,000,000
|
|
|
|
Accounts Receivable
Factoring Agreement
|
|
|
|
|
|
McCoy, Deane and
Knott County secured accounts receivable note payable to a bank.
The agreement calls for interest of .30% for each 10 days of
outstanding balances. The advance is secured by the accounts
receivable, corporate guaranty by the Company and personal
guarantees by two officers of the Company. The agreement ends in
October 2018
|
1,582,989
|
1,616,167
|
|
|
|
Kentucky New
Markets Development Program
|
|
|
|
|
|
Quest Processing -
loan payable to Community Venture Investment XV, LLC, with interest
only payments due quarterly until March 2023, at which time
quarterly principal and interest payments are due. The note bears
interest at 3.698554% and is due March 7, 2046. The loan is secured
by all equipment and accounts of Quest Processing. See
Note
|
4,117,139
|
4,117,139
|
|
|
|
Quest Processing -
loan payable to Community Venture Investment XV, LLC, with interest
only payments due quarterly until March 2023, at which time
quarterly principal and interest payments are due. The note bears
interest at 3.698554% and is due March 7, 2046. The loan is secured
by all equipment and accounts of Quest Processing. See
Note
|
1,026,047
|
1,026,047
|
|
|
|
Less: Debt
Discounts and Loan Issuance Costs
|
(475,333)
|
(451,389)
|
|
|
|
Affiliate
Notes
|
|
|
|
|
|
Notes payable to
affiliate, due on demand with no interest and is uncollateralized.
Equipment purchasing was paid by an affiliate resulting in the note
payable.
|
$74,000
|
$74,000
|
|
|
|
During July 2017,
an officer of the Company advanced $50,000 to Quest. The advance is
unsecured, non interest bearing and due on demand.
|
$50,000
|
$-
|
|
|
|
|
14,850,842
|
9,469,947
|
Less: Current
maturities
|
9,769,154
|
4,505,006
|
|
|
|
Total Long-term
Debt
|
$5,081,688
|
$4,964,941
|
Total interest expense was $558,772 in 2017 and $283,564 in
2016.
F-26
Future minimum principal payments, interest payments and payments
on capital leases are as follows:
Payable
In
|
Loan
Principal
|
Lease
Principal
|
Total Loan and
Lease Principal
|
Lease
Interest
|
|
|
|
|
|
2018
|
9,704,444
|
64,710
|
9,769,154
|
8,560
|
2019
|
312,707
|
125,798
|
438,505
|
3,722
|
2020
|
37,283
|
-
|
37,283
|
-
|
2021
|
10,491
|
-
|
10,491
|
-
|
2022
|
-
|
-
|
-
|
-
|
Thereafter
|
4,595,409
|
|
4,595,409
|
|
NOTE 4 – RELATED PARTY TRANSACTIONS
On June 12, 2015, the Company executed a consulting agreement with
an entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615, respectively, relating
to services rendered under this agreement. The amount outstanding
and payable as of December 31, 2017 and 2016, was $17,840,615 and
$17,840,615, respectively. The amount is due on demand and does not
accrue interest.
On January 1, 2016, the Company awarded stock options for 857,464
shares that were cashlessly exercised into 290,513 shares of Series
A preferred stock or consulting efforts to an entity with common
ownership. No stock options were awarded to related parties during
2017.
During 2015, equipment purchasing was paid by an affiliate
resulting in a note payable. The balance of the note was $74,000 as
of December 31, 2017 and 2016, respectively.
On April 30, 2017, the Company purchased $250,000 of secured debt
that had been owed to that party, by an operating subsidiary of a
related party. As a result of the transaction, the Company is now
the creditor on the notes. The first note in the amount of $150,000
is dated March 13, 2013, carries an interest rate of 12% and was
due on September 13, 2015. The second note in the amount of
$100,000 is dated July 17, 2013, carries an interest rate of 12%
and was due January 17, 2016. Both notes are in default and have
been fully impaired due to collectability uncertainty. (see Note
9)
During July 2017, an officer of the Company advanced $50,000 to
Quest. The advance is unsecured, non interest bearing and due on
demand. (see Note 3)
On June 12, 2015, the Company executed a consulting agreement with
an entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615, respectively, relating
to services rendered under this agreement. The amount outstanding
and payable as of December 31, 2017 and 2016, was $17,840,615 and
$17,840,615, respectively. The amount is due on demand and does not
accrue interest.
NOTE 5 – VARIABLE INTEREST ENTITY
On October 24, 2016, the Company sold certain mineral and land
interests to a subsidiary of an entity, LRR, owned by members of
the Company’s management. LRR leases various parcels of land
to QEI and engages in other activities creating miscellaneous
income. The consideration for the transaction was a note in the
amount of $178,683. The note bears no interest and is due in 2026.
The balance as of December 31, 2016 was $130,145. As of January 28,
2017, the note was paid in full. This transaction was eliminated
upon consolidation as a variable interest entity.
The Company’s management also manages the operations of LRR.
LRR has assets totaling $475,401 and liabilities totaling $77,443
as of December 31, 2017 for which there were no
restrictions. The
Company’s risk associated with LRR is greater than its
ownership percentage and its involvement does not affect the
Company’s business beyond the relationship described
above.
NOTE 6 – KENTUCKY NEW MARKETS DEVELOPMENT
PROGRAM
On March 18, 2016, Quest Processing entered into two loans under
the Kentucky New Markets Development Program for a total of
$5,143,186. Quest Processing paid $460,795 of debt issuance costs
resulting in net proceeds of $4,682,391. See note 3. The Company
retains the right to call $5,143,186 of the loans in March 2023.
State of Kentucky income tax credits were generated for the lender
which the Company has guaranteed over their statutory life of seven
years in the event the credits are recaptured or reduced. At the
time of the transaction, the income tax credits were valued at
$2,005,843. The Company has not established a liability in
connection with the guarantee because it believes the likelihood of
recapture or reduction is remote.
On March 18, 2016, ERC Mining LLC, an entity consolidated as a VIE,
lent $4,117,139 to an unaffiliated entity, as part of the Kentucky
New Markets Development Program loans. The note bears interest at
4% and is due March 7, 2046. The balance as of December 31, 2017
and 2016 was $4,117,139 and $4,117,139, respectively. Payments of
interest only are due quarterly until March 18, 2023 at which time
quarterly principal and interest are due. The note is
collateralized by the equity interests of the
borrower.
The Company’s management also manages the operations of ERC
Mining LLC. ERC Mining LLC has assets totaling $4,415,860 and
liabilities totaling $4,117,139 as of December 31, 2017 for which
there are to be used in conjunction with the transaction described
above. Assets totaling $3,818,418 and liabilities totaling
$4,117,139, respectively, are eliminated upon consolidation. The
Company’s risk associated with ERC Mining LLC is greater than
its ownership percentage and its involvement does not affect the
Company’s business beyond the relationship described
above.
F-27
NOTE 7 – MANAGEMENT AGREEMENT
On April 13, 2015, ERC entered into a mining and management
agreement with an unrelated entity, to operate a coal mining and
processing facility in Jasonville, Indiana. The agreement called
for a monthly base fee of $20,000 in addition to certain per ton
fees based on performance to be paid to ERC. During 2017 and 2016
no fee had been paid and due to the uncertainty of collection, no
fee has been recorded. Fees earned totaled $240,000 and $240,000
for 2017 and 2016, respectively, which have been fully reserved.
The agreement called for equipment payments to be made by the
entity. As of December 31, 2017, and 2016 amounts owed from the
entity to ERC for equipment payments amounted to $192,432 and
$258,096, respectively.
During 2017, ERC had advances of $77,800 and repayments of $625,227
of amounts previously advanced. During 2016, ERC had advances of
$1,975,000 which is unsecured, non-interest bearing and due upon
demand and repayments of previously advanced amounts of $1,175,000.
Of the amounts received in 2017, $387,427 was the collection of a
previously impaired amount.
As part of the agreement, ERC retained the administrative rights to
the underlying mining permit and reclamation liability. The entity
has the right within the agreement to take the mining permits and
reclamation liability at any time. In addition, all operational
activity that takes place on the facility is the responsibility of
the entity. ERC acts as a fiduciary and as such has recorded cash
held for the entity’s benefit as both an asset and an
offsetting liability amounting to $82,828 and $24,987 respectively
as of December 31, 2017 and 2016.
NOTE 8 – INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. The primary temporary differences that give rise to
the deferred tax assets and liabilities are as follows: accrued
expenses.
Deferred tax assets consisted of $4,152,800 at December 31, 2017,
which was fully reserved. Deferred tax assets consist of net
operating loss carryforwards in the amount of $4,152,800 at
December 31, 2017, which was fully reserved. The net operating loss
carryforwards for years 2015, 2016 and 2017 begin to expire in
2035. The application of net operating loss carryforwards are
subject to certain limitations as provided for in the tax code. The
Tax Cuts and Jobs Act was signed into law on December 22, 2017 and
reduced the corporate income tax rate from 34% to 21%. The
Company’s deferred tax assets, liabilities, and valuation
allowance have been adjusted to reflect the impact of the new tax
law.
The Company’s effective income tax rate is lower than what
would be expected if the U.S. federal statutory rate (34%) were
applied to income before income taxes primarily due to certain
expenses being deductible for tax purposes but not for financial
reporting purposes. The Company files income tax returns in the
U.S. federal jurisdiction and various state jurisdictions. All
years are open to examination as of December 31, 2017.
NOTE 9 – EQUITY TRANSACTIONS
A new 2016 Stock Incentive Plan (2016 Plan) was approved by the
Board during January 2016. The Company may grant up to 6,363,225
shares of Series A Preferred stock under the 2016 Plan. The 2016
Plan is administered by the Board of Directors, which has
substantial discretion to determine persons, amounts, time, price,
exercise terms, and restrictions of the grants, if any. The options
issued under the 2016 Plan vest upon issuance.
During 2016, the Company issued options amounting to 6,363,225
shares (which includes shares disclosed above) under an adopted
stock option plan that were cashlessly exercised into 2,267,362
shares of Series A preferred stock resulting in an expense of
$88,675.
F-28
On May 10, 2017, the Company issued warrants amounting to 8,334
common shares to a board member. The options expire May 9, 2020 and
have an exercise price of $3.60. An expense in the amount of
$40,000 was recognized for this issuance.
The Company had a note payable in the amount of $50,000 which was
assumed as part of the share exchange agreement and accounted for
as an expense in the recapitalization transaction. On February 22,
2017, the Company modified the note to add a conversion option with
a price of $1.50. The conversion option was beneficial, therefore,
the Company recognized $50,000 as a discount to the assumed note
payable. The note was immediately converted, resulting in the
issuance of 33,334 shares and the full amortization of the
discount.
The
Company has Series A Preferred stock outstanding, which has the
following key provisions: par value of $0.0001, voting rights of
33(1/3) votes of Class A Common stock for each Series A Preferred
stock, conversion to Class A Common stock at a rate 3(1/3) Class A
Common stock, liquidation rights at $1.65 per share, and
anti-dilution protection through March 21, 2020 for conversion into
Class A Common Stock at no less than 72.0% of the fully-diluted
Class A Common stock outstanding. The Company evaluated the
embedded conversion option under ASC 815. The conversion option was
deemed clearly and closely related to its equity host instrument
and as such was not bifurcated.
On March 7, 2017, ARC closed a private placement whereby it issued
an aggregate of 500,000 shares of ARC’s Series B Preferred
Stock at a purchase price of $1.00 per Series B Preferred share and
warrants to purchase an aggregate of 208,334 shares of the
ARC’s common stock (subject to certain adjustments), for
proceeds to ARC of $500,000 (the “March 2017 Private
Placement”). After deducting for fees and expenses, the
aggregate net proceeds from the sale of the preferred series B
shares and the warrants in the March 2017 Private Placement were
approximately $500,000. The ‘A’ warrants totaling
138,889 shares expire March 6, 2020 and hold an exercise price of
$7.60 per share. The ‘A-1’ warrants totaling 69,445
shares expire March 6, 2020 and hold an exercise price of $.003 per
share.
On April 2, 2017, American Resources Corporation closed a private
placement whereby it issued an aggregate of 100,000 shares of the
ARC’s Series B Preferred Stock at a purchase price of $1.00
per Series B Preferred share, and warrants to purchase an aggregate
of 27,778 shares of the ARC’s common stock (subject to
certain adjustments), for proceeds to ARC of $100,000 (the
“April 2017 Private Placement”). After deducting for
fees and expenses, the aggregate net proceeds from the sale of the
Series B Preferred Stock and the warrants in the April 2017 Private
Placement were approximately $100,000. The ‘A’ warrants
totaling 27,778 shares expire April 2, 2019 and hold an exercise
price of $7.20 per share.
On April 30, 2017, American Resources Corporation closed on a
private placement agreement whereby it issued an aggregate of
250,000 shares of the ARC’s Series B Preferred Stock and A
warrants amounting to 69,445 to an unrelated party for the purchase
of $250,000 of secured debt that had been owed to that party, by an
operating subsidiary of a related party. As a result of the
transaction, the Company is now the creditor on the notes. The
first note in the amount of $150,000 is dated March 13, 2013,
carries an interest rate of 12% and was due on September 13, 2015.
The second note in the amount of $100,000 is dated July 17, 2013,
carries an interest rate of 12% and was due January 17, 2016. Both
notes are in default and were impaired. The A warrants totaling
69,445 shares expire April 29, 2019 and hold an exercise price of
$7.20 per share.
The Series B Preferred Stock converts into common stock of the
Company at the holder’s discretion at a conversion price of
$3.60 per common share (one share of Series B Preferred converts to
common at a ratio of 0.27778). Furthermore, the Series B Preferred
share purchase agreement provides for certain adjustments to the
conversion value of the Series B Preferred to common shares of the
Company that are based on the EBITDA (earnings before interest,
taxes, depreciation, and amortization) for the Company for the 12
months ended March 31, 2018 of $6,000,000. Those adjustments
provide for a decrease in the conversion value based on the
proportional miss of the Company’s EBITDA, up to a maximum of
30.0% decrease in the conversion value of the Series B Preferred to
common shares.
The Series B Preferred share purchase agreement
provides,
for a period of nine months post execution of the purchase
agreement, an option for the investor to put the Series B
Preferred investment to the Company at a 12% premium to the Series
B Preferred purchase price should the Company achieve certain
hurdles, such as a secondary offering and an up-listing to a
national stock exchange. Such put option expires after 20 days from
notification of the Company to the Series B Preferred investor of
the fulfillment of such qualifications.
Total preferred dividend requirement for 2017 and 2016 amounted to
$53,157 and $0, respectively.
Total stock-based compensation expense incurred for awards to
employees during 2017 and 2016 was $0 and $88,675, respectively.
Fair value was determined using the total enterprise value
approach.
F-29
On July 5, 2017, the Company issued 13,333 common shares and
warrants to purchase 33,333 shares to an unrelated consulting
company. The warrants had an exercise price of $3.60 with a
three-year term. The total compensation expense related to this
warrant was $10,000 which was determined using the closing stock
price at the date of the grant and the Black-Sholes Option Pricing
Model.
In conjunction with the ARC business loan, warrants of 5,996,609
common shares were issued and 979,603 were subsequently canceled at
an exercise price ranging from $.01 to $11.44 per share and with an
expiration date of October 2, 2020.
|
2017
|
Expected Dividend
Yield
|
0%
|
Expected
volatility
|
13.73%
|
Risk-free
rate
|
1.62%
|
Expected life of
warrants
|
2-3
years
|
|
Number of
Warrants
|
Weighted
Average Price
|
Weighted
Average Contractual Life in Years
|
Aggregate
Intrinsic Value
|
Outstanding
– December 31, 2015
|
-
|
-
|
-
|
-
|
Exercisable -
December 31, 2015
|
-
|
-
|
-
|
-
|
Granted
|
-
|
-
|
-
|
-
|
Forfeited or
Expired
|
-
|
-
|
-
|
-
|
Outstanding -
December 31, 2016
|
-
|
-
|
-
|
-
|
Exercisable -
December 31, 2016
|
-
|
-
|
-
|
-
|
Granted
|
6,343,833
|
$2.317
|
2.706
|
$174,253
|
Forfeited or
Expired
|
979,603
|
$0.560
|
1.997
|
$36,184
|
Exercised
|
-
|
-
|
-
|
-
|
Outstanding -
December 31, 2017
|
5,364,230
|
$2.638
|
2.835
|
$138,069
|
Exercisable -
December 31, 2017
|
5,364,230
|
$2.638
|
2.835
|
$138,069
|
NOTE 10 – CONTINGENCIES
In the course of normal operations, the Company is involved in
various claims and litigation that management intends to defend.
The range of loss, if any, from potential claims cannot be
reasonably estimated. However, management believes the ultimate
resolution of matters will not have a material adverse impact on
the Company’s business or financial position.
The company leases various office space some from an entity which
we consolidate as a variable interest entity. (see note 5). The
future annual rent is $6,000 through 2021. Rent expense for 2017
and 2016 amounted to $26,000 each year, respectively.
NOTE 11 – SUBSEQUENT EVENTS
On January 25, 2018, Quest entered into an equipment financing
agreement with an unaffiliated entity, to purchase certain surface
equipment for $346,660. The agreement calls for monthly payments
until maturity of December 25, 2020.
During 2018, the company drew an additional $1,300,000 on the ARC
business loan. (see note 3)
On March 29, 2018, Quest entered into an equipment financing
agreement with an affiliated entity, to purchase certain surface
mining equipment for $135,000. Payments of $75,000 and $60,000 are
due on April 6, 2018 and April 13, 2018, respectively.
F-30
PART II:
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution.
The
following table sets forth the estimated fees and expenses paid or
payable by the registrant in connection with the issuance and
distribution of securities in this offering. All amounts are
estimates.
Various filing
fees
|
$9,000
|
Accounting fees and
expenses
|
$6,000
|
Legal fees and
expenses
|
$6,000
|
Underwriter’s
Engagement Fee and Potential Expense
Reimbursement
|
$ 175,000
|
Miscellaneous
expenses
|
$9,000
|
Total
|
$ 205,000
|
Item 14. Indemnification of Directors and
Officers.
The
Florida Business Corporation Act permits, but does not require,
corporations to indemnify a director, officer or control person of
the corporation for any liability asserted against her and
liability and expenses incurred by her in her capacity as a
director, officer, employee or agent, or arising out of her status
as such, if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests
of the corporation, and, unless the articles of incorporation
provide otherwise, whether or not the corporation has provided for
indemnification in its articles of incorporation. Our articles of
incorporation have no separate provision for indemnification of
directors, officers, or control persons.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling our
company pursuant to the foregoing provisions, we have been informed
that in the opinion of the SEC, such indemnification is against
public policy as expressed in the act and is therefore
unenforceable.
Item 15. Recent Sales of Unregistered Securities.
COMMON STOCK
During the periods ending December 31, 2015, December 31, 2016,
December 31, 2017and
December 31, 2018, the Company engaged in the sale of its
unregistered securities as described below. The shares of our
common stock were issued pursuant to an exemption from registration
in Section 4(a)(2) of the Securities Act of 1933. These shares of
our common stock qualified for exemption under Section 4(a)(2) of
the Securities Act of 1933 since the issuance of shares by us did
not involve a public offering. The offering was not a “public
offering” as defined in Section 4(a)(2) due to the
insubstantial number of persons involved in the deal, size of the
offering, manner of the offering and number of shares offered. We
did not undertake an offering in which we sold a high number of
shares to a high number of investors. In addition, these
shareholders had necessary investment intent as required by Section
4(a)(2) since they agreed to receive share certificates bearing a
legend stating that such shares are restricted pursuant to Rule 144
of the 1933 Act. This restriction ensures that these shares would
not be immediately redistributed into the market and therefore not
be part of a “public offering.” All shareholders are
“sophisticated investors” and are family members,
friends or business acquaintances of our officers and directors.
Based on an analysis of the above factors, we believe we have met
the requirements to qualify for exemption under section 4(a)(2) of
the Securities Act of 1933 for this transaction.
II-1
On February 22, 2017, Tarpon Bay Partners LLC converted its $50,000
promissory note and accrued interest held in the Company into
33,334 common shares, representing the full value of the promissory
note held by Tarpon Bay Partners LLC.
On July
18, 2018, we issued 150,000 restricted common shares to Sylva
International LLC for an agreement to provide digital marketing
services to the Company. The agreement was subsequently terminated
by the Company for breach of contract.
On
September 14, 2018, we issued 105,000 restricted common shares to
Redstone Communications LLC and 45,000 restricted common shares to
Mr. Marlin Molinaro as compensation for the first six months of an
agreement to provide for public relations with existing
shareholders, broker dealers, and other investment professionals
for the Company.
On
November 7, 2018, Wyoming County Coal LLC, acquired 5 permits, coal
processing and loading facilities, surface ownership, mineral
ownership, and coal refuse storage facilities from unrelated
entities. As part of the consideration for the acquired assets we
issued 1,727,273 shares of common stock of the Company to the
seller.
On
October 24, 2018, options totaling 69,420 common shares of the
company were exercised by a non-affiliated shareholder. The
exercise was a cashless exercise.
On
November 5, 2018, 4,336,012 Series A preferred shares were
converted into 14,453,373 common shares of the company in a
cashless conversion under the terms of the agreement.
On
November 7, 2018, 964,290 Series B preferred shares were converted
into 267,859 common shares of the company in a cashless
conversion.
On
November 7, 2018, $36,000 worth of trade payables were settled with
6,000 common shares of the company.
On January 17, 2019, a non-affiliated shareholder partially
exercised 300,000 shares of a warrant they held in the Company. The
exercise was cashless, and the shareholder received 299,697 shares
of common stock as a result of the
conversion.
On
January 25, 2019, we issued 105,000 restricted common shares to
Redstone Communications LLC and 45,000 restricted common shares to
Mr. Marlin Molinaro as compensation for the second six months of an
agreement to provide for public relations with existing
shareholders, broker dealers, and other investment professionals
for the Company.
On
January 27, 2019, the Company issued 1,000 shares of Class A Common
Stock to an unrelated party for the consideration of $5,000 to the
Company.
On
January 28, 2019, the Company issued a total of 400 shares of Class
A Common Stock to two unrelated parties for the total consideration
of $2,000 to the Company.
On
January 30, 2019, the Company issued 9,000 shares of Class A Common
stock as compensation to American Capital Ventures, Inc. for six
months of consulting services that include assistance to the
Company in planning, reviewing and creating corporate
communications, press releases, and presentations and consulting
and liaison services to the Company relating to the conception and
implementation of its corporate and business development
plan.
On
February 1, 2019, the Company issued a total of 1,000 shares of
Class A Common Stock to two unrelated parties for the total
consideration of $5,000 to the Company.
On
February 6, 2019, a non-affiliated shareholder partially exercised
300,000 shares of a warrant they held in the Company. The exercise
was cashless, and the shareholder received 299,730 shares of common
stock as a result of the conversion.
On
February 4 through February 8, 2019, the Company issued a total of
17,800 shares of Class A Common Stock to sixteen unrelated parties
for the total consideration of $89,000 cash to the
Company.
On
February 10, 2019, $3,000 worth of trade payables were settled with
500 common shares of the company.
On
February 14, 2019, 452,729 Series A preferred shares were converted
into 1,509,097 common shares of the company in a cashless
conversion under the terms of the agreement. This resulted in no
more Series A Preferred stock being outstanding.
During the twelve months ended December 31, 2017 the Company issued
shares to a non-related party for services, recorded at the fair
market value of the share price, in the amount of 13,333 common
shares. Additional shares of our common stock were issued at fair
market value of the share price as set forth in the table
below.
II-2
Date
|
|
Name
|
|
Shares
|
Fair
Market
Value
|
Dollar
Amount
|
|
|
|
|
|
|
|
7/5/2017
|
|
Oscaleta
Partners LLC
|
|
13,333
|
$.75/share
|
$10,000
|
During the twelve months ended December 31, 2016 the Company issued
shares to a non-related party for services, recorded at the fair
market value of the share price, in the amount of 3,805 common
shares. Additional shares of our common stock were issued at fair
market value of the share price as set forth in the table below.
These items were transacted before the merger with the predecessor
company (NGFC).
Date
|
|
Name
|
|
Shares
|
Fair Market
Value
|
Dollar
Amount
|
|
|
|
|
|
|
|
8/15/2016
|
|
Stockvest
|
|
3,334
|
$ 12.00/share
|
$40,000
|
9/30/2016
|
|
Clifford
Hunt
|
|
221
|
$12.00/share
|
$2,650
|
9/30/2016
|
|
Lynx
Management
|
|
250
|
$12.00/share
|
$3,000
|
SERIES A PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
our Series A Preferred stock, par value $0.0001 per share, covering
up to an aggregate of 5,000,000 shares of Series A Preferred stock.
The Series A Preferred stock will cover the number of shares and
will have the powers, preferences, rights, qualifications,
limitations and restrictions determined by the board of directors,
which may include, among others, dividend rights, liquidation
preferences, voting rights, conversion rights, preemptive rights
and redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
stockholders. Effective
November 5, 2018, the eleven Series A Preferred holders elected to
proportionally convert a total of 4,336,012 of the 4,817,792 total
Series A Preferred stock outstanding into 14,453,373 common shares
of the company. Effective February 14, 2019, the
remaining 452,729 Series A Preferred shares were converted into
1,509,097 common shares of the company in a cashless conversion
under the terms of the agreement. This resulted in no more Series A
Preferred stock being outstanding as of this date.
Pursuant to the Series A Preferred Stock Designation, the holders
of the Series A Preferred stock are entitled to three hundred
thirty-three and one-third votes, on an “as-converted”
basis, per each Series A Preferred share held of record on all
matters to be voted upon by the stockholders. The holders of the
Series A Preferred stock are not entitled to receive
dividends.
The holders of the Series A Preferred stock are entitled to convert
into common shares, at the holder’s discretion, at a rate of
one Series A Preferred share for three and one-third common shares.
Any fractional common shares created by the conversion is rounded
to the nearest whole common share.
Upon our liquidation, dissolution, distribution of assets or other
winding up, the holders of the Series A Preferred stock shall be
entitled to receive in preference to the holders of the Common
Stock a per share amount equal to $1.65 per share.
SERIES C PREFERRED STOCK
Our certificate of incorporation authorizes our Board of Directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
our Series C Preferred stock, par value $0.0001 per share, covering
up to an aggregate of 20,000,000 shares of Series C Preferred
stock. The Series C Preferred stock will cover the number of shares
and will have the powers, preferences, rights, qualifications,
limitations and restrictions determined by the Board of Directors,
which may include, among others, dividend rights, liquidation
preferences, voting rights, conversion rights, preemptive rights
and redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
stockholders. As of the date of this prospectus, 50,000 shares of
Series C Preferred stock are outstanding.
The holders of Series C Preferred shares are entitled to vote on an
“as-converted” basis of one share of Series C Preferred
Stock voting for one vote of common stock. The holders of the
Series C Preferred shall accrue and pay-in-kind with additional
Series C Preferred stock a dividend based on an 10.0% annual
percentage rate, compounded annually in arrears, for any Series C
Preferred stock that is outstanding at the end of such prior
year.
II-3
The holders of the Series C Preferred stock are entitled to convert
into common shares, at the holder’s discretion, at a
conversion price of Six Dollars ($6.00) per share of common stock,
subject to certain price adjustments found in the Series C
Preferred stock purchase agreements. Should the company complete an
equity offering (including any offering convertible into equity of
the Company) of greater than Five Million Dollars ($5,000,000) (the
“Underwritten Offering”), then the Series C Preferred
stock shall be automatically and without notice convertible into
Common Stock of the company concurrently with the subsequent
Underwritten Offering at the same per share offering price of the
Underwritten Offering. If the Underwritten Offering occurs within
twelve months of the issuance of the Series C Preferred stock to
the holder, the annual dividend of 10.0% shall become immediately
accrued to the balance of the Series C Preferred stock and
converted into the Underwritten Offering.
Upon our liquidation, dissolution, distribution of assets or other
winding up, the holders of Series C Preferred shares shall have a
liquidation preference to the common shares at an amount equal to
$1.00 per share.
“BLANK CHECK” PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
up to an aggregate of 5,000,000 shares of preferred stock that is
considered “blank check”. The blank check preferred
stock shall be designed by the Board of Directors at the time of
classification
OPTIONS AND WARRANTS
Pursuant to our previously-completed Series B Preferred stock
offering, investors in the Series B Preferred stock received
warrants to purchase additional common shares at exercise prices
stated within such warrant. The warrants have an expiration date of
two or three years post the date of the investment in the Series B
Preferred stock by the investor.
On October 24, 2018, one of the holders of the options issued
pursuant to the Series B Preferred stock financing exercised 69,445
of his options through a cashless exercise and received 69,420 Class A Common shares as a
result. Should all Series B Preferred stock warrant holders fully
exercise their right to purchase shares, for cash, the Company will
receive $1,700,006 proceeds from such exercises and will increase
the common shares outstanding by 236,112
shares.
On June 27, 2017 we entered into a settlement agreement with
Oscaleta Partners LLC, a company we engaged on February 20, 2017 to
perform consulting services to the Company, and as part of that
settlement, we issued to Oscaleta Partners LLC the amount of 13,333
restricted shares, of the Company’s common stock, and a
three-year warrant to purchase up to 33,333 common shares of stock
of the Company at an exercise price of $3.60 per share. Should
Oscaleta Partners LLC exercise all of its shares under the warrant,
the company will receive $119,999 cash proceeds.
On May 10, 2017, as compensation to Bill Bishop for his service on
the Board of Directors of the Company, we issued Mr. Bishop a
three-year warrant to purchase up to 8,334 common shares of our
company at an exercise price of $3.60 per share, subject to certain
price adjustments and other provisions found within the warrant
issued to Mr. Bishop. Should Mr. Bishop exercise the option through
a cash payment to the Company, the Company will receive up to
$30,002 from Mr. Bishop and he will receive up to 8,334 restricted
common shares of the Company. There are no registration rights
associated with this warrant that require the Company to register
the shares.
On October 4, 2017, we entered into a financing transaction with
Golden Properties Ltd., a British Columbia company based in
Vancouver, Canada (“Golden Properties”) that involved a
series of loans made by Golden Properties to the Company. As part
of that financing, we issued to Golden Properties the following
warrants:
|
●
|
Warrant
B-4, for the purchase of 3,417,006 shares of common stock at $0.01
per share, as adjusted from time to time, expiring on October 4,
2020, and providing the Company with up to $34,170 in cash proceeds
should all the warrants be exercised;
|
|
|
|
|
●
|
Warrant
C-1, for the purchase of 400,000 shares of common stock at $3.55
per share, as adjusted from time to time, expiring on October 4,
2019, and providing the Company with up to $1,420,000 in cash
proceeds should all the warrants be exercised;
|
|
|
|
|
●
|
Warrant
C-2, for the purchase of 400,000 shares of common stock at $7.09
per share, as adjusted from time to time, expiring on October 4,
2019, and providing the Company with up to $2,836,000 in cash
proceeds should all the warrants be exercised;
|
|
|
|
|
●
|
Warrant
C-3, for the purchase of 400,000 shares of common stock at $8.58
per share, as adjusted from time to time, expiring October 2, 2020,
and providing the Company with up to $3,432,000 in cash proceeds
should all the warrants be exercised; and
|
|
|
|
|
●
|
Warrant
C-4, for the purchase of 400,000 shares of common stock at $11.44
per share, as adjusted from time to time, expiring October 2, 2020,
and providing the Company with up to $4,576,000 in cash proceeds
should all the warrants be exercised.
|
None of the warrants resulting from the agreement with Golden
Properties have been exercised as of the date of this annual
report.
On
September 12, 2018, pursuant to the Company’s Employee
Incentive Stock Option Plan, we issued a total of 636,830 options
to certain employees. The options have an expiration date of
September 10, 2025 and have an exercise price of $1.00 per share.
Of the total options issued, 25,000 vested immediately, with the
balance of 611,830 options vesting equally over the course of three
years, subject to restrictions regarding the employee’s
continued employment by the Company.
On
September 14, 2018, we entered into a consulting agreement with
Redstone Communications, LLC, an Indiana limited liability company
based in Carmel, Indiana, to provide for public relations with
existing shareholders, broker dealers, and other investment
professionals. As compensation under that agreement, for the first
six months we issued to Redstone Communications a five-year option
to purchase up to 175,000 common shares of our Company at an
exercise price of $1.00 per share and issued to Mr. Marlin Molinaro
a five-year option to purchase up to 75,000 common shares of our
Company at an exercise price of $1.00 per share. Should Redstone
Communications, LLC and Mr. Molinaro exercise the options received
under the first six months of engagement, the Company will receive
up to $175,000 and $75,000, respectively. On January 25, 2019,
Redstone Communications and the Company agreed to renew the
consulting agreement, and as a result, we issued 105,000 restricted
common shares to Redstone Communications LLC and 45,000 restricted
common shares to Mr. Marlin Molinaro, and to Redstone
Communications another five-year option to purchase up to 175,000
common shares of our Company at an exercise price of $1.50 per
share and issued to Mr. Marlin Molinaro another five-year option to
purchase up to 75,000 common shares of our Company at an exercise
price of $1.50 per share. Should Redstone Communications, LLC and
Mr. Molinaro receive and exercise the options received under the
second six months of engagement, the Company will receive up to
$262,500 and $112,500, respectively.
On November 15, 2018, as compensation to Randal V. Stephenson, Ian
Sadler, and Courtenay O. Taplin for their service on the Board of
Directors of the Company, we issued to each of them a three-year
warrant to purchase up to 15,000 common shares of our company at an
exercise price of $6.00 per share, subject to certain price
adjustments and other provisions found within the respective
warrants. Should each of the three directors exercise the option
through a cash payment to the Company, the Company will receive up
to $90,000 from each director, and each director will receive up to
15,000 restricted common shares of the Company. There are no
registration rights associated with this warrant that require the
Company to register the shares.
On
December 3, 2018, pursuant to a consulting agreement with a
non-related entity, we issued a two-year option to purchase up to
417 common shares of our company at an exercise price of $6.00 per
share. The option can be exercised via a cashless exercise by the
holder at any time during its term.
During
the period the options are outstanding, we will reserve from our
authorized and unissued common stock a sufficient number of shares
to provide for the issuance of shares of common stock underlying
the options upon the exercise of the options. No fractional shares
will be issued upon the exercise of the options. The options are
not listed on any securities exchange. Except as otherwise provided
within the option, the option holders have no rights or privileges
as members of the Company until they exercise their
options.
II-4
EXHIBITS
Item 16. Exhibits and Financial Statement
Schedules.
(A)
Exhibits:
Exhibit
Number
|
|
Description
|
|
Location Reference
|
|
|
|
|
|
1.1
|
|
Form of
Underwriting Agreement
|
|
Filed
Herewith.
|
1.2
|
|
Form of
Underwriter’s Warrant
|
|
Filed
Herewith.
|
3.1
|
|
Articles
of Incorporation of Natural Gas Fueling and Conversion
Inc.
|
|
Incorporated
herein by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form S-1, filed with the SEC on November
27, 2013.
|
3.2
|
|
Amended
and Restated Articles of Incorporation of NGFC Equities
Inc.
|
|
Incorporated
herein by reference to Exhibit 3.1 to the Company’s 8k filed
on February 25, 2015.
|
3.3
|
|
Articles
of Amendment to Articles of Incorporation of NGFC Equities,
Inc.
|
|
Incorporated
herein by reference to Exhibit 10.2 to the Company’s Form 8-K
on February 21, 2017.
|
3.4
|
|
Articles
of Amendment to Articles of Incorporation of American Resources
Corporation dated March 24, 2017.
|
|
Incorporated
herein by reference to Exhibit 3.4 to the Company’s Form
10-Q, filed with the SEC on May 15, 2018.
|
3.5
|
|
Bylaws
of Natural Gas Fueling and Conversion Inc.
|
|
Incorporated
herein by reference to Exhibit 3.2 to the Company’s
Registration Statement on Form S-1, filed with the SEC on November
27, 2013.
|
3.6
|
|
Bylaws,
of NGFC Equities Inc., as amended and restated.
|
|
Incorporated
herein by reference to Exhibit 3.2 to the Company’s 8k filed
on February 25, 2015.
|
3.7
|
|
Articles
of Amendment to Articles of Incorporation of American Resources
Corporation dated November 8, 2018.
|
|
Filed
as Exhibit 99.1 to the Company's 8k filed on November 13, 2018,
incorporated herein by reference.
|
3.8
|
|
Bylaws
of American Resources Corporation, as amended and
restated
|
|
Incorporated
herein by reference to Exhibit 99.2 to the Company's 8k filed on
November 13, 2018.
|
4.1
|
|
Common Stock Purchase Warrant "B-4" dated October 4,
2017
|
|
Incorporated
herein by reference to Exhibit 4.1 to the Company’s 8k filed
on October 11, 2017.
|
4.2
|
|
Common Stock Purchase Warrant "C-1" dated October 4,
2017
|
|
Incorporated
herein by reference to Exhibit 4.2 to the Company’s 8k filed
on October 11, 2017.
|
4.3
|
|
Common Stock Purchase Warrant "C-2" dated October 4,
2017
|
|
Incorporated
herein by reference to Exhibit 4.3 to the Company’s 8k filed
on October 11, 2017.
|
4.4
|
|
Common Stock Purchase Warrant "C-3" dated October 4,
2017
|
|
Incorporated
herein by reference to Exhibit 4.4 to the Company’s 8k filed
on October 11, 2017.
|
4.5
|
|
Common Stock Purchase Warrant "C-4" dated October 4,
2017
|
|
Incorporated
herein by reference to Exhibit 4.5 to the Company’s 8k filed
on October 11, 2017.
|
4.6
|
|
Promissory Note for $600,000.00 dated October 4, 2017
|
|
Incorporated
herein by reference to Exhibit 4.6 to the Company’s 8k filed
on October 11, 2017.
|
4.7
|
|
Promissory Note for $1,674,632.14 dated October 4,
2017
|
|
Incorporated
herein by reference to Exhibit 4.7 to the Company’s 8k filed
on October 11, 2017.
|
4.8
|
|
Loan
Agreement for up to $6,500,000 dated December 31,
2018
|
|
Incorporated herein by reference to Exhibit 99.1 to the Company's
8k filed on January 3, 2019.
|
4.9
|
|
Promissory
Note for up to $6,500,000 dated December 31,
2018
|
|
Incorporated herein by reference to Exhibit 99.2 to the Company's
8k filed on January 3, 2019.
|
5.1
|
|
Opinion
of Law Office of Clifford J. Hunt, P.A. as to legality
|
|
Filed
Herewith.
|
10.1
|
|
Secured Promissory Note
|
|
Incorporated herein by reference to Exhibit 99.1 to the Company's
8k filed on May 15, 2018.
|
10.2
|
|
Security Agreement
|
|
Incorporated herein by reference to Exhibit 99.2 to the Company's
8k filed on May 15, 2018.
|
10.3
|
|
Pledge Agreement
|
|
Incorporated herein by reference to Exhibit 99.3 to the Company's
8k filed on May 15, 2018.
|
10.4
|
|
Guaranty Agreement
|
|
Incorporated herein by reference to Exhibit 99.4 to the Company's
8k filed on May 15, 2018.
|
10.5
|
|
Bill of Sale
|
|
Incorporated herein by reference to Exhibit 99.5 to the Company's
8k filed on May 15, 2018.
|
10.6
|
|
Sublease Agreement Between Colonial Coal Company, Inc. and McCoy
Elkhorn Coal LLC
|
|
Incorporated herein by reference to Exhibit 99.1 to the Company's
8k filed on May 1, 2018
|
10.7
|
|
Interim Operating Agreement
|
|
Incorporated herein by reference to Exhibit 99.2 to the Company's
8k filed on May 1, 2018
|
10.8
|
|
Consolidated and Restated Loan and Security Agreement dated October
4, 2017
|
|
Incorporated herein by reference to Exhibit 10.1 to the Company's
8k filed on October 11, 2017
|
10.9
|
|
Asset Purchase Agreement between Wyoming County Coal LLC and Thomas
Shelton dated November 7, 2018
|
|
Filed Herewith.
|
10.10
|
|
Asset Purchase Agreement between Wyoming County Coal LLC and
Synergy Coal, LLC dated November 7, 2018
|
|
Filed Herewith.
|
10.11
|
|
Security
Agreement
|
|
Incorporated
herein by reference to Exhibit 99.3 to the Company's 8k filed on
January 3, 2019.
|
10.12
|
|
Purchase
Order
|
|
Incorporated
herein by reference to Exhibit 99.4 to the Company's 8k filed on
January 3, 2019.
|
10.13
|
|
Employment
Agreement with Mark C. Jensen
|
|
Filed
Herewith
|
10.14
|
|
Employment
Agreement with Thomas M. Sauve
|
|
Filed Herewith
|
10.15
|
|
Employment
Agreement with Kirk P. Taylor
|
|
Filed Herewith
|
10.16
|
|
Employee
Stock Option Plan
|
|
Filed Herewith
|
10.17 |
|
Letter
of Intent
|
|
Filed
Herewith
|
10.18 |
|
Merger
Agreement with Colonial Coal
|
|
Filed
Herewith
|
10.19 |
|
Share Exchange Agreement to replace Merger Agreement with Colonial
Coal
|
|
Filed
Herewith
|
14.1
|
|
Code of
Conduct
|
|
Incorporated
herein by reference to Exhibit 99.2 to the Company's 8k filed on
November 13, 2018.
|
14.2
|
|
Financial
Code of Ethics
|
|
Incorporated
herein by reference to Exhibit 99.3 to the Company's 8k filed on
November 13, 2018.
|
23.1
|
|
Consent
of MaloneBailey LLP
|
|
File
Herewith.
|
23.2
|
|
Consent
of Law office of Clifford J. Hunt, P.A. included in Exhibit
5.1
|
|
File
Herewith.
|
95.1
|
|
Mine
Safety Disclosure pursuant to Regulation S-K, Item 104
|
|
Filed
Herewith.
|
|
|
|||
101.INS
|
|
XBRL
Instance Document
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
II-5
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in this registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) (§ 230.424(b) of this chapter) if, in the aggregate,
the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the
effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
the time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) That, for purposes of determining liability under the
Securities Act to any purchaser:
(i) If the registrant is relying on Rule 430B (§ 230.430B of
this chapter):
(A) Each prospectus filed by the registrant pursuant to Rule
424(b)(3) (§ 230.424(b)(3) of this chapter) shall be deemed to
be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration
statement; and
(B) Each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) (§ 230.424(b)(2), (b)(5), or
(b)(7) of this chapter) as part of a registration statement in
reliance on Rule 430B relating to an offering made pursuant to Rule
415(a)(1)(i), (vii), or (x) (§ 230.415(a)(1)(i), (vii), or (x)
of this chapter) for the purpose of providing the information
required by section 10(a) of the Securities Act of 1933 shall be
deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used
after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided
in Rule 430B, for liability purposes of the issuer and any person
that is at that date an underwriter, such date shall be deemed to
be a new effective date of the registration statement relating to
the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in
any such document immediately prior to such effective
date.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b) or under the securities Act shall be deemed
to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities as that time shall be deemed to be the initial bona
fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fishers,
State of Indiana on February
14, 2019.
American Resources Corporation
|
|||
|
|
|
|
|
By:
|
/s/ Mark C. Jensen
|
|
|
|
Name: Mark C. Jensen
|
|
|
|
Title: Chief Executive Officer
|
|
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Mark C. Jensen, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments)
and supplements to this registration statement, and to file the
same, with all exhibits thereto, and other documents in connection
therewith, with the U.S. Securities and Exchange Commission, and
hereby grants to such attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite
and necessary to be done, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the
following persons in the capacities and on the dates
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Mark C.
Jensen
|
|
Chairman of the Board of Directors,
|
|
February 14,
2019
|
Mark C. Jensen
|
|
Chief Executive Officer
|
|
|
/s/ Thomas
M. Sauve
|
|
Director, President
|
|
February 14,
2019
|
Thomas M. Sauve
|
|
|
|
|
/s/ Kirk P.
Taylor
|
|
Chief Financial Officer
|
|
February 14,
2019
|
Kirk P. Taylor
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Randal V. Stephenson
|
|
Director
|
|
February 14,
2019
|
Randal
V. Stephenson
|
|
|
|
|
|
|
|
|
|
/s/ Ian Sadler
|
|
Director
|
|
February 14,
2019
|
Ian
Sadler
|
|
|
|
|
|
|
|
|
|
/s/ Courtenay O. Taplin
|
|
Director
|
|
February 14,
2019
|
Courtney O.
Taplin
|
|
|
|
|
II-7
Exhibit 1.1
[●] Shares
American Resources Corporation
Underwriting Agreement
February
[●], 2019
Maxim
Group LLC
405
Lexington Avenue
New
York, NY 10174
Ladies
and Gentlemen:
American Resources
Corporation, a Florida corporation (the “Company”),
proposes, subject to the terms and conditions stated herein, to
issue and sell to the underwriter or underwriters, as the case may
be, named in Schedule I hereto (each, an
“Underwriter” and, collectively, the
“Underwriters;” in the event that only a sole
Underwriter is named on Schedule I hereto, then all references
to “Underwriters” shall be deemed to mean and refer to
such sole Underwriter), for whom Maxim Group LLC
(“Maxim”) is acting as the representative (the
“Representative”), an aggregate of [●] shares
(the “Firm Shares”) of the Company’s Class A
common stock, par value $0.0001 per share (the “Common
Stock”). The Company has also agreed to grant to the
Representative on behalf of the Underwriters an option (the
“Option”) to purchase up to an additional shares (the
“Optional Shares”) of Common Stock (the Firm Shares and
the Optional Shares that the Underwriters elect to purchase
pursuant to Section 1(b) hereof are herein collectively called the
“Shares”).
The
Company confirms as follows its agreement with each of the
Underwriters:
1. Agreement to Sell and
Purchase.
(a) Purchase of Firm Shares. On the basis
of the representations and warranties herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to
issue and sell, severally and not jointly, to the several
Underwriters, an aggregate of [_____] Firm Shares of the Company at
a purchase price (net of discounts and commissions) of $[___] per
Firm Share. The Underwriters, severally and not jointly, agree to
purchase from the Company the number of Firm Shares set forth
opposite their respective names on Schedule I attached hereto and
made a part hereof at a purchase price (net of discounts and
commissions) of $[___] per Firm Share.
(b) Purchase of Option Shares. Subject to
all the terms and conditions of this Agreement, the Company grants
to the Representative on behalf of the Underwriters the Option to
purchase, severally and not jointly, up to [__] Option Shares. The
purchase price to be paid for the Option Shares (net of discounts
and commissions) will be $[____] per Option Share. The Option may
be exercised in whole or in part at any time on or before the 45th
day after the date of this Agreement, upon written notice (the
“Option Notice”) by the Representative to the Company
no later than 12:00 noon, New York City time, at least one and no
more than five business days before the date specified for closing
in the Option Notice (the “Option Closing Date”)
setting forth the aggregate number of shares of Common Stock to be
purchased and the time and date for such purchase. Upon exercise of
the Option, the Company will become obligated to convey to the
Underwriters, and, subject to the terms and conditions set forth
herein, the Underwriters will become obligated to purchase, the
number of shares of Common Stock specified in the Option Notice. If
any Option Shares are to be purchased, each Underwriter agrees,
severally and not jointly, to purchase the number of Option Shares
(as adjusted by the Representative in such manner as it deems
advisable to avoid fractional securities) that bears the same
proportion to the number of Firm Shares to be purchased by it as
set forth on Schedule I opposite such Underwriter’s name as
the total number of Option Shares to be purchased bears to the
total number of Firm Shares.
|
|
|
1
(c) Representative’s Warrants. The
Company hereby agrees to issue to the Representative (and/or its
designees) on the Closing Date and each Option Closing Date, as the
case may be, Warrants to purchase an aggregate of seven percent
(7%) of the shares of Common Stock issued at such closing (the
“Representative’s Warrants”). The
Representative’s Warrants shall be exercisable, in whole or
in part, commencing 180 days after the Effective Date and expiring
on the three-year anniversary thereof, at an initial exercise price
of $[●] per share, which is equal to one hundred and ten
percent (110%) of the initial public offering price of the Firm
Shares issued at such closing. The Representative’s Warrants
and the shares of Common Stock issuable upon exercise of the
Representative’s Warrants are hereinafter referred to
collectively as the “Representative’s Securities”
and the Representative’s Securities together with the Shares
are hereinafter referred to as the
“Securities.”
2. Delivery and
Payment.
(a) Closing. Delivery of the
Firm Shares shall be made to the Representative through the
facilities of the Depository Trust Company (“DTC”) for
the respective accounts of the Underwriters against payment of the
Purchase Price by wire transfer of immediately available funds to
the order of the Company. Such payment shall be made at
10:00 a.m., New York City time, on the second business day
(the third business day, should the offering be priced after
4:00 p.m., New York City Time) after the date of this
Agreement or at such time on such other date, not later than ten
business days after such date, as may be agreed upon by the Company
and the Representative (such date is hereinafter referred to as the
“Closing Date”).
(b) Option Closing. To the
extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner and at the
location specified above) shall take place at the time and date
(which may be the Closing Date, but not earlier than the Closing
Date) specified in the Option Notice.
(c) Electronic
Transfer. Electronic transfer of the Shares shall
be made at the time of purchase in such names and in such
denominations as the Representative shall specify.
(d) Tax Stamps. The cost of
original issue tax stamps, if any, in connection with the issuance
and delivery of the Shares by the Company to the Underwriters shall
be borne by the Company. The Company shall pay and hold each
Underwriter and any subsequent holder of the Shares harmless from
any and all liabilities with respect to or resulting from any
failure or delay in paying United States federal and state and
foreign stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original
issuance, sale and delivery to such Underwriter of the
Securities.
2
3. Representations and Warranties of the
Company.
(a) Compliance with Registration
Requirements. A registration statement on
Form S-1 (Registration No. 333-226042) relating to the
Securities, including a preliminary prospectus and such amendments
to such registration statement as may have been required prior to
the date of this Agreement, has been prepared by the Company under
the provisions of the Securities Act of 1933, as amended (the
“Act”), and the rules and regulations (collectively
referred to as the “Rules and Regulations”) of the
Securities and Exchange Commission (the “Commission”)
thereunder, and has been filed with the Commission. Copies of such
registration statement and of each amendment thereto, if any,
including the related preliminary prospectuses, heretofore filed by
the Company with the Commission have been delivered to the
Underwriters. The term “Registration Statement” means
such registration statement on Form S-1 as amended at the time it
becomes or became effective, including financial statements, all
exhibits and any information deemed to be included or incorporated
by reference therein, including any information deemed to be
included pursuant to Rule 430A or Rule 430B of the Rules and
Regulations, as applicable. If the Company files a registration
statement to register a portion of the Securities and relies on
Rule 462(b) of the Rules and Regulations for such registration
statement to become effective upon filing with the Commission (the
“Rule 462 Registration Statement”), then any
reference to the “Registration Statement” shall be
deemed to include the Rule 462 Registration Statement, as
amended from time to time. The term “preliminary
prospectus” as used herein means a preliminary prospectus as
contemplated by Rule 430 or Rule 430A of the Rules and
Regulations included at any time as part of, or deemed to be part
of or included in, the Registration Statement. The term
“Prospectus” means the final prospectus in connection
with this offering as first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no such filing
is required, the form of final prospectus included in the
Registration Statement at the effective date, except that if
any revised prospectus or prospectus supplement shall be
provided to the Representative by the Company for use in
connection with the Shares which differs from the
Prospectus (whether or not such revised prospectus or prospectus
supplement is required to be filed by the Company pursuant to Rule
424(b)), the term “Prospectus” shall also refer to such
revised prospectus or prospectus supplement, as the case may be,
from and after the time it is first provided to
the Representative for such use. Any reference
herein to the terms “amend”, “amendment” or
“supplement” with respect to the Registration
Statement, any preliminary prospectus or the Prospectus shall be
deemed to refer to and include: (i) the filing of any document
under the Securities Exchange Act of 1934, as amended, and together
with the rules and regulations promulgated thereunder
(collectively, the “Exchange Act”) after the
effective date of the Registration Statement, the date of such
preliminary prospectus or the date of the Prospectus, as the case
may be, which is incorporated therein by reference, and (ii) any
such document so filed.
(b) Effectiveness of Registration. The
Registration Statement, any Rule 462 Registration Statement
and any post-effective amendment thereto have been declared
effective by the Commission under the Act or have become effective
pursuant to Rule 462 of the Rules and Regulations. The Company has
responded to all requests, if any, of the Commission for additional
or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462
Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the knowledge of
the Company, are threatened by the Commission.
3
(c) Accuracy of Registration
Statement. Each of the Registration Statement,
any Rule 462 Registration Statement and any post-effective
amendment thereto, at the time it became effective, when any
document filed under the Exchange Act was or is filed and at
all subsequent times, complied and will comply in all material
respects with the Act and the Rules and Regulations, and did not
and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading.
The Prospectus, as amended or supplemented, as of its date and at
all subsequent times when a prospectus is delivered or required
(or, but for the provisions of Rule 172, would be required) by
applicable law to be delivered in connection with sales of
Securities, complied and will comply in all material respects with
the Act, the Exchange Act and the Rules and Regulations, and did
not or will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements
therein not misleading, in the light of the circumstances under
which they were made. Each preliminary prospectus (including the
preliminary prospectus or prospectuses filed as part of the
Registration Statement or any amendment thereto) complied when so
filed in all material respects with Act, the Exchange Act and the
Rules and Regulations, and each preliminary prospectus and the
Prospectus delivered to the Representative for use in connection
with this offering is identical to the electronically transmitted
copies thereof filed with the Commission on EDGAR, except to the
extent permitted by Regulation S-T. The foregoing representations
and warranties in this Section 3(c) do not apply to any statements
or omissions made in reliance on and in conformity with information
relating to the Underwriters furnished in writing to the Company by
the Underwriters through the Representative specifically for
inclusion in the Registration Statement or Prospectus or any
amendment or supplement thereto. For all purposes of this
Agreement, the information set forth in the Prospectus (i) in the
third paragraph under the caption "Underwriting" setting forth the
amount of the selling concession, and (ii) in the eleventh, twelfth
and thirteenth paragraphs under the caption "Underwriting"
regarding stabilization, short positions and penalty bids
constitutes the only information (the “Underwriters’
Information”) relating to the Underwriters furnished in
writing to the Company by the Underwriters through the
Representative specifically for inclusion in the preliminary
prospectus, the Registration Statement or the
Prospectus.
(d) Company Not Ineligible
Issuer. (i) At the time of filing the
Registration Statement relating to the Securities and (ii) as of
the date of the execution and delivery of this Agreement (with such
date being used as the determination date for purposes of this
clause (ii)), the Company was not and is not an “ineligible
issuer” (as defined in Rule 405 of the Rules and
Regulations).
(e) Disclosure at the Time of
Sale. As of the Applicable Time, neither (i) the
Issuer General Use Free Writing Prospectus(es) (as defined below)
issued at or prior to the Applicable Time, the most recent
preliminary prospectus related to this offering, and the
information included on Schedule II hereto, all
considered together (collectively, the “General Disclosure
Package”), nor (ii) any individual Issuer Limited Use Free
Writing Prospectus, when considered together with the General
Disclosure Package, included any untrue statement of a material
fact or omitted to state any material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading. The preceding sentence
does not apply to statements in or omissions from the General
Disclosure Package based upon and in conformity with written
information furnished to the Company by the Underwriters through
the Representative specifically for use therein, it being
understood and agreed that the only such information furnished by
the Underwriters consists of the Underwriters’
Information.
4
As used
in this subsection and elsewhere in this Agreement:
“Applicable
Time” means [8:15 a.m.] (New York City Time) on [__], 2019 or
such other time as agreed by the Company and the
Representative.
“Issuer Free
Writing Prospectus” means any “issuer free writing
prospectus,” as defined in Rule 433 of the Rules and
Regulations, relating to the Securities that (i) is required
to be filed with the Commission by the Company, (ii) is
“a written communication that is a road show” within
the meaning of Rule 433(d)(8)(i), whether or not required to be
filed with the Commission or (iii) is exempt from filing
pursuant to Rule 433(d)(5)(i) because it contains a description of
the Securities or of the Offering that does not reflect the final
terms, in each case in the form filed or required to be filed with
the Commission or, if not required to be filed, in the form
retained in the Company’s records pursuant to Rule
433(g).
“Issuer
General Use Free Writing Prospectus” means any Issuer Free
Writing Prospectus that is intended for general distribution to
prospective investors, as evidenced by its being specified
in Schedule II hereto.
“Issuer
Limited Use Free Writing Prospectus” means any Issuer Free
Writing Prospectus that is not an Issuer General Use Free Writing
Prospectus.
(f) Issuer Free Writing
Prospectuses. Each Issuer Free Writing
Prospectus, as of its issue date and at all subsequent times
through the Prospectus Delivery Period (as defined below), does not
include any information that conflicts with the information
contained in the Registration Statement. The foregoing sentence
does not apply to statements in or omissions from any Issuer Free
Writing Prospectus based upon and in conformity with the
Underwriters’ Information. If at any time following the
issuance of an Issuer Free Writing Prospectus there occurred an
event or development as a result of which such Issuer Free Writing
Prospectus conflicted with the information contained in the
Registration Statement relating to the Securities or included an
untrue statement of material fact or omitted to state a material
fact necessary in order to make the statements therein, in light of
the circumstances prevailing at that subsequent time, not
misleading, the Company has promptly notified the Representative
and has promptly amended or supplemented, at its own expense, such
Issuer Free Writing Prospectus to eliminate or correct such
conflict, untrue statement or omission.
(g) Distribution of Offering Material by the
Company. The Company has not distributed and will
not distribute, prior to the later of the Closing Date, any Option
Closing Date and the completion of the Underwriters’
distribution of the Securities, any offering material in connection
with the offering or sale of the Securities, the Registration
Statement, the preliminary prospectus, the Permitted Free Writing
Prospectuses reviewed and consented to by the Representative and
included in Schedule II hereto, and the
Prospectus. None of the Marketing Materials, as of their
respective issue dates and at all subsequent times through the
Prospectus Delivery Period (as defined below), include any
information that conflicts with the information contained in the
Registration Statement. If at any time following the issuance of
any Marketing Material there occurred an event or development as a
result of which such Marketing Material conflicted with the
information contained in the Registration Statement relating to the
Securities or included an untrue statement of material fact or
omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances prevailing at
that subsequent time, not misleading, the Company has promptly
notified the Representative and has promptly amended or
supplemented, at its own expense, such Marketing Material to
eliminate or correct such conflict, untrue statement or
omission.
5
(h) Subsidiaries. The names and
jurisdictions of incorporation or formation of each of the
Company’s subsidiaries (the “Subsidiaries”) are
set forth in the Registration Statement, the General Disclosure
Package and the Prospectus. Except as described in the Registration
Statement, the General Disclosure Package and the Prospectus, (i)
the Company does not own or control, directly or indirectly, any
corporation, association or other entity that is
“significant” to the Company within the meaning of
Rule 1-02(w) of Regulation S-X and (ii) the Company owns, directly or
indirectly, all of the capital stock or other equity interests of
each Subsidiary free and clear of any lien, charge, pledge,
security interest, encumbrance, right of first refusal, preemptive
right or other similar restriction (each, a
“Lien”), and all of the issued and outstanding shares
of capital stock of each Subsidiary are validly issued and are
fully paid, non-assessable and free of preemptive and similar
rights to subscribe for or purchase securities.
(i) Organization and Qualification. The
Company and each of the Subsidiaries is an entity duly incorporated
or otherwise organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization,
with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently
conducted. Neither the Company nor any Subsidiary is in violation
nor default of any of the provisions of its respective certificate
or articles of incorporation, bylaws or other organizational or
charter documents. Each of the Company and the Subsidiaries is duly
qualified to conduct business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so
qualified or in good standing, as the case may be, would not have
or reasonably be expected to result in: (i) a material adverse
effect on the legality, validity or enforceability of this
Agreement, the Warrant Agreement (as hereinafter defined), the
Warrants, the Underwriters’ Warrants or any other
agreement, document, certificate or instrument required to be
delivered pursuant to this Agreement (collectively, the
“Transaction Documents”), (ii) a material adverse
effect on the results of operations, assets, business, prospects or
condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse effect
on the Company’s ability to perform in any material respect
on a timely basis its obligations under any Transaction Document
(any of (i), (ii) or (iii), a “Material Adverse
Effect”) and no action, claim, suit or proceeding (including,
without limitation, a partial proceeding, such as a deposition),
whether commenced or threatened (each, a “Proceeding”)
has been instituted in any such jurisdiction revoking, limiting or
curtailing or seeking to revoke, limit or curtail such power and
authority or qualification.
(j) Authorization;
Enforcement. The Company has
the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by this Agreement and each
of the other Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution and delivery of
this Agreement and each of the other Transaction Documents by the
Company and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required
by the Company, the Board of Directors or the Company’s
stockholders in connection herewith or therewith other than in
connection with the Required Approvals (as hereinafter defined
in Section 3(l)). This Agreement and each other Transaction
Document to which it is a party has been (or upon delivery will
have been) duly executed by the Company and, when delivered in
accordance with the terms hereof and thereof, assuming due
authorization, execution and delivery by the Representative, will
constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms,
except (i) as limited by general equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of
creditors’ rights generally, (ii) as limited by laws relating
to the availability of specific performance, injunctive relief or
other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable
law.
6
(k) No Conflicts. The execution,
delivery and performance by the Company of this Agreement and the
other Transaction Documents to which it is a party, the issuance
and sale of the Securities and the consummation by it of the
transactions contemplated hereby and thereby do not and will not
(i) conflict with or violate any provision of the Company’s
or any Subsidiary’s certificate or articles of incorporation,
bylaws or other organizational or charter documents, or (ii)
conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under,
result in the creation of any Lien upon any of the properties or
assets of the Company or any Subsidiary, or give to others any
rights of termination, amendment, acceleration or cancellation
(with or without notice, lapse of time or both) of, any agreement,
credit facility, debt or other instrument (evidencing a Company or
Subsidiary debt or otherwise) or other understanding to which the
Company or any Subsidiary is a party or by which any property or
asset of the Company or any Subsidiary is bound or affected, or
(iii) subject to the Required Approvals, conflict with or result in
a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is
subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a
Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as would not have or reasonably be
expected to result in a Material Adverse Effect.
(l) Filings, Consents and Approvals. The
Company is not required to obtain any consent, waiver,
authorization or order of, give any notice to, or make any filing
or registration with, any court or other federal, state, local or
other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the
Transaction Documents, other than: (i) the filing with the
Commission of the Registration Statement and the Prospectus, (ii)
application(s) to the Nasdaq Capital Market for the listing of the
Shares for trading thereon in the time and manner required thereby,
(iii) such filings, if any, as are required to be made under
applicable state securities laws, (iv) such notices, filings or
authorizations as are required to be obtained or made under
applicable rules of the Financial Industry Regulatory Authority,
Inc. (“FINRA”) and The Nasdaq Stock Market, and (v)
such notices, filings or authorizations as have been obtained,
given or made as of the date hereof (collectively, the
“Required Approvals”).
(m) Issuance of the Securities. The
Securities are duly authorized and, when issued and paid for in
accordance with the applicable Transaction Documents, will be duly
and validly issued, fully paid and nonassessable, free and clear of
all Liens.
7
(n) Capitalization. The capitalization of
the Company as of the date hereof is as set forth in the
Registration Statement, the General Disclosure Package and the
Prospectus. The Company has not issued any capital stock since its
most recently filed periodic report under the Exchange Act, other
than pursuant to the Company’s equity incentive plans, the
issuance of shares of Common Stock to employees, directors or
consultants pursuant to the Company’s equity incentive plans
and pursuant to the conversion and/or exercise of any securities of
the Company or the Subsidiaries which would entitle the holder
thereof to acquire at any time Common Stock, including, without limitation, any
debt, preferred stock, right, option, warrant or other instrument
that is at any time convertible into or exercisable or exchangeable
for, or otherwise entitles the holder thereof to receive, Common
Stock (“Common Stock Equivalents”) and is
outstanding as of the date of the most recently filed periodic
report under the Exchange Act. No individual or corporation,
partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of
any kind (each, a “Person”) has any right of first
refusal, preemptive right, right of participation, or any similar
right to participate in the transactions contemplated by the
Transaction Documents. Except as a result of the purchase and sale
of the Securities or as disclosed in the Registration
Statement, the General Disclosure Package and the Prospectus, there
are no outstanding options, warrants, scrip rights to subscribe to,
calls or commitments of any character whatsoever relating to, or
securities, rights or obligations convertible into
or exercisable or exchangeable for, or giving any Person
any right to subscribe for or acquire, any shares of Common Stock
or the capital stock of any Subsidiary, or contracts, commitments,
understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of
Common Stock or Common Stock Equivalents or capital stock of any
Subsidiary. The issuance and sale of the Securities will not
obligate the Company or any Subsidiary to issue shares of Common
Stock or other securities to any Person (other than the
Underwriters) and will not result in a right of any holder of
Company securities to adjust the exercise, conversion, exchange or
reset price under any of such securities. There are no securities
of the Company or any Subsidiary that have any anti-dilution or
similar adjustment rights (other than adjustments for stock splits,
recapitalizations, and the like) to the exercise or conversion
price, have any exchange rights, or reset rights. Except as set
forth in the Registration Statement, the General Disclosure Package
and the Prospectus, there are no outstanding securities or
instruments of the Company or any Subsidiary that contain any
redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to redeem a security of the
Company or such Subsidiary. The Company does not have any stock
appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement. All of the outstanding
shares of capital stock of the Company are duly authorized, validly
issued, fully paid and nonassessable, have been issued in
compliance in all material respects with all federal and state
securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe
for or purchase securities. No further approval or authorization of
any stockholder, the Board of Directors or others is required for
the issuance and sale of the Securities. There are no stockholders
agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company
is a party or, to the knowledge of the Company, between or among
any of the Company’s stockholders.
8
(o) SEC Reports; Financial Statements. The
Company has filed all reports, schedules, forms, statements and
other documents required to be filed by the Company under the Act
and the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof, for the two years preceding the date hereof (or such
shorter period as the Company was required by law or regulation to
file such material) (the foregoing materials, including the
exhibits thereto and documents incorporated by reference therein,
together with the Registration Statement, the General Disclosure
Package and the Prospectus, being collectively referred to herein
as the “SEC Reports”) on a timely basis or has received
a valid extension of such time of filing and has filed any such SEC
Reports prior to the expiration of any such extension. As of their
respective dates, the SEC
Reports complied in all material respects with the requirements of
the Act and the Exchange Act, as applicable, and none of the SEC
Reports, when filed, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading. The Company has never been an issuer subject to Rule
144(i) under the Act. The financial statements of the Company
included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of
the Commission with respect thereto as in effect at the time of
filing. Such financial statements have been prepared in accordance
with United States generally accepted accounting principles applied
on a consistent basis during the periods involved
(“GAAP”), except as may be otherwise specified in such
financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by
GAAP, and fairly present in all material respects the financial
position of the Company and its consolidated Subsidiaries as of and
for the dates thereof and the results of operations and cash flows
for the periods then ended, subject, in the case of unaudited
statements, to normal, immaterial, year-end audit
adjustments. The agreements and documents described in the SEC
Reports conform to the descriptions thereof contained therein and
there are no agreements or other documents required by the Act and
the rules and regulations thereunder to be described in the SEC
Reports or to be filed with the Commission as exhibits to the
Registration Statement, that have not been so described or filed.
Each agreement or other instrument (however characterized or
described) to which the Company is a party or by which it is or may
be bound or affected and (i) that is referred to in the SEC
Reports, or (ii) is material to the Company’s business, has
been duly authorized and validly executed by the Company, is in
full force and effect in all material respects and is enforceable
against the Company and, to the Company’s knowledge, the
other parties thereto, in accordance with its terms, except (x) as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors’ rights
generally, (y) as enforceability of any indemnification or
contribution provision may be limited under the federal and state
securities laws, and (z) that the remedy of specific performance
and injunctive and other forms of equitable relief may be subject
to the equitable defenses and to the discretion of the court before
which any proceeding therefore may be brought. Except as
disclosed in the SEC Reports, none of such agreements or
instruments has been assigned by the Company, and neither the
Company nor, to the best of the Company’s knowledge, any
other party is in default thereunder and, to the best of the
Company’s knowledge, no event has occurred that, with the
lapse of time or the giving of notice, or both, would constitute a
default thereunder. To the best of the Company’s knowledge,
performance by the Company of the material provisions of such
agreements or instruments will not result in a violation of any
existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court, domestic or foreign,
having jurisdiction over the Company or any of its assets or
businesses, including, without limitation, those relating to
environmental laws and regulations.
9
(p) Material Changes; Undisclosed Events,
Liabilities or Developments. Since the date of the latest
audited financial statements included within the SEC Reports,
except as reflected or specifically disclosed in a subsequent SEC
Report filed prior to the date hereof, (i) there has been no event,
occurrence or development that has had or that would reasonably be
expected to result in a Material Adverse Effect, (ii) the Company
has not incurred any material liabilities (contingent or otherwise)
other than (A) trade payables and accrued expenses incurred in the
ordinary course of business consistent with past practice and (B)
liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or disclosed in
filings made with the Commission, (iii) the Company has not altered
its method of accounting, (iv) the Company has not declared or made
any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the
Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company equity
incentive plans or as set forth in the Registration Statement, the
General Disclosure Package and the Prospectus. The Company does not
have pending before the Commission any request for confidential
treatment of information. Except for the issuance of the Securities
contemplated by this Agreement, no event, liability, fact,
circumstance, occurrence or development has occurred or exists or
is reasonably expected to occur or exist with respect to the
Company or its Subsidiaries or their respective businesses,
prospects, properties, operations, assets or financial condition
that would be required to be disclosed by the Company under
applicable securities laws at the time this representation is made
or deemed made that has not been publicly disclosed at least 1
Trading Day prior to the date that this representation is
made.
(q) Litigation. There is no action, suit,
inquiry, notice of violation or proceeding pending or, to the
knowledge of the Company, threatened against or affecting the
Company, any Subsidiary or any of their respective properties
before or by any court, arbitrator, governmental or administrative
agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i)
adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the
Securities or (ii) would, if there were an unfavorable decision,
have or reasonably be expected to result in a Material Adverse
Effect. Except as disclosed in the Registration Statement, the
General Disclosure Package and the Prospectus, neither the Company
nor any Subsidiary, nor any director or officer thereof, is or has
been the subject of any Action involving a claim of violation of or
liability under federal or state securities laws or a claim of
breach of fiduciary duty. There has not been, and to the knowledge
of the Company, there is not pending or contemplated, any
investigation by the Commission involving the Company or any
current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending
the effectiveness of any registration statement filed by the
Company or any Subsidiary under the Exchange Act or the
Act.
(r) Labor Relations. No labor dispute
exists or, to the knowledge of the Company, is imminent with
respect to any of the employees of the Company, which would
reasonably be expected to result in a Material Adverse Effect. None
of the Company’s or its Subsidiaries’ employees is a
member of a union that relates to such employee’s
relationship with the Company or such Subsidiary, and neither the
Company nor any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and its Subsidiaries believe
that their relationships with their employees are good. To the
knowledge of the Company, no executive officer of the Company or
any Subsidiary, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality,
disclosure or proprietary information agreement or non-competition
agreement, or any other contract or agreement or any restrictive
covenant in favor of any third party, and the continued employment
of each such executive officer does not subject the Company or any
of its Subsidiaries to any liability with respect to any of the
foregoing matters. The Company and its Subsidiaries are in
compliance with all U.S. federal, state, local and foreign laws and
regulations relating to employment and employment
practices, terms and
conditions of employment and wages and hours, except where the
failure to be in compliance would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect.
10
(s) Compliance. Except as disclosed in the
SEC Reports and except as set forth in the Registration Statement,
the General Disclosure Package and the Prospectus, neither the
Company nor any Subsidiary: (i) is in default under or in violation
of (and no event has occurred that has not been waived that, with
notice or lapse of time or both, would result in a default by the
Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under
or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or
not such default or violation has been waived), (ii) is in
violation of any judgment, decree or order of any court, arbitrator
or other governmental authority or (iii) is or has been in
violation of any statute, rule, ordinance or regulation of any
governmental authority, including, without limitation, all foreign,
federal, state and local laws relating to taxes, environmental
protection, occupational health and safety, product quality and
safety and employment and labor matters, except in each case as
would not have or reasonably be expected to result in a Material
Adverse Effect.
(t) Environmental Laws. The Company and its
Subsidiaries (i) are in compliance in all material respects with
all federal, state, local and foreign laws relating to pollution or
protection of human health or the environment (including ambient
air, surface water, groundwater, land surface or subsurface
strata), including laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or
toxic or hazardous substances or wastes (collectively,
“Hazardous Materials”) into the environment, or
otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees,
demands, or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations,
issued, entered, promulgated or approved thereunder
(“Environmental Laws”); (ii) have received
all permits licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective
businesses; and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where in each
clause (i), (ii) and (iii), the failure to so comply would be
reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect.
(u) Regulatory Permits. The Company and the
Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state, local or foreign
regulatory authorities necessary to conduct their respective
businesses as described in the SEC Reports, except where the
failure to possess such permits would not reasonably be expected to
result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has
received any written notice of proceedings relating to the
revocation or modification of any Material Permit.
(v) Title to Assets. The Company and the
Subsidiaries have good and marketable title in all personal
property owned by them that is material to the business of the
Company and the Subsidiaries, in each case free and clear of all
Liens, except for (i) Liens as do not materially affect the value
of such property and do not materially interfere with the use
made and proposed to be
made of such property by the Company and the Subsidiaries and (ii)
Liens for the payment of federal, state or other taxes, for which
appropriate reserves have been made therefor in accordance with
GAAP and, the payment of which is neither delinquent nor subject to
penalties. Any real property and facilities held under lease by the
Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases with which the Company
and the Subsidiaries are in compliance in all material
respects.
11
(w) Intellectual Property. To the knowledge
of the Company, the Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks,
trademark applications, service marks, trade names, trade secrets,
inventions, copyrights, licenses and other intellectual property
rights and similar rights necessary or required for use in
connection with their respective businesses as described in the SEC
Reports and which the failure to so have could have a Material
Adverse Effect (collectively, the “Intellectual Property
Rights”). None of, and neither the Company nor any Subsidiary
has received a notice (written or otherwise) that any of, the
Intellectual Property Rights has expired, terminated or been
abandoned, or is expected to expire or be abandoned, within two (2)
years from the date of this Agreement, except where such action
would not reasonably be expected to have a Material Adverse Effect.
Neither the Company nor any Subsidiary has received, since the date
of the latest audited financial statements included within the SEC
Reports, a written notice of a claim or otherwise has any knowledge
that the Intellectual Property Rights violate or infringe upon the
rights of any Person, except as would not have or reasonably be
expected to not have a Material Adverse Effect. To the knowledge of
the Company, all such Intellectual Property Rights are enforceable
and there is no existing infringement by another Person of any of
the Intellectual Property Rights. The Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties,
except where failure to do so would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect. The Company has no knowledge that it lacks or will be
unable to obtain any rights or licenses to use all Intellectual
Property Rights that are necessary to conduct its
business.
(x) Insurance. The Company and the
Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which the Company
and the Subsidiaries are engaged, including, but not limited to,
directors and officers insurance coverage at least equal to the
aggregate Purchase Price. Neither the Company nor any Subsidiary
has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary
to continue its business without a significant increase in
cost.
(y) Transactions With Affiliates and
Employees. Except as set forth in the SEC Reports, none of
the officers or directors of the Company or any Subsidiary and, to
the knowledge of the Company, none of the employees of the Company
or any Subsidiary is presently a party to any transaction with the
Company or any Subsidiary (other than for services as employees,
officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from,
providing for the borrowing of money from or lending of money to or
otherwise requiring payments to or from any officer, director or
such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial
interest or is an officer,
director, trustee, stockholder, member or partner, in each case in
excess of $120,000 other than for (i) payment of salary or
consulting fees for services rendered, (ii) reimbursement for
expenses incurred on behalf of the Company and (iii) other employee
benefits, including stock option agreements under any stock option
plan of the Company.
12
(z) Sarbanes-Oxley; Internal Accounting
Controls. The Company and the Subsidiaries are in compliance
with any and all applicable requirements of the Sarbanes-Oxley Act
of 2002 that are effective and applicable to the Company as of the
date hereof, and any and all applicable rules and regulations
promulgated by the Commission thereunder that are effective as of
the date hereof and as of the Closing Date or the Option Closing
Date, as applicable. Except as set forth in the SEC Reports, the
Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance
that: (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain asset
accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. The
Company and the Subsidiaries have established disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and the Subsidiaries and designed such
disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the
Commission’s rules and forms. The Company’s certifying
officers have evaluated the effectiveness of the disclosure
controls and procedures of the Company and the Subsidiaries as of
the end of the period covered by the most recently filed periodic
report under the Exchange Act (such date, the “Evaluation
Date”). The Company presented in its most recently filed
periodic report under the Exchange Act the conclusions of the
certifying officers about the effectiveness of the disclosure
controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no
changes in the internal control over financial reporting (as such
term is defined in the Exchange Act) of the Company and its
Subsidiaries that have materially affected, or is reasonably likely
to materially affect, the internal control over financial reporting
of the Company and its Subsidiaries.
(aa) Certain
Fees; FINRA Affiliation. Except as set forth in the
Registration Statement, the General Disclosure Package and the
Prospectus, no brokerage or finder’s fees or commissions are
or will be payable by the Company or any Subsidiary to any broker,
financial advisor or consultant, finder, placement agent,
investment banker, bank or other Person with respect to the
transactions contemplated by the Transaction Documents. To the
Company’s knowledge, there are no other arrangements,
agreements or understandings of the Company or, to the
Company’s knowledge, any of its stockholders that may affect
the Underwriters’ compensation, as determined by FINRA. The
Company has not made any direct or indirect payments (in cash,
securities or otherwise) to (i) any person, as a finder’s
fee, investing fee or otherwise, in consideration of such person
raising capital for the Company or introducing to the Company
persons who provided capital to the Company, (ii) any FINRA member,
or (iii) any person or entity that has any direct or indirect
affiliation or association with any FINRA member within the
12-month period prior to the date on which the Registration
Statement was filed with the Commission (the “Filing
Date”) or thereafter. To the Company’s knowledge, no
(i) officer or director of the Company or its subsidiaries,
(ii) owner of 5% or more of the Company’s unregistered
securities or that of its subsidiaries or (iii) owner of any amount
of the Company’s unregistered securities acquired within the
180-day period prior to the Filing Date, has any direct or indirect
affiliation or association with any FINRA member. The Company will
advise the Underwriters and their respective counsel if it becomes
aware that any officer, director or stockholder of the Company or
its subsidiaries is or becomes an affiliate or associated person of
a FINRA member participating in the
Offering.
13
(bb) Investment
Company. The Company is not, and is not an affiliate of, and
immediately after receipt of payment for the Securities, will not
be or be an affiliate of, an “investment company”
within the meaning of the Investment Company Act of 1940, as
amended.
(cc) Registration
Rights. Except as set forth in the Registration Statement,
the General Disclosure Package and the Prospectus, no Person has
any right to cause the Company or any Subsidiary to effect the
registration under the Act of any securities of the Company or any
Subsidiary.
(dd) Listing
and Maintenance Requirements. The Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge
is likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act nor has the Company
received any notification that the Commission is contemplating
terminating such registration. The Common Stock has been approved
for listing on the Nasdaq Capital Market (the
“Exchange”) subject to notice of issuance on the
Exchange, and the Company has taken no action designed to, or
likely to have the effect of, delisting the Common Stock from the
Exchange, nor has the Company received any notification that the
Exchange is contemplating terminating such listing. Except as
disclosed in the SEC Reports, the Company is, and has no reason to
believe that it will not in the foreseeable future continue to be,
in compliance with all such listing and maintenance requirements.
The Common Stock is currently eligible for electronic transfer
through the Depository Trust Company or another established
clearing corporation and the Company is current in payment of the
fees to the Depository Trust Company (or such other established
clearing corporation) in connection with such electronic
transfer.
(ee) No
Integrated Offering. Neither the Company or any Person
acting on its behalf, nor, to the Company’s knowledge, any
Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common
control with the Company (as such terms are used in and construed
under Rule 405 under the Act) (each, an “Affiliate”) or any Person
acting on their behalf, has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any
security, under circumstances that would cause this offering of the
Securities to be integrated with prior offerings by the
Company.
(ff) Solvency.
Based on the consolidated financial condition of the Company as of
the Closing Date and as of the Option Closing Date, after giving
effect to the receipt by the Company of the proceeds from the sale
of the Securities hereunder, the current cash flow of the
Company, together with the proceeds the Company would receive, were
it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, may be insufficient to pay all
amounts on or in respect of its liabilities when such amounts are
required to be paid. The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be payable on or in
respect of its debt). Except as set forth in the Registration
Statement, the General Disclosure Package and the Prospectus, the
Company has no knowledge of any facts or circumstances which lead
it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date or the Option Closing
Date, as applicable. The Registration Statement, the General
Disclosure Package and the Prospectus sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of the
Company or any Subsidiary, or for which the Company or any
Subsidiary has commitments. For the purposes of this Agreement,
“Indebtedness” means (x) any liabilities for borrowed
money or amounts owed in excess of $50,000 (other than trade
accounts payable incurred in the ordinary course of business), (y)
all guaranties, endorsements and other contingent obligations in
respect of indebtedness of others, whether or not the same are or
should be reflected in the Company’s consolidated balance
sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (z) the
present value of any lease payments in excess of $50,000 due
under leases required to be capitalized in accordance with GAAP.
Except as set forth in the Registration Statement, the General
Disclosure Package and the Prospectus, neither the Company nor any
Subsidiary is in default with respect to any
Indebtedness.
14
(gg) Tax
Status. Except for matters that would not, individually or
in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, each of the Company and its Subsidiaries
(i) has made or filed all United States federal, state and local
income and all foreign income and franchise tax returns,
reports and declarations required by any jurisdiction to which it
is subject, (ii) has paid all taxes and other governmental
assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations and
(iii) has set aside on its books provision reasonably adequate for
the payment of all material taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There
are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the
Company or of any Subsidiary know of no basis for any such
claim.
(hh) Foreign
Corrupt Practices. Neither the Company nor any Subsidiary,
nor to the knowledge of the Company or any Subsidiary, any agent or
other person acting on behalf of the Company or any Subsidiary, has
(i) directly or indirectly, used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses
related to foreign or domestic political activity, (ii) made any
unlawful payment to foreign or domestic government officials or
employees or to any foreign or domestic political parties or
campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company or any Subsidiary (or made by any
person acting on its behalf of which the Company is aware) which is
in violation of law, or (iv) violated in any material respect any
provision of Foreign Corrupt Practices Act of 1977, as
amended.
(ii) Accountants.
The Company’s accounting firm is MaloneBailey, LLP (the
“Accountants”). The Accountants have certified the
financial statements and supporting schedules of the Company
included in the Registration Statement and the Prospectus, and are
independent registered public accountants as required by the Act,
the Exchange Act and the Rules and Regulations, and such
Accountants are not in violation of the auditor independence
requirements of the Sarbanes-Oxley Act of 2002 with respect to the
Company.
(jj) Regulation
M Compliance. The Company has not, and to its
knowledge no one acting on its behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result in the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Securities,
(ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or
agreed to pay to any Person any compensation for soliciting another
to purchase any other securities of the Company, other than, in the
case of clauses (ii) and (iii), compensation paid to the
Underwriters in connection with the offering.
(kk) Office
of Foreign Assets Control. Neither the Company nor any
Subsidiary nor, to the Company’s knowledge, any director,
officer, agent, employee or Affiliate of the Company or any
Subsidiary is currently subject to any U.S. sanctions administered
by the Office of Foreign Assets Control of the U.S. Treasury
Department (“OFAC”).
15
(ll) U.S.
Real Property Holding Corporation. The Company is not and
has never been a U.S. real property holding corporation within the
meaning of Section 897 of the Internal Revenue Code of 1986, as
amended, and the Company shall so certify upon the
Representative’s request.
(mm) Bank
Holding Company Act. Neither the Company nor any of its
Subsidiaries or Affiliates is subject to the Bank Holding Company
Act of 1956, as amended (the “BHCA”), and to regulation
by the Board of Governors of the Federal Reserve System (the
“Federal Reserve”). Neither the Company nor any of its
Subsidiaries or Affiliates owns or controls, directly or
indirectly, five percent (5%) or more of the outstanding shares of
any class of voting securities or twenty-five percent or more of
the total equity of a bank or any entity that is subject to the
BHCA and to regulation by the Federal Reserve. Neither the Company
nor any of its Subsidiaries or Affiliates exercises a controlling
influence over the management or policies of a bank or any entity
that is subject to the BHCA and to regulation by the Federal
Reserve.
(nn) Money
Laundering. The operations of the Company and its
Subsidiaries are and have been conducted at all times in compliance
with applicable financial record-keeping and reporting requirements
of the Currency and Foreign Transactions Reporting Act of 1970, as
amended, applicable money laundering statutes and applicable rules
and regulations thereunder (collectively, the “Money
Laundering Laws”), and no Action or Proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company or any Subsidiary with respect to
the Money Laundering Laws is pending or, to the knowledge of the
Company or any Subsidiary, threatened.
(oo) Benefit
Plans. Any “employee benefit plan” (as defined
under the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations
thereunder (collectively, “ERISA”)) established or
maintained by the Company or its “ERISA Affiliates” (as
defined below) are in compliance in all material respects with
ERISA; “ERISA Affiliate” means, with respect to the
Company, any member of any group of organizations described in
Section 414(b), (c), (m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the “Code”) of which the
Company is a member; no “reportable event” (as defined
under ERISA) has occurred or is reasonably expected to occur (other
than events as to which the requirement of notice has been waived
by the Pension Benefit Guaranty Corporation) with respect to any
“employee benefit plan” established or maintained by
the Company or any of its ERISA Affiliates (without regard to Code
Sections 414(m) and (o)) for which the Company would have any
material liability; no “employee benefit plan”
established or maintained by the Company or any of its ERISA
Affiliates, if such “employee benefit plan” were
terminated, would have any “amount of unfunded benefit
liabilities” (as defined under ERISA); neither the Company
nor any of its ERISA Affiliates has incurred or reasonably expects
to incur any material liability under (A) Title IV of ERISA
with respect to termination of, or withdrawal from, any
“employee benefit plan” or (B) Sections 412,
4971, 4975 or 4980B of the Code; each “employee benefit
plan” established or maintained by the Company or any of its
ERISA Affiliates that is intended to be qualified under Section
401(a) of the Code is so qualified and nothing has occurred whether
by action or failure to act, which would cause the loss of such
qualification. Each share option granted by the Company under the
Company’s share option plans was granted (i) in accordance
with the terms of the Company’s share option plans and (ii)
with an exercise price at least equal to the fair market value of
the Common Stock on the date such share option would be considered
granted under GAAP and applicable law. No share option granted
under the Company’s share option plan has been backdated. The
Company has not knowingly granted, and there is no and has been no
Company policy or practice to knowingly grant, share options prior
to, or otherwise knowingly coordinate the grant of share options
with, the release or other public announcement of material
information regarding the Company or its Subsidiaries or their
financial results or prospects
16
(pp) Statistical
Data. Any statistical and market related data contained in
the Registration Statement, the General Disclosure Package and the
Prospectus are based on or derived from sources which the Company
believes are reliable and accurate and the Company has obtained the
written consent to the use of such data from such sources to the
extent required;
(qq) Officer’s
Certificates. Any certificate signed by any officer of the
Company or any of its Subsidiaries delivered to the Representative
or its counsel shall be deemed a representation and warranty by the
Company to the Underwriters as to the matters covered
thereby.
4. Agreements of the Company. The
Company agrees with each of the Underwriters:
(a) Amendments and Supplements to Registration
Statement. The Company shall not, either prior to
any effective date or thereafter during such period as the
Prospectus is required by law to be delivered (whether physically
or through compliance with Rule 172 of the Rules and Regulations or
any similar rule) (the “Prospectus Delivery Period”) in
connection with sales of the Securities by an Underwriter or
dealer, amend or supplement the Registration Statement, the General
Disclosure Package or the Prospectus, unless a copy of such
amendment or supplement thereof shall first have been submitted to
the Representative within a reasonable period of time prior to the
filing or, if no filing is required, the use thereof and the
Representative shall not have objected thereto in good
faith.
(b) Amendments and Supplements to the Registration
Statement, the General Disclosure Package, and the Prospectus and
Other Act Matters. During the Prospectus Delivery
Period, the Company will comply with all requirements imposed upon
it by the Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, and by the Exchange Act
so far as necessary to permit the continuance of sales of or
dealings in the Securities as contemplated by the provisions
hereof, the General Disclosure Package, the Registration Statement
and the Prospectus. If, during the Prospectus Delivery Period,
any event or development shall occur or condition exist as a result
of which the General Disclosure Package or the Prospectus, as then
amended or supplemented, would include any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
then prevailing or under which they were made, as the case may be,
not misleading, or if it shall be necessary to amend or supplement
the General Disclosure Package or the Prospectus in order to make
the statements therein, in the light of the circumstances then
prevailing or under which they were made, as the case may be, not
misleading, or if in the opinion of the Representative it is
otherwise necessary to amend or supplement the Registration
Statement, the General Disclosure Package or the
Prospectus, or to file a new registration statement containing the
Prospectus, in order to comply with the Act, the Rules and
Regulations, the Exchange Act or the Exchange Act Rules, including
in connection with the delivery of the Prospectus, the Company
agrees to (i) promptly notify the Representative of any such event
or condition and (ii) promptly prepare (subject to Section 4(a) and
4(f) hereof), file with the Commission (and use its best efforts to
have any amendment to the Registration Statement or any new
registration statement to be declared effective) and furnish at its
own expense to the Representative (and, if applicable, to dealers),
amendments or supplements to the Registration Statement, the
General Disclosure Package or the Prospectus, or any new
registration statement, necessary in order to make the statements
in the General Disclosure Package or the Prospectus as so amended
or supplemented, in the light of the circumstances then prevailing
or under which they were made, as the case may be, not misleading,
or so that the Registration Statement or the Prospectus, as amended
or supplemented, will comply with the Act, the Rules and
Regulations, the Exchange Act or the Exchange Act Rules or any
other applicable law.
17
(c) Notifications to the
Underwriters. The Company shall use its best
efforts to cause the Registration Statement to become effective,
and shall notify the Representative promptly, and shall confirm
such advice in writing, (i) when any post-effective amendment to
the Registration Statement has become effective and when
any post-effective amendment thereto becomes effective, (ii) of any
request by the Commission for amendments or supplements to the
Registration Statement or the Prospectus or for additional
information, (iii) of the commencement by the Commission or by any
state securities commission of any proceedings for the suspension
of the qualification of any of the Securities for offering or sale
in any jurisdiction or of the initiation, or the threatening, of
any proceeding for that purpose, including, without limitation, the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (iv) of the
happening of any event during the Prospectus Delivery Period that
in the judgment of the Company makes any statement made in the
Registration Statement or the Prospectus misleading (including by
omission) or untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the
statements therein, in light of the circumstances in which they are
made, not misleading (including by omission), and (v) of
receipt by the Company or any representative of the Company of any
other communication from the Commission relating to the Company,
the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order
suspending the effectiveness of the Registration Statement, the
Company shall use best efforts to obtain the withdrawal of such
order at the earliest possible moment. The Company shall comply
with the provisions of and make all requisite filings with the
Commission pursuant to Rules 424(b), 430A, 430B and 462(b) of
the Rules and Regulations and to notify the Representative promptly
of all such filings.
(d) Executed Registration
Statement. The Company shall furnish to the
Representative, without charge, one signed copy of the Registration
Statement, and of any post-effective amendment thereto, including
financial statements and schedules, and all exhibits thereto, and
shall furnish to the Representative, without charge, a copy of the
Registration Statement and any post-effective amendment thereto,
including financial statements and schedules but without
exhibits.
(e) Undertakings. The Company
shall comply with all the provisions of any undertakings contained
and required to be contained in the Registration
Statement.
(f) Prospectus. The Company
shall prepare the Prospectus in a form approved by the
Representative and shall file such Prospectus with the Commission
pursuant to Rule 424(b) of the Rules and Regulations with a filing
date not later than the second business day following the execution
and delivery of this Agreement. Promptly after the effective date
of the Registration Statement, and thereafter from time to time
during the period when the Prospectus is required (or, but for the
provisions of Rule 172 under the Act, would be required) to be
delivered, the Company shall deliver to the Representative, without
charge, as many copies of the Prospectus and any amendment or
supplement thereto as the Representative may reasonably request.
The Company consents to the use of the Prospectus and any amendment
or supplement thereto by the Representative and by all dealers to
whom the Securities may be sold, both in connection with the
offering or sale of the Securities and for any period of time
thereafter during the Prospectus Delivery Period. If, during the
Prospectus Delivery Period any event shall occur that in the
judgment of the Company or counsel to the Underwriters should be
set forth in the Prospectus in order to make any statement therein,
in the light of the circumstances under which it was made, not
misleading (including by omission), or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company
shall forthwith prepare and duly file with the Commission an
appropriate supplement or amendment thereto, and shall deliver to
the Representative, without charge, such number of copies thereof
as the Representative may reasonably request.
18
(g) Permitted Free Writing
Prospectuses. The Company represents and agrees
that it has not made and, unless it obtains the prior consent of
the Representative, will not make, any offer relating to the
Securities that would constitute a “free writing
prospectus” as defined in Rule 405 of the Rules and
Regulations, required to be filed with the Commission or
retained by the Company under Rule 433 of the Rules and
Regulations; provided that the prior written
consent of the Representative hereto shall be deemed to have been
given in respect of the Issuer Free Writing Prospectuses included
in Schedule II hereto. Any such free writing prospectus
consented to by the Representative is herein referred to as a
“Permitted Free Writing Prospectus.” The Company agrees
that (i) it has treated and will treat, as the case may be, each
Permitted Free Writing Prospectus as an Issuer Free Writing
Prospectus, and (ii) has complied and will comply, as the case may
be, with the requirements of Rules 164 and 433 of the Act
applicable to any Permitted Free Writing Prospectus, including in
respect of timely filing with the Commission, legending and record
keeping. If at any time following the issuance of an Issuer Free
Writing Prospectus there occurs an event or development as a result
of which such Issuer Free Writing Prospectus would conflict with
the information contained in the Registration Statement relating to
the Securities or would include an untrue statement of material
fact or would omit to state a material fact necessary in order to
make the statements therein, in light of the circumstances
prevailing at that subsequent time, not misleading, the Company
will promptly notify the Representative and will promptly amend or
supplement, at its own expense, such Issuer Free Writing Prospectus
to eliminate or correct such conflict, untrue statement, or
omission. The Company represents that it has satisfied and
agrees that it will satisfy the conditions in Rule 433 to avoid a
requirement to file with the Commission any electronic road
show.
(h) Compliance with Blue Sky
Laws. Prior to any public offering of the
Securities by the Underwriters, the Company shall cooperate with
the Representative and counsel to the Underwriters in connection
with the registration or qualification (or the obtaining of
exemptions from the application thereof) of the Securities for
offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Representative may request
limitation, provided, however, that in no event shall the
Company be obligated to qualify a public offering outside the
United States or to do business as a foreign corporation in
any jurisdiction where it is not now so qualified, to qualify or
register as a dealer in securities, to take any action which would
subject it to general service of process in any jurisdiction where
it is not now so subject or subject itself to ongoing taxation in
respect of doing business in any jurisdiction in which it is not so
subject.
(i) Delivery of Financial
Statements. During the period of five years
commencing on the effective date of the Registration Statement
applicable to the Underwriters, the Company shall furnish to the
Representative and each other Underwriter who may so request copies
of such financial statements and other periodic and special reports
as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representative and each other Underwriter who may so request a copy
of each annual or other report it shall be required to file with
the Commission; provided, however, that the availability of
electronically transmitted copies filed with the Commission
pursuant to EDGAR shall satisfy the Company’s obligation to
furnish copies hereunder.
19
(j) Availability of Earnings
Statements. The Company shall make generally
available to holders of its securities as soon as may be
practicable but in no event later than the last day of the
fifteenth (15th) full calendar
month following the calendar quarter in which the most recent
effective date occurs in accordance with Rule 158 of the Rules and
Regulations, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of twelve
(12) months ended commencing after the effective date, and
satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and
Regulations).
(k) Consideration; Payment of
Expenses. In consideration of the services to be
provided for hereunder, the Underwriters or their respective
designees their pro rata portion (based on the Securities
purchased) of the following compensation with respect to the
Securities they are offering:
(i) An underwriting
discount equal to seven percent (7%) of the aggregate gross
proceeds raised in the Offering; and
(ii) The
Representative’s Warrants.
(iii) Additionally,
the Company grants the Representative the right of first refusal
for a period of twelve (12) months from the effective date of the
Registration Statement to act as lead managing underwriter and sole
book runner (or minimally as a co-lead manager and co-book runner
and/or co-lead placement agent with at least 80% of the economics)
for any and all future public or private equity, equity-linked or
debt offerings (excluding commercial bank debt) undertaken by the
Company, its Subsidiary(ies), or any successor thereto. The Company
shall provide written notice to the Representative with the terms
of such offering and if the Representative fails to accept in
writing any such proposal within twenty (20) days after receipt of
such written notice, then the Representative will have no claim or
right with respect to any such offering(s).
(iv) The
Representative reserves the right to reduce any item of
compensation or adjust the terms thereof as specified herein in the
event that a determination shall be made by FINRA to the effect
that the Underwriters’ aggregate compensation is in
excess of FINRA rules or that the terms thereof require
adjustment.
(v) Whether or not the
transactions contemplated by this Agreement, the Registration
Statement and the Prospectus are consummated or this Agreement is
terminated, the Company hereby agrees to pay the
following:
(1) all expenses in
connection with the preparation, printing, formatting for EDGAR and
filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and any and all exhibits, amendments and
supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers;
(2) all filing
fees in connection with filings with FINRA’s Public Offering
System;
20
(3) all fees,
disbursements and expenses of the Company’s counsel,
accountants and other agents and representatives in connection with
the registration of the Securities under the Act and the
Offering;
(4) all expenses in
connection with the qualifications of the Securities for offering
and sale under state or foreign securities or blue sky laws
(including, without limitation, all filing and registration fees,
and the fees and disbursements of Underwriters’
counsel;
(5) all fees and
expenses in connection with listing the Securities on a national
securities exchange;
(6) all expenses,
including travel and lodging expenses, of the Company’s
officers, directors and employees and any other expense of the
Company incurred in connection with attending or hosting meetings
with prospective purchasers of the Securities and any fees and
expenses associated with the i-Deal system and
NetRoadshow;
(7) any stock transfer
taxes or other taxes incurred in connection with this Agreement or
the offering, including any stock transfer taxes payable upon the
transfer of securities to the Underwriters;
(8) the costs
associated with preparing, printing and delivering certificates
representing the Securities;
(9) the cost and
charges of any transfer agent or registrar for the
Securities;
(10) (subject
to the following proviso, other costs (including
Underwriters’ counsel’s fees and expenses) and expenses
incident to the Offering that are not otherwise specifically
provided for in this Section 4(k);
(11) costs
relating to background checks of the Company’s officers and
directors, up to $15,000 in the aggregate;
provided, however, that all such costs
and expenses (including Underwriters’ counsel’s fees
and expenses) that are incurred by the Underwriters shall not
exceed $125,000 in the aggregate.
(l) Reimbursement of Expenses upon Termination of
Agreement. If this Agreement shall be terminated
by the Company pursuant to any of the provisions hereof or if for
any reason the Company shall be unable to perform its obligations
or to fulfill any conditions hereunder, or if the Underwriters
shall terminate this Agreement pursuant to the last paragraph of
Section 5, Section 7(a), Section 7(e) or Section 7(f), the
Company shall reimburse the Underwriters for all out-of-pocket
expenses (including the reasonable fees, disbursements and other
charges of counsel to the Underwriter) actually incurred by the
Underwriters in connection herewith and as allowed under FINRA Rule
5110; provided, however, that the maximum amount of
costs and expenses to be reimbursed by Company to the Underwriters
pursuant to this Section 4(l) shall not exceed $125,000 (including
the reasonable fees, disbursements and other charges of counsel to
the Underwriters). The Company has paid $5,000 to the Underwriters
as an advance to be applied towards reasonable out-of-pocket
accountable expenses (the “Advance”). Any portion of
the Advance shall be returned back to the Company to the extent not
actually incurred.
21
(m) No
Stabilization or Manipulation. The Company shall
not at any time, directly or indirectly, take any action intended
to cause or result in, or which might reasonably be expected to
cause or result in, or which will constitute, stabilization or
manipulation, under the Act or otherwise, of the price of the
Shares or the Securities to facilitate the sale or resale of any of
the Securities.
(n) Use
of Proceeds. The Company shall apply the net
proceeds from the offering and sale of the Securities to be sold by
the Company in the manner set forth in the General Disclosure
Package and the Prospectus under “Use of Proceeds” and
shall file such reports with the Commission with respect to the
sale of the Securities and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under
the Act.
(o) Lock-Up
Agreements of Company, Management and
Affiliates. The Company shall not, for a period
of one hundred and eighty (180) days after the Closing Date (the
“Lock-Up Period”), without the prior written consent of
Maxim (which consent may be withheld in its sole discretion), (1)
offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer
or dispose of, directly or indirectly, or file with the Commission
a registration statement under the Act to register, any shares of
common stock, warrants, or any securities convertible into or
exercisable or exchangeable for common stock or (2) enter into any
swap or other derivatives transaction that transfers to another, in
whole or in part, directly or indirectly, any of the economic
benefits or risks of ownership of shares of Common Stock, whether
any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise, or publicly disclose the intention to enter into any
transaction described in clause (1) or (2) above. The
foregoing sentence shall not apply to (A) the Securities to be sold
hereunder, (B) any shares of common stock issued pursuant to a
trading plan established prior to July 1, 2018 pursuant to Rule
10b5-1 of the Exchange Act, and (C) the issuance of Common Stock
upon the exercise of warrants as disclosed as outstanding in the
Registration Statement, the General Disclosure Package or the
Prospectus, provided that such warrants have not been amended
since the date of this Agreement to increase the number of such
warrants or warrant shares or to decrease the exercise price of
such warrants or to extend the term of such warrants. The Company
has caused each of its officers and directors and certain
shareholders of five percent (5%) or more of the outstanding Common
Stock of the Company (other than Golden Properties, Ltd. and/or
Alex Lau, the control person of Golden Properties, Ltd.) to enter
into agreements with the Representative in the form set
forth in Annex II.
(p) Lock-Up Releases. If Maxim,
in its sole discretion, agrees to release or waive the restrictions
set forth in a lock-up letter described in Section 4(o) hereof for
an officer or director of the Company and provides the Company with
notice of the impending release or waiver at least three business
days before the effective date of the release or waiver, the
Company agrees to announce the impending release or waiver by a
press release substantially in the form of Annex III hereto through a
major news service at least two business days before the effective
date of such release or waiver, or any other method that satisfies
the obligations described in FINRA Rule 5131(d)(2) at least two
business days before the effective date of the release or
waiver.
22
(q) NASDAQ
listing. The Company will use its reasonable best efforts to
effect and maintain the listing of the common stock on the NASDAQ
Capital Market for at least three (3) years after the Closing
Date.
(r) Accountants.
Upon conclusion of the Offering, the Company will continue the
engagement of the Accountants for no less than three (3) years from
the Closing Date, or another nationally recognized,
PCAOB-registered mutually acceptable to the Company’s audit
committee and the Representative.
(s) Resales
of Representative’s Securities. The Company shall use
its best efforts to maintain the effectiveness of the Registration
Statement and a current Prospectus relating thereto for as long as
the Warrants and the Represenative’s Warrants remain
outstanding. During any period when the Company fails to have
maintained an effective Registration Statement or a current
Prospectus relating thereto and a holder of a
Representative’s Warrant desires to exercise such warrant
and, in the opinion of counsel to the holder, Rule 144 is not
available as an exemption from registration for the resale of the
shares of Common Stock underlying such warrant (such shares, the
“Warrant Shares”), the Company shall immediately file a
registration statement registering the resale of the Warrant Shares
and use its best efforts to have it declared effective by the
Commission within thirty (30) days.
(t) Key Person Insurance. The Company has
obtained and will use its good faith best efforts to maintain its
key person life insurance in the amount of $[____] on the life of
[____] in full force and effect for a period of three (3) years
from the Closing Date. The Company is and shall be the sole
beneficiary of such policy.
(u) Public
Relations Firm. Upon conclusion of the Offering, the Company
will engage (for no less than two (2) years from the Closing Date)
a financial public relations firm mutually acceptable to the
Company and the Representative.
(v) Transfer
Agent. The Company has or will retain a transfer agent reasonably
acceptable to the Representative for the Shares and shall continue
to retain such transfer agent for a period of three (3) years
following the Closing Date.
5. Conditions
of the Obligations of the Underwriters. The obligation of
the Underwriters to purchase the Firm Securities on the Closing
Date or the Option Securities on the Option Closing Date, as the
case may be, as provided herein is subject to the accuracy of the
representations and warranties of the Company, the performance by
the Company of its covenants and other obligations hereunder and to
the following additional conditions:
(a) Post Effective Amendments and Prospectus
Filings. Notification that the Registration
Statement has become effective shall be received by the
Representative not later than 4:30 p.m., New York City time, on the
date of this Agreement or at such later date and time as shall be
consented to in writing by the Representative and all filings made
pursuant to Rules 424, 430A, or 430B of the Rules and
Regulations, as applicable, shall have been made or will be made
prior to the Closing Date in accordance with all such applicable
rules.
23
(b) No Stop Orders, Requests for
Information and No Amendments. (i) No stop order suspending the
effectiveness of the Registration Statement shall have been issued
and no proceedings for that purpose shall be pending or are, to the
knowledge of the Company, threatened by the Commission, (ii) no
order suspending the qualification or registration of the
Securities under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose
shall be pending before or threatened or contemplated by the
authorities of any such jurisdiction, (iii) any request for
additional information on the part of the staff of the Commission
or any such authorities shall have been complied with to the
satisfaction of the staff of the Commission or such authorities and
(iv) after the date hereof no amendment or supplement to the
Registration Statement or the Prospectus shall have been filed
unless a copy thereof was first submitted to the Representative and
the Representative did not object thereto in good faith, and the
Representative shall have received certificates, dated the Closing
Date and the Option Closing Date and signed by the Chief Executive
Officer or the Chairman of the Board of Directors and the Chief
Financial Officer of the Company in their capacities as such, and
not individually, (who may, as to proceedings threatened, certify
to their knowledge), to the effect of clauses (i), (ii) and
(iii).
(c) No Material Adverse
Changes. Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, except as set forth in the Registration Statement, the
General Disclosure Package and the Prospectus (i) there shall not
have been a Material Adverse Change, (ii) the Company shall not
have incurred any material liabilities or obligations, direct or
contingent, (iii) the Company shall not have entered into any
material transactions not in the ordinary course of business other
than pursuant to this Agreement and the transactions referred to
herein, (iv) the Company shall not have issued any securities
(other than the Securities or the Shares issued in the ordinary
course of business pursuant to existing employee benefit plans of
the Company referred to in the Registration Statement, General
Disclosure Package and the Prospectus) or declared or paid any
dividend or made any distribution in respect of its capital stock
of any class or debt (long-term or short-term), and (v) no material
amount of the assets of the Company shall have been pledged,
mortgaged or otherwise encumbered.
(d) No Actions, Suits or
Proceedings. Since the respective dates as of
which information is given in the Registration Statement, the
General Disclosure Package and the Prospectus, there shall have
been no actions, suits or proceedings instituted, or to the
Company’s knowledge, threatened against or affecting, the
Company or its subsidiaries or any of their respective officers in
their capacity as such, before or by any federal, state or local
court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign.
(e) All Representations True and Correct and All
Conditions Fulfilled. Each of the representations
and warranties of the Company contained herein shall be true and
correct as of the date of the Agreement and at the Closing Date as
if made at the Closing Date and any Option Closing Date, as the
case may be, and all covenants and agreements contained herein to
be performed by the Company and all conditions contained herein to
be fulfilled or complied with by the Company at or prior to the
Closing Date and any Option Closing Date, shall have been duly
performed, fulfilled or complied with.
24
(f) Opinions
of Counsel to the Company. The Underwriters shall
have received the opinion, dated the Closing Date and any Option
Closing Date, as the case may be, reasonably satisfactory in form
and substance to the Representative and counsel for the
Underwriters, from the Law Office of Clifford J. Hunt, P.A., as
corporate/securities counsel.
(g) Accountants’
Comfort Letter. On the date of the Prospectus,
the Representative shall have received from the Accountants a
letter dated the date of its delivery, addressed to the
Underwriters, in form and substance reasonably satisfactory to the
Representative and counsel to the Underwriters, containing
statements and information of the type ordinarily included in
accountant’s “comfort letters” to underwriters,
delivered according to Statement of Auditing Standards No. 72 (or
any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in
the Registration Statement and the Prospectus. At the Closing Date
and any Option Closing Date, as the case may be, the Representative
shall have received from the Accountants a letter dated such date,
in form and substance reasonably satisfactory to the Representative
and counsel to the Underwriters, to the effect that they reaffirm
the statements made in the letter furnished by them pursuant to the
preceding sentence and have conducted additional procedures with
respect to certain financial figures included in the Prospectus,
except that the specified date referred to therein for the
carrying out of procedures shall be no
more than three business days prior to the Closing Date or any
Option Closing Date, as the case may be.
(h) Officers’
Certificates. At the
Closing Date and any Option Closing Date, there shall be furnished
to the Representative an accurate certificate, dated the date of
its delivery, signed by each of the Chief Executive Officer and the
Chief Financial Officer of the Company, in their capacities as
such, and not individually, in form and substance satisfactory to
the Representative and counsel to the Underwriters, to the effect
that:
(i) each
signer of such certificate has carefully examined the Registration
Statement and the Prospectus;
(ii) there
has not been a Material Adverse Change; and
(iii) with
respect to the matters set forth in Sections 5(b)(i) and
5(e).
(i) Transfer
Agent’s Certificate. The Company’s
transfer agent shall have furnished or caused to be furnished to
the Representative a certificate satisfactory to the Representative
of one of its authorized officers with respect to the issuance of
the and such other customary matters related thereto as the
Representative may reasonably request.
(j) Eligible for DTC
Clearance. At or prior to the Closing Date and
each Option Closing Date, the Shares shall be eligible for
clearance and settlement through the facilities of the
DTC.
25
(k) Lock-Up Agreements. At the
date of this Agreement, the Representative shall have received the
executed “lock-up” agreements referred to in Section
4(o) hereof from the Company’s officers and
directors.
(l) Compliance with Blue Sky
Laws. The Securities shall be qualified for sale
in such states and jurisdictions as the Representative may
reasonably request, including, without limitation, qualification
for exemption from registration or prospectus delivery requirements
in the provinces and territories of Canada and other jurisdictions
outside the United States, and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the
Closing Date and the Option Closing Date.
(m) Stock Exchange Listing. The
Shares shall have been duly authorized for listing on the NASDAQ
Capital Market, subject to official notice of
issuance.
(n) Exchange Act
Registration. One or more registration statements
in respect of the Shares have been filed on Form 8-A pursuant to
Section 12(b) of the Exchange Act, each of which registration
statement complies in all material respects with the Exchange
Act.
(o) Good
Standing. At the Closing Date and any Option
Closing Date, the Company shall have furnished to
the Representative satisfactory evidence of the good
standing of the Company and its subsidiaries Quest Energy Inc.,
McCoy Elkhorn Coal LLC, Deane Mining LLC, Knott County Coal LLC,
Wyoming County Coal LLC, ERC Mining Indiana Corp. and Quest
Processing LLC, in their respective jurisdictions of organization
(to the extent the concept of “good standing” or such
equivalent concept exists under the laws of the applicable
jurisdictions) and their good standing as foreign entities in
such other jurisdictions as the Representative may
reasonably request, in each case in writing or any standard form of
telecommunication from the appropriate governmental authorities of
such jurisdictions. If the applicable jurisdiction does
not have a concept of “good standing,” the Company will
furnish evidence in writing or any standard form of
telecommunication from the appropriate governmental authorities
that the relevant company was duly incorporated and remains duly
registered in the jurisdiction of its incorporation.
(p) Company Certificates. The
Company shall have furnished to the Representative such
certificates, in addition to those specifically mentioned herein,
as the Representative may have reasonably requested as to the
accuracy and completeness at the Closing Date and any Option
Closing Date of any statement in the Registration Statement, the
General Disclosure Package or the Prospectus, as to the accuracy at
the Closing Date and any Option Closing Date of the representations
and warranties of the Company herein, as to the performance by the
Company of its obligations hereunder, or as to
the fulfillment of the conditions concurrent and precedent to the
obligations hereunder of the Underwriters.
(q) No
Objection. FINRA has
confirmed that it has not raised any objection with respect to the
fairness and reasonableness of the underwriting terms and
arrangements relating to the offering of the
Securities.
26
If
any of the conditions hereinabove provided for in this Section 5
shall not have been fulfilled when and as required by this
Agreement to be fulfilled, the obligations of the Underwriters
hereunder may be terminated by the Representative by notifying the
Company of such termination in writing at or prior to the Closing
Date or any Option Closing Date, as the case may be.
6. Indemnification.
(a) Indemnification
of the Underwriters. The Company shall indemnify
and hold harmless each Underwriter, its affiliates, the directors,
officers, employees and agents of such Underwriter and each person,
if any, who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act
from and against any and all losses, claims, liabilities, expenses
and damages (including any and all investigative, legal and other
expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding between any
of the indemnified parties and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or any
claim asserted), to which they, or any of them, may become subject
under the Act, the Exchange Act or other federal or state statutory
law or regulation, at common law or otherwise, insofar as such
losses, claims, liabilities, expenses or damages arise out of or
are based on (i) any untrue statement or alleged untrue statement
of a material fact contained in the Registration
Statement (or any amendment thereto), including the
information deemed to be a part of the Registration Statement at
the time of effectiveness and at any subsequent time pursuant to
Rules 430A and 430B of the Rules and Regulations, as applicable, or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading
or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, any
preliminary prospectus supplement, any Issuer Free Writing
Prospectus or the Prospectus (or any amendment or supplement to any
of the foregoing) or the omission or alleged omission therefrom of
a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading or (iii) any untrue statement or alleged untrue
statement of a material fact contained in any materials or
information provided to investors by, or with the approval of, the
Company in connection with the marketing of the offering of the
Securities, including any roadshow or investor presentations made
to investors by the Company (whether in person or electronically)
(collectively, Marketing Materials”) or the omission or
alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading or (iv) in whole or in
part any inaccuracy in any material respect in the representations
and warranties of the Company contained
herein; provided, however, that the Company shall not be liable to the
extent that such loss, claim, liability, expense or damage is based
on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with
Underwriters’ Information. This indemnity agreement will be
in addition to any liability that the Company might otherwise
have.
27
(b) Indemnification
of the Company. Each
Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, its affiliates, the directors,
officers, employees and agents of the Company and each other person
or entity, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever,
as incurred (including but not limited to reasonable
attorneys’ fees and any and all reasonable expenses
whatsoever, incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim
or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses
(or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement at the time of
effectiveness and at any subsequent time pursuant to Rules 430A and
430B of the Rules and Regulations, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement to any of them, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability,
claim, damage or expense (or action in respect thereof) arises out
of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance
upon the Underwriters’ Information; provided, however,
that in no case shall any Underwriter be liable or responsible for
any amount in excess of the underwriting discount and commissions
applicable to the Securities purchased by such Underwriter
hereunder. The parties agree that such information provided by or
on behalf of the Underwriters through the Representative consists
solely of the material referred to in the last sentence of Section
3(c) hereof.
(c) Indemnification
Procedures. Any party that proposes to assert the
right to be indemnified under this Section 6 shall, promptly
after receipt of notice of commencement of any action against such party in respect of which
a claim is to be made against an indemnifying party or parties
under this Section 6, notify each such indemnifying party of
the commencement of such action, enclosing a copy of all papers
served, but the omission so to notify such indemnifying party shall
not relieve the indemnifying party from any liability that it may
have to any indemnified party under the foregoing provisions of
this Section 6 unless, and only to the extent that, such
omission results in the forfeiture of substantive rights or
defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying
party of its commencement, the indemnifying party will be entitled
to participate in and, to the extent that it elects by delivering
written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified
party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel
satisfactory to the indemnified party, and after notice from the
indemnifying party to the indemnified party of its election to
assume the defense, the indemnifying party will not be liable to
the indemnified party for any legal or other expenses except as
provided below and except for the reasonable out-of-pocket costs of
investigation subsequently incurred by the indemnified party in
connection with the defense. The indemnified party will have the
right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense
of such indemnified party unless (i) the employment of counsel by
the indemnified party has been authorized in writing by one of the
indemnifying parties in connection with the defense of such action,
(ii) the indemnified party has reasonably concluded (based on
advice of counsel) that there may be legal defenses available to it
or other indemnified parties that are different from or in addition
to those available to the indemnifying party, (iii) the indemnified
party has reasonably concluded that a conflict or potential
conflict exists (based on advice of counsel to the indemnified
party) between the indemnified party and the indemnifying party (in
which case the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified
party), (iv) the indemnifying party does not diligently defend
the action after assumption of the defense, or (v) the
indemnifying party has not in fact employed counsel satisfactory to
the indemnified party to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements
and other charges of counsel shall be at the expense of the
indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be
liable for the reasonable fees, disbursements and other charges of
more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges shall be
reimbursed by the indemnifying party promptly as they are incurred.
An indemnifying party shall not be liable for any settlement of any
action or claim effected without its written consent (which consent
will not be unreasonably withheld or delayed). No indemnifying
party shall, without the prior written consent of each indemnified
party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding relating
to the matters contemplated by this Section 6 (whether or not
any indemnified party is a party thereto), unless (x) such
settlement, compromise or consent (i) includes an unconditional
release of each indemnified party from all liability arising or
that may arise out of such claim, action or proceeding and
(ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified
party, and (y) the indemnifying party confirms in writing its
indemnification obligations hereunder with respect to such
settlement, compromise or judgment. Notwithstanding the foregoing,
if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and
expenses of counsel, such indemnifying party agrees that it shall
be liable for any settlement of the nature contemplated by Section
6(a) effected without its written consent if (A) such settlement is
entered into more than 45 days after receipt by such indemnifying
party of the aforesaid request, (B) such indemnifying party shall
have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the
date of such settlement.
28
(d) Contribution. In
order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 6 is applicable in
accordance with its terms but for any reason is held to be
unavailable, the Company and the Underwriters shall contribute to
the total losses, claims, liabilities, expenses and damages
(including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons
other than the Underwriters, such as persons who control the
Company within the meaning of the Act, officers of the Company who
signed the Registration Statement and directors of the Company, who
may also be liable for contribution), to which the Company and the
Underwriter may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the
offering of the Securities pursuant to this Agreement. The
relative benefits received by the Company and the Underwriters
shall be deemed to be in the same proportion as (x) the total
proceeds from the Offering (net of underwriting discount and
commissions but before deducting expenses) received by the Company
bears to (y) the underwriting discount and commissions received by
the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. If, but only if, the allocation
provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such
proportion as is appropriate to reflect not only the relative
benefits referred to in the foregoing sentence but also the
relative fault of the Company, on the one hand, and the
Underwriters, on the other, with respect to the statements or
omissions which resulted in such loss, claim, liability, expense or
damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such
relative fault shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters, the intent of the
parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 6(d) were to be
determined by pro rata allocation or by any other method of
allocation (even if the Underwriters were treated as one entity for
such purpose) which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, liability,
expense or damage, or action in respect thereof, referred to above
in this Section 6(d) shall be deemed to include, for purpose of
this Section 6(d), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions
of this Section 6(d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts
and commissions received by it. No person found guilty of
fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section
6(d), any person who controls a party to this Agreement within the
meaning of the Act will have the same rights to contribution as
that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as
the Company, and each director, officer, employee, counsel or agent
of an Underwriter will have the same rights to contribution as such
Underwriter, subject in each case to the provisions hereof. Any
party entitled to contribution, promptly after receipt of notice of
commencement of any action against such party in respect of which a
claim for contribution may be made under this Section 6(d), will
notify any such party or parties from whom contribution may be
sought, but the omission so to notify will not relieve the party or
parties from whom contribution may be sought from any other
obligation it or they may have under this Section 6(d). The
obligations of the Underwriters to contribute pursuant to this
Section 6(d) are several in proportion to the respective number of
Securities to be purchased by each of the Underwriters hereunder
and not joint. No party will be liable for contribution
with respect to any action or claim settled without its written
consent (which consent will not be unreasonably
withheld).
29
(e) Survival. The
indemnity and contribution agreements contained in this
Section 6 and the representations and warranties of the
Company contained in this Agreement shall remain operative and in
full force and effect regardless of (i) any investigation made by
or on behalf of any Underwriter or any controlling Person thereof,
(ii) acceptance of any of the Securities and payment therefor or
(iii) any termination of this Agreement.
7. Termination. The
obligations of the Underwriters under this Agreement may be
terminated at any time prior to the Closing Date (or, with respect
to the Option Securities, on or prior to the Option Closing Date),
by notice to the Company from the Representative, without liability
on the part of the Underwriters to the Company, if, prior to
delivery and payment for the Firm Securities (or the Option
Securities, as the case may be), in the sole judgment of the
Representative, any of the following shall occur:
(a) trading
or quotation in any of the equity securities of the Company shall
have been suspended or limited by the Commission, The Nasdaq Stock
Market or by an exchange or otherwise;
(b) trading
in securities generally on the New York Stock Exchange, the NYSE
MKT, the NASDAQ Capital Market, the NASDAQ Global Market, the
NASDAQ Global Select Market shall have been suspended or limited or
minimum or maximum prices shall have been generally established on
such exchange, or additional material governmental restrictions,
not in force on the date of this Agreement, shall have been imposed
upon trading in securities generally by such exchange or by order
of the Commission or any court or other governmental
authority;
(c) a
general banking moratorium shall have been declared by any of U.S.
federal, New York authorities;
(d) the United States
shall have become engaged in new hostilities, there shall have been
an escalation in hostilities involving the United States or there
shall have been a declaration of a national emergency or war by the
United States or there shall have occurred such a material adverse
change in general economic, political or financial conditions,
including, without limitation, as a result of terrorist activities
after the date hereof (or the effect of international conditions on
the financial markets in the United States shall be such), or any
other calamity or crisis shall have occurred, the effect of any of
which is such as to make it impracticable or inadvisable to market
the Securities on the terms and in the manner contemplated by the
Prospectus;
(e) the Company shall
have sustained a loss material or substantial to the Company by
reason of flood, fire, accident, hurricane, earthquake, theft,
sabotage, or other calamity or malicious act, whether or not such
loss shall have been insured, the effect of any of which is such as
to make it impracticable or inadvisable to market the Securities on
the terms and in the manner contemplated by the Prospectus;
or
30
(f) there shall have
been a Material Adverse Change.
8. Underwriter
Default.
(a) If
any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Securities hereunder, and if the
Securities with respect to which such default relates (the
“Default
Securities”) do not (after giving effect to
arrangements, if any, made by the Representative pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of
the Firm Securities, each non-defaulting Underwriter, acting
severally and not jointly, agrees to purchase from the Company that
number of Default Securities that bears the same proportion to the
total number of Default Securities then being purchased as the
number of Firm Securities set forth opposite the name of such
Underwriter on Schedule A hereto bears to
the aggregate number of Firm Securities set forth opposite the
names of the non-defaulting Underwriters; subject, however, to such
adjustments to eliminate fractional shares as the Representative in
its discretion shall make.
(b) In the event that
the aggregate number of Default Securities exceeds 10% of the
number of Firm Securities, the Representatives may in their
discretion arrange for themselves or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so
agree) to purchase the Default Securities on the terms contained
herein. In the event that within five (5) calendar days after such
a default the Representative does not arrange for the purchase of
the Default Securities as provided in this Section 8, this
Agreement shall thereupon terminate, without liability on the part
of the Company with respect thereto (except in each case as
provided in Sections 4(k), 6 and 8) or the Underwriters, but
nothing in this Agreement shall relieve a defaulting Underwriter or
Underwriters of its or their liability, if any, to the other
Underwriters and the Company for damages occasioned by its or their
default hereunder.
(c) In
the event that any Default Securities are to be purchased by the
non-defaulting Underwriters, or are to be purchased by another
party or parties as aforesaid, the Representatives or the
Company shall have the right to postpone the Closing Date for a
period, not exceeding five (5) Business Days, in order to effect
whatever changes may thereby be necessary in the Registration
Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment
or supplement to the Registration Statement or the Prospectus
which, in the reasonable opinion of Underwriters’ Counsel,
may be necessary or advisable. The term “Underwriter”
as used in this Agreement shall include any party substituted
under this Section 8 with like effect as if it had originally
been a party to this Agreement with respect to such Firm
Securities.
9. Miscellaneous.
(a) Notices. Notice given
pursuant to any of the provisions of this Agreement shall be in
writing and, unless otherwise specified, shall be mailed, hand
delivered or telecopied (a) if to the Company, at the office of the
Company, 9002 Technology Lane, Fishers, IN 46038, telecopy number:
[___], Attention: Chief Executive Officer, or (b) if to
the Representative or any Underwriter, to Maxim Group LLC, 405
Lexington Avenue, New York, New York 100174, Attention: Legal
Department, telecopy number: (212) 895-3555. Any such notice shall
be effective only upon receipt. Any notice under Section 6
hereof may be made by telecopy or telephone, but if so made shall
be subsequently confirmed in writing.
31
(b) No
Third Party Beneficiaries. This Agreement has
been and is made solely for the benefit of the Underwriters, the
Company and, with respect to Section 6, the controlling persons,
directors, officers, employees, counsel and agents referred to in
Section 6 hereof, and their respective successors and assigns,
and no other person shall acquire or have any right under or by
virtue of this Agreement. The term “successors and
assigns” as used in this Agreement shall not include a
purchaser of Securities from any Underwriter in his, her or its
capacity as such a purchaser, as such purchaser of Securities from
such Underwriter.
(c) Survival of Representations and
Warranties. All representations, warranties and
agreements of the Company contained herein or in certificates or
other instruments delivered pursuant hereto shall remain operative
and in full force and effect regardless of any investigation made
by or on behalf of the Underwriters or any of their controlling
persons and shall survive delivery of and payment for the
Securities hereunder.
(d) Disclaimer
of Fiduciary Relationship. The Company
acknowledges and agrees that (i) the purchase and sale of the
Securities pursuant to this Agreement, including the determination
of the public offering price of the Securities and any related
discounts and commissions, is an arm’s-length commercial
transaction between the Company, on the one hand, and the
Underwriters, on the other hand, (ii) in connection with the
Offering contemplated by this Agreement and the process leading to
such transaction, the Underwriters are and have been
acting pursuant to a contractual relationship created solely
by this Agreement and are not agents or fiduciaries of the
Company or its securityholders, creditors, employees or any other
party, (iii) no Underwriter has assumed nor will it assume any
advisory or fiduciary responsibility in favor of the Company with
respect to the offering of the Securities contemplated by this
Agreement or the process leading thereto (irrespective of whether
such Underwriter or its affiliates has advised or is currently
advising the Company on other matters) and each such Underwriter
has no obligation to the Company with respect to the offering of
the Securities contemplated by this Agreement except the
obligations expressly set forth in this Agreement, (iv) the
Underwriters and their affiliates may be engaged in a broad range
of transactions that involve interests that differ from those of
the Company, and (v) no Underwriter has provided any legal,
accounting, regulatory or tax advice with respect to the Offering
contemplated by this Agreement and the Company has consulted its
own legal, accounting, regulatory and tax advisors to the extent it
deemed appropriate.
(e) Governing
Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN
SUCH STATE.
(f) Submission to
Jurisdiction. The Company irrevocably submits to
the non-exclusive jurisdiction of any New York State or United
States federal court sitting in The City of New York, Borough of
Manhattan, over any suit, action or proceeding arising out of or
relating to this Agreement, the Disclosure Package, the Prospectus,
the Registration Statement, or the offering of the Securities. The
Company irrevocably waives, to the fullest extent permitted by law,
any objection which it may now or hereafter have to the laying of
venue of any such suit, action or proceeding brought in such a
court and any claim that any such suit, action or proceeding
brought in such a court has been brought in an inconvenient forum.
To the extent that the Company has or hereafter may acquire any
immunity (on the grounds of sovereignty or otherwise) from the
jurisdiction of any court or from any legal process with respect to
itself or its property, the Company irrevocably waives, to the
fullest extent permitted by law, such immunity in respect of any
such suit, action or proceeding including without limitation, any
immunity pursuant to the U.S. Foreign Sovereign Immunities Act of
1976, as amended. Each of the Underwriters and the Company
further agrees to accept and acknowledge service of any and all
process which may be served in any such suit, action or proceeding
in the Supreme Court of the State of New York, New York County, or
in the United States District Court for the Southern District of
New York and agrees that service of process upon the Company mailed
by certified mail or delivered by Federal Express via overnight
delivery to the Company’s address shall be deemed in every
respect effective service of process upon the Company in any such
suit, action or proceeding, and service of process upon an
Underwriter mailed by certified mail or delivered by Federal
Express via overnight delivery to the Underwriters’ address
shall be deemed in every respect effective service of process upon
such Underwriter in any such suit, action or
proceeding.
32
(g) Judgment
Currency. If for the purposes of obtaining
judgment in any court it is necessary to convert a sum due
hereunder into any currency other than United States dollars, the
parties hereto agree, to the fullest extent permitted by law, that
the rate of exchange used shall be the rate at which in accordance
with normal banking procedures the Underwriters could purchase
United States dollars with such other currency in The City of New
York on the business day preceding that on which final judgment is
given. The obligation of the Company with respect to any sum due
from it to an Underwriter or any person controlling such
Underwriter shall, notwithstanding any judgment in a currency other
than United States dollars, not be discharged until the first
business day following receipt by such Underwriter or controlling
person of any sum in such other currency, and only to the extent
that such Underwriter or controlling person may in accordance with
normal banking procedures purchase United States dollars with such
other currency. If the United States dollars so purchased are less
than the sum originally due to such Underwriter or controlling
person hereunder, the Company agrees as a separate obligation and
notwithstanding any such judgment, to indemnify such Underwriter or
controlling person against such loss. If the United States dollars
so purchased are greater than the sum originally due to such
Underwriter or controlling person hereunder, such Underwriter or
controlling person agrees to pay to the Company an amount equal to
the excess of the dollars so purchased over the sum originally due
to such Underwriter or controlling person hereunder.
(h) Counterparts. This
Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same
instrument.
(i) Survival of Provisions Upon Invalidity of Any
Single Provision. In case any provision in this
Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
(j) Waiver of Jury
Trial. The Company
and each Underwriter each hereby irrevocably waive any right they
may have to a trial by jury in respect of any claim based upon or
arising out of this Agreement or the transactions contemplated
hereby.
(k) Titles and
Subtitles. The
titles of the sections and subsections of this Agreement are for
convenience and reference only and are not to be considered in
construing this Agreement.
(l) Entire
Agreement. This
Agreement embodies the entire agreement and understanding between
the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. This
Agreement may not be amended or otherwise modified or any provision
hereof waived except by an instrument in writing signed by the
parties hereto.
[Signature
page follows]
33
|
Very
truly yours,
|
|
|
AMERICAN
RESOURCES CORPORATION.
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
Accepted
as of the date hereof:
MAXIM
GROUP LLC
By:
___________________________________
Name:
Clifford A. Teller
Title:
Executive Managing Director
Head
of Investment Banking
34
SCHEDULE I
Underwriter
|
Total Number of Firm Shares to be Purchased
|
Number of Optional Shares to be Purchased if Maximum Option
Exercised
|
Maxim
Group LLC
|
|
|
|
|
|
35
SCHEDULE II
Free
Writing Prospectuses
36
ANNEX
I
Opinion of Counsel
(1)
The Company has
been duly incorporated and is validly existing as a corporation in
good standing under the laws of the State of Florida, with
corporate power and authority to own, lease and operate its
properties and conduct its business as described in the
Registration Statement, the General Disclosure Package and the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement;
(2)
The Shares to be
issued and sold by the Company to the Underwriters pursuant to the
Underwriting Agreement have been duly and validly authorized and,
when issued and delivered to and paid for by the Underwriters in
accordance with the terms of the Underwriting Agreement, will be
duly and validly issued and fully paid and non-assessable and will
conform to the descriptions thereof contained in the Registration
Statement, the General Disclosure Package and the Prospectus; and
the issuance of such Shares is not subject to any preemptive or
similar rights;
(3)
The Underwriting
Agreement has been duly authorized, executed and delivered by the
Company and the Company has all the requisite corporate power and
authority to enter into the Underwriting Agreement and to perform
its obligations thereunder;
(4)
The issue and sale
of the Shares to be sold by the Company pursuant to the
Underwriting Agreement, the execution of the Underwriting Agreement
by the Company and the compliance by the Company with all of the
provisions of the Underwriting Agreement and the consummation of
the transactions therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries is bound or to which any of the
property or assets of the Company or any of the Subsidiaries is
subject, nor will such action result in any violation of the
provisions of the certificate of incorporation or by-laws of the
Company or, to our knowledge, any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries or any of
their properties; and, to our knowledge, no consent, approval,
authorization, order, registration or qualification of or with any
such court or governmental agency or body is required for the issue
and sale of the Shares to be sold by the Company to the
Underwriters pursuant to the Underwriting Agreement or the
consummation by the Company of the transactions contemplated by the
Underwriting Agreement, except the registration under the Act of
the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters, as to which we
express no opinion;
37
(5)
Other than as set
forth in the Registration Statement, the General Disclosure Package
and the Prospectus, to our knowledge, there are no legal or
governmental proceedings pending to which the Company or any of the
Subsidiaries is a party or of which any property of the Company or
any of the Subsidiaries is the subject which, if determined
adversely to the Company or any of the Subsidiaries, individually
or in the aggregate, would have or would reasonably be expected to
have a material adverse effect on the general affairs, business,
prospects, management, financial position, shareholders’
equity or results of operations of the Company and the
Subsidiaries, considered as one enterprise, or would prevent or
impair the consummation of the transactions contemplated by the
Underwriting Agreement, or which are required to be described in
the Registration Statement, the General Disclosure Package and the
Prospectus; and, to our knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
others;
(6)
The
Company is not and, after giving effect to the offering and sale of
the Shares as contemplated herein and the application of the net
proceeds therefrom as described in the Registration Statement, the
General Disclosure Package and the Prospectus, will not be an
“investment company”, as such term is defined in the
Investment Company Act of 1940;
(7) The
Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the Act; any required
filing of the Prospectus pursuant to Rule 424(b) under the Act has
been made in the manner and within the time period required by Rule
424(b); all material required to be filed by the Company pursuant
to Rule 433(d) under the Act shall have been filed with the
Commission within the applicable time period prescribed for such
filing by Rule 433 under the Act; and no stop order suspending the
effectiveness or use of the Registration Statement, the General
Disclosure Package and the Prospectus has been issued under the Act
and no proceedings for that purpose have been instituted or are
pending or, to our knowledge, threatened by the
Commission;
(8) To
our knowledge, there are no statutes or regulations that are
required to be described in the Registration Statement, the General
Disclosure Package and the Prospectus that are not described as
required;
(9) The
Common Stock has been approved for listing on The NASDAQ Capital
Market, subject to official notice of issuance;
(10) The
Registration Statement, the General Disclosure Package and the
Prospectus and any further amendments and supplements thereto made
by the Company (other than the financial statements, related
schedules and other financial data therein, as to which we do not
express an opinion), comply as to form in all material respects
with the requirements of the Act and the Rules and Regulations; and
we do not know of any amendment to the Registration Statement, the
General Disclosure Package and the Prospectus required to be filed
or of any contracts or other documents of a character required to
be filed as an exhibit to the Registration Statement or required to
be described in the Registration Statement, the General Disclosure
Package and the Prospectus which are not filed or described as
required; and
38
(11) To
our knowledge, except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to
file a registration statement under the Act with respect to shares
of Common Stock or other securities to include such shares of
Common Stock or other securities as part of the offering
contemplated hereby.
In
addition, although we are not passing upon and do not assume any
responsibility for nor have we independently verified, the
accuracy, completeness or fairness of the statements contained in
the Registration Statement, the General Disclosure Package and the
Prospectus, in connection with the preparation of the Registration
Statement, the General Disclosure Package and the Prospectus, we
have participated in conferences with representatives and counsel
of the Representative and with certain officers and employees of,
and independent certified public accountants for, the Company, at
which conferences the contents of the Registration Statement, the
General Disclosure Package and the Prospectus and related matters
were discussed, and we advise the Underwriters that nothing has
come to our attention that would lead us to believe
that:
●
as of its effective
date, the Registration Statement (other than the financial
statements, related schedules and other financial data therein, as
to which we do express no opinion), contained an untrue statement
of a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that,
●
as of the
Applicable Time, the General Disclosure Package (other than the
financial statements, related schedules and other financial and
statistical data therein, as to which express no opinion) contains
an untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or
that
●
as of its date or
as of the Closing Date, the Prospectus (other than the financial
statements, related schedules and other financial data therein, as
to which we express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading.
39
ANNEX
II
Form of Lock-Up Agreement
February
__, 2019
Maxim
Group LLC
405
Lexington Avenue
New
York, NY 10174
Ladies
and Gentlemen:
The
undersigned understands that Maxim Group LLC (“Maxim” or the
“Underwriter”)
proposes to enter into an Underwriting Agreement (the
“Underwriting
Agreement”) with American
Resources Corporation, a Florida corporation (the
“Company”),
providing for the public offering (the “Public Offering”) by the
Underwriter of Shares (the “Shares”) of the Company’s
Class A common stock, par value $0.0001 per share (the
“Common
Stock”).
To
induce the underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering,
the undersigned hereby agrees that, without the prior written
consent of Maxim, he or she will not, during the period commencing
on the date hereof and ending 180 days after the date of the final
prospectus relating to the Public Offering (the “Prospectus”) (the
“Lock-Up
Period”), sell, offer, agree to sell, contract to
sell, hypothecate, pledge, grant any option to purchase, make any
short sale of, or otherwise dispose of or hedge, directly or
indirectly, any shares of Common Stock , or any securities
convertible into or exercisable or exchangeable for shares of
Common Stock, whether any such transaction described above is to be
settled by delivery of shares of Common Stock, in cash or
otherwise. The foregoing sentence shall not apply to (a)
transactions relating to shares of Common Stock or other securities
acquired in open market transactions after the completion of the
Public Offering, (b) transfers of shares of Common Stock or
securities convertible into or exercisable or exchangeable for
shares of Common Stock to (i) the spouse or any lineal descendant
of the undersigned, (ii) any trust for the benefit of the
undersigned or the spouse or lineal descendant of the undersigned
(or by gift to a charitable organization), (iii) the estate of the
undersigned, or (iv) any affiliate of the undersigned; provided that in the case of any
transfer or distribution pursuant to clause(b), each donee or
distributee shall sign and deliver a lock-up agreement
substantially in the form of this agreement. In addition, the
undersigned agrees that, without the prior written consent of
Maxim, it will not, during the Lock-Up Period, make any demand for
or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock. The
undersigned also agrees and consents to the entry of stop transfer
instructions with the Company’s transfer agent and registrar
against the transfer of the undersigned’s shares of Common
Stock except in compliance with the foregoing
restrictions.
40
No
provision in this agreement shall be deemed to restrict or prohibit
the exercise or exchange by the undersigned of any option or
warrant to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of
Common Stock; provided that
the undersigned does not transfer the shares of Common Stock
acquired on such exercise or exchange during the Lock-Up Period,
unless otherwise permitted pursuant to the terms of this agreement.
In addition, no provision herein shall be deemed to restrict or
prohibit the entry into or modification of a so-called
“10b5-1” plan at any time (other than the entry into or
modification of such a plan in such a manner as to cause the sale
of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock within the
Lock-Up Period).
The
undersigned understands that the Company and the Underwriter are
relying upon this agreement in proceeding toward consummation of
the Public Offering. The undersigned further understands that this
agreement is irrevocable and shall be binding upon the
undersigned’s heirs, legal representatives, successors and
assigns.
The
undersigned understands that, if the Underwriting Agreement is not
executed, or if the Underwriting Agreement (other than the
provisions thereof which survive termination) shall terminate or be
terminated prior to payment for and delivery of the Shares to be
sold thereunder, the undersigned shall be released from all
obligations under this letter agreement.
Whether
or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only
be made pursuant to an Underwriting Agreement, the terms of which
are subject to negotiation between the Company and the
Underwriter.
Very truly yours,
41
ANNEX III
Form of Press Release
[]
[Date]
American Resources Corporation, a Delaware corporation (the
“Company”), announced today that Maxim Group LLC, the
lead book-running manager in the Company’s recent public sale
of common stock, is [waiving][releasing] a lock-up restriction with
respect to [___] of the Company’s Shares held by [certain
officers or directors][an officer or director] of the Company. The
[waiver][release] will take effect on [___], and the Shares may be
sold on or after such date.
This press release is not an offer for sale of the securities in
the United States or in any other jurisdiction where such offer is
prohibited, and such securities may not be offered or sold in the
United States absent registration or an exemption from registration
under the United States Securities Act of 1933, as
amended.
42
Exhibit 10.18
AGREEMENT AND PLAN OF MERGER
By and Among
AMERICAN RESOURCES CORPORATION,
and
EMPIRE KENTUCKY LAND, INC.
Dated as of February 12, 2019
1
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this
“Agreement”), dated the 12 day of February, 2019, is by
and among AMERICAN RESOURCES
CORPORATION, a Florida
corporation (“American Resources”), and
EMPIRE KENTUCKY
LAND, INC., a Kentucky
corporation (“Company”). Capitalized terms used herein
(including in the immediately preceding sentence) and not otherwise
defined herein shall have the meanings set forth in Appendix A
hereof.
WHEREAS,
the parties intend for American Resources to acquire the Company,
on the terms and subject to the conditions set forth in this
Agreement;
WHEREAS,
in furtherance of such acquisition of the Company by American
Resources, and on the terms and subject to the conditions set forth
in this Agreement, Company shall be merged with and into American
Resources (the “Merger”), with American Resources
surviving the Merger and each outstanding share of the
Company’s common stock, no par value (the “Company
Common Stock”) (other than the Cancelled Shares and the
Dissenting Shares) shall be converted into the right to receive the
Merger Consideration;
WHEREAS,
the Board of Directors of the Company (the “Company
Board”) has unanimously: (a) determined that it is in the
best interests of the Company and the holders of shares of the
Company Common Stock, and declared it advisable, to enter into this
Agreement with American Resources; (b) approved the execution,
delivery, and performance of this Agreement and the consummation of
the transactions contemplated hereby, including the Merger; and (c)
resolved, subject to the terms and conditions set forth in this
Agreement, to recommend adoption of this Agreement by the
stockholders of the Company;
WHEREAS,
the Board of Directors of American Resources (the “American
Resources Board”) has unanimously: (a) determined that it is
in the best interests of American Resources, and its stockholders,
and declared it advisable, to enter into this Agreement; and (b)
approved the execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated hereby,
including the Merger;
WHEREAS,
the American Resources Board has resolved to recommend that the
holders of shares of American Resources’ common stock, par
value $0.0001 per share (the “American Resources Common
Stock”) approve the issuance of shares of American Resources
Common Stock in connection with the Merger on the terms and subject
to the conditions set forth in this Agreement (the “American
Resources Stock Issuance”);
WHEREAS,
for U.S. federal income Tax purposes, the parties intend that the
Merger qualify as a “reorganization” within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the “Code”), and that this Agreement be, and is
hereby, adopted as a plan of reorganization within the meaning of
Section 368(a) of the Code; and
WHEREAS,
the parties desire to make certain representations, warranties,
covenants, and agreements in connection with the Merger and the
other transactions contemplated by this Agreement and also to
prescribe certain terms and conditions to the Merger.
NOW,
THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants, and agreements contained in
this Agreement, the parties, intending to be legally bound, agree
as follows:
1.01. The
Merger. On the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Florida
Business Corporation Act (“FBCA”) and the Kentucky
Business Corporation Act (“KBCA”), at the Effective
Time: (i) the Company will merge with and into American Resources;
(ii) the separate corporate existence of the Company will cease;
and (iii) American Resources will continue its corporate existence
under the FBCA as the surviving corporation in the
Merger.
1.02. Closing.
Upon the terms and subject to the conditions set forth herein, the
closing of the Merger (the “Closing”) will take place
at Lexington, KY, as soon as practicable (and, in any event, within
three Business Days) after the satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger set
forth in Section 6 (other than those conditions that by their
nature are to be satisfied at the Closing, but subject to the
satisfaction or, to the extent permitted hereunder, waiver of all
such conditions), unless this Agreement has been terminated
pursuant to its terms or unless another time or date is agreed to
in writing by the parties hereto. The Closing shall be held at the
offices of McBrayer, McGinnis, Leslie & Kirkland PLLC, 201 East
Main Street, Suite 900, Lexington, Kentucky, unless another place
is agreed to in writing by the parties hereto, and the actual date
of the Closing is hereinafter referred to as the “Closing
Date.”
1.03. Effective
Time. Subject to the provisions
of this Agreement, on the Closing Date, the Company and American
Resources will cause a certificate of merger (the
“Certificate of Merger”) to be executed, acknowledged,
and filed with the Secretaries of State of the State of Florida and
the Commonwealth of Kentucky in accordance with the relevant
provisions of the FBCA and the KBCA and shall make all other
filings or recordings required under the FBCA and the KBCA. The
Merger will become effective at such time as the Certificate of
Merger has been duly filed with the Secretaries of State of the
State of Florida and the Commonwealth of Kentucky or at such later
date or time as may be agreed by the Company and American Resources
in writing and specified in the Certificate of Merger in accordance
with the FBCA and the KBCA (the effective time of the Merger being
hereinafter referred to as the
“Effective Time”).
1.04. Effects
of the Merger.
The Merger shall have the effects set in this Agreement and in the
applicable provisions of the FBCA and the KBCA. Without limiting
the generality of the foregoing, and subject thereto from and after
the Effective Time, the effects of the Merger shall be that all
property, rights, privileges, immunities, powers, franchises,
licenses, and authority of the Company shall vest in American
Resources, and all debts, liabilities, obligations, restrictions,
and duties of the Company shall become the debts, liabilities,
obligations, restrictions, and duties of American
Resources.
2
2. Effect
of the Merger on Capital Stock; Exchange of
Certificates.
2.01. Effect
of the Merger on Capital Stock.
At the Effective Time, as a result of the Merger and without any
action on the part of American Resources or the Company or the
holder of any capital stock of American Resources or the
Company:
(a). Cancellation
of Certain Company Common Stock. Each share of Company Common Stock that is owned
by the Company (as treasury stock or otherwise) or any of their
respective direct or indirect wholly-owned Subsidiaries as of
immediately prior to the Effective Time (the “Cancelled
Shares”) will automatically be cancelled and retired and will
cease to exist, and no consideration will be delivered in exchange
therefor.
(b). Conversion
of Company Common Stock. Each
share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than Cancelled Shares and
Dissenting Shares) will be converted into the right to receive: (i)
two thousand (2,000) (the “Exchange Ratio”) shares of
American Resources Common Stock (the “Merger
Consideration”); and (ii) any dividends or other
distributions to which the holder thereof becomes entitled to upon
the surrender of such shares of Company Common Stock in accordance
with Section 2.02(g).
(c). Cancellation
of Shares. At the Effective
Time, all shares of Company Common Stock will no longer be
outstanding and all shares of Company Common Stock will be
cancelled and retired and will cease to exist, and each holder of:
(i) a certificate formerly representing any shares of Company
Common Stock (each, a “Certificate”); or (ii) any
book-entry shares which immediately prior to the Effective Time
represented shares of Company Common Stock (each, a
“Book-Entry Share”) will, subject to applicable Law in
the case of Dissenting Shares, cease to have any rights with
respect thereto, except the right to receive (A) the Merger
Consideration in accordance with Section 2.02 hereof, (B) any cash in lieu of fractional shares
of American Resources Common Stock payable pursuant to
Section 2.01(e), and (C) any dividends
or other distributions to which the holder thereof becomes entitled
to upon the surrender of such shares of Company Common Stock in
accordance with Section 2.02(g).
(d). Intentionally
omitted.
(e). Fractional
Shares. No certificates or
scrip representing fractional shares of American Resources Common
Stock shall be issued upon the conversion of Company Common Stock
pursuant to Section 2.01(b) and
such fractional share interests shall not entitle the owner thereof
to vote or to any other rights of a holder of shares of American
Resources Common Stock. Notwithstanding any other provision of this
Agreement, each holder of shares of Company Common Stock converted
pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of American Resources Common Stock
(after taking into account all shares of Company Common Stock
exchanged by such holder) shall in lieu thereof, upon surrender of
such holder’s Certificates and Book-Entry Shares, receive in
cash (rounded to the nearest whole cent), without interest, an
amount equal to such fractional amount multiplied by the last
reported sale price of American Resources Common Stock on the
NASDAQ Stock Market (“Nasdaq”) or OTC listing
(“OTC”), as applicable, on the last complete trading
day prior to the date of the Effective Time.
2.02. Exchange
Procedures.
(a). Exchange
Agent; Exchange Fund. Prior to
the Effective Time, American Resources shall appoint an exchange
agent (the “Exchange Agent”) to act as the agent for
the purpose of paying the Merger Consideration for the Certificates
and the Book-Entry Shares. At or promptly following the Effective
Time, American Resources shall deposit with the Exchange Agent: (i)
certificates representing the shares of American Resources Common
Stock to be issued as Merger Consideration (or make appropriate
alternative arrangements if uncertificated shares of American
Resources Common Stock represented by book-entry shares will be
issued); and (ii) any cash sufficient to make payments in lieu of
fractional shares pursuant to Section 2.01(e). In addition, American Resources shall deposit or
cause to be deposited with the Exchange Agent, as necessary from
time to time after the Effective Time, any dividends or other
distributions, if any, to which the holders of Company Common
Shares may be entitled pursuant to Section 2.02(g)
for distributions or dividends, on the
American Resources Common Stock to which they are entitled to
pursuant to Section 2.01(b), with both a record and payment date after the
Effective Time and prior to the surrender of the Company Common
Shares in exchange for such American Resources Common Stock. Such
cash and shares of American Resources Common Stock, together with
any dividends or other distributions deposited with the Exchange
Agent pursuant to this Section 2.02(a), are referred to collectively in this Agreement as
the “Exchange Fund.”
(b). Procedures
for Surrender; No Interest.
Promptly after the Effective Time, American Resources shall send,
or shall cause the Exchange Agent to send, to each record holder of
shares of Company Common Stock at the Effective Time, whose Company
Common Stock was converted pursuant to Section 2.01(b)
into the right to receive the Merger
Consideration, a letter of transmittal and instructions (which
shall specify that the delivery shall be effected, and risk of loss
and title shall pass, only upon proper delivery of the Certificates
or transfer of the Book-Entry Shares to the Exchange Agent, and
which letter of transmittal will be in customary form and have such
other provisions as American Resources may reasonably specify) for
use in such exchange. Each holder of shares of Company Common Stock that have
been converted into the right to receive the Merger Consideration
shall be entitled to receive the Merger Consideration into which
such shares of Company Common Stock have been converted pursuant
to Section 2.01(b) in respect
of the Company Common Stock represented by a Certificate or
Book-Entry Share, any cash in lieu of fractional shares which the
holder has the right to receive pursuant to Section 2.01(e),
and any dividends or other
distributions pursuant to Section 2.02(g) upon: (i) surrender to the Exchange Agent of a
Certificate; or (ii) receipt of an “agent’s
message” by the Exchange Agent (or such other evidence, if
any, of transfer as the Exchange Agent may reasonably request) in
the case of Book-Entry Shares; in each case, together with a duly
completed and validly executed letter of transmittal and such other
documents as may reasonably be requested by the Exchange Agent. No
interest shall be paid or accrued upon the surrender or transfer of
any Certificate or Book-Entry Share. Upon payment of the Merger
Consideration pursuant to the provisions of this Section 2, each
Certificate or Certificates or Book-Entry Share or Book-Entry
Shares so surrendered or transferred, as the case may be, shall
immediately be cancelled.
(c). Investment
of Exchange Fund. Until
disbursed in accordance with the terms and conditions of this
Agreement, the cash in the Exchange Fund will be invested by the
Exchange Agent, as directed by American Resources. No losses with
respect to any investments of the Exchange Fund will affect the
amounts payable to the holders of Certificates or Book-Entry
Shares. Any income from investment of the Exchange Fund will be
payable to American Resources on demand.
(d). Payments
to Non-Registered Holders. If
any portion of the Merger Consideration is to be paid to a Person
other than the Person in whose name the surrendered Certificate or
the transferred Book-Entry Share, as applicable, is registered, it
shall be a condition to such payment that: (i) such Certificate
shall be properly endorsed or shall otherwise be in proper form for
transfer or such Book-Entry Share shall be properly transferred;
and (ii) the Person requesting such payment shall pay to the
Exchange Agent any transfer or other Tax required as a result of
such payment to a Person other than the registered holder of such
Certificate or Book-Entry Share, as applicable, or establish to the
reasonable satisfaction of the Exchange Agent that such Tax has
been paid or is not payable.
3
(e). Full
Satisfaction. All Merger
Consideration paid upon the surrender of Certificates or transfer
of Book-Entry Shares in accordance with the terms hereof shall be
deemed to have been paid in full satisfaction of all rights
pertaining to the shares of Company Common Stock formerly
represented by such Certificate or Book-Entry Shares, and from and
after the Effective Time, there shall be no further registration of
transfers of shares of Company Common Stock on the stock transfer
books of American Resources. If, after the Effective Time,
Certificates or Book-Entry Shares are presented to American
Resources, they shall be cancelled and exchanged as provided in
this Section 2.
(f). Termination
of Exchange Fund. Any portion
of the Exchange Fund that remains unclaimed by the holders of
shares of Company Common Stock six (6) months after the Effective
Time shall be returned to American Resources, upon demand, and any
such holder who has not exchanged shares of Company Common Stock
for the Merger Consideration in accordance with this Section
2.02 prior to that time shall
thereafter look only to American Resources (subject to abandoned
property, escheat, or other similar Laws), as general creditors
thereof, for payment of the Merger Consideration without any
interest. Notwithstanding the foregoing, American Resources shall
not be liable to any holder of shares of Company Common Stock for
any amounts paid to a public official pursuant to applicable
abandoned property, escheat, or similar Laws. Any amounts remaining
unclaimed by holders of shares of Company Common Stock one (1) year
after the Effective Time (or such earlier date, immediately prior
to such time when the amounts would otherwise escheat to or become
property of any Governmental Entity) shall become, to the extent
permitted by applicable Law, the property of American Resources
free and clear of any claims or interest of any Person previously
entitled thereto.
(g). Distributions
with Respect to Unsurrendered Shares of Company Common
Stock. All shares of American
Resources Common Stock to be issued pursuant to the Merger shall be
deemed issued and outstanding as of the Effective Time and whenever
a dividend or other distribution is declared by American Resources
in respect of the American Resources Common Stock, the record date
for which is after the Effective Time, that declaration shall
include dividends or other distributions in respect of all shares
issuable pursuant to this Agreement. No dividends or other
distributions in respect of the American Resources Common Stock
shall be paid to any holder of any unsurrendered Company Common
Share until the Certificate (or affidavit of loss in lieu of the
Certificate as provided in Section 2.06) or Book-Entry Share is surrendered for exchange
in accordance with this Section 2.02. Subject to the effect of applicable Laws,
following such surrender, there shall be issued or paid to the
holder of record of the whole shares of American Resources Common
Stock issued in exchange for Company Common Shares in accordance
with this Section 2.02, without
interest: (i) at the time of such surrender, the dividends or other
distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of American
Resources Common Stock and not paid; and (ii) at the appropriate
payment date, the dividends or other distributions payable with
respect to such whole shares of American Resources Common Stock
with a record date after the Effective Time but with a payment date
subsequent to surrender.
(h). Dissenting
Shares Merger Consideration.
Any portion of the Cash Consideration made available to the
Exchange Agent in respect of any Dissenting Shares shall be
returned to American Resources, upon demand.
2.03. Dissenting
Shares. Notwithstanding any
provision of this Agreement to the contrary, including
Section 2.01, shares of Company Common
Stock issued and outstanding immediately prior to the Effective
Time (other than Cancelled Shares) and held by a holder who has not
voted in favor of adoption of this Agreement or consented thereto
in writing and who is entitled to demand and has properly exercised
appraisal rights of such shares in accordance with the KBCA (such
shares of Company Common Stock being referred to collectively as
the “Dissenting Shares” until such time as such holder
fails to perfect or otherwise waives, withdraws, or loses such
holder’s appraisal rights under the KBCA with respect to such
shares) shall not be converted into a right to receive the Merger
Consideration, but instead shall be entitled to only such rights as
are granted by the KBCA; provided,
however, that if, after the
Effective Time, such holder fails to perfect, waives, withdraws, or
loses such holder’s right to appraisal pursuant to the KBCA
or if a court of competent jurisdiction shall determine that such
holder is not entitled to the relief provided by the KBCA, such
shares of Company Common Stock shall be treated as if they had been
converted as of the Effective Time into the right to receive the
Merger Consideration in accordance with Section 2.01(b),
without interest thereon, upon
surrender of such Certificate formerly representing such share or
transfer of such Book-Entry Share, as the case may be. The Company
shall provide American Resources prompt written notice of any
demands received by the Company for appraisal of shares of Company
Common Stock, any waiver or withdrawal of any such demand, and any
other demand, notice, or instrument delivered to the Company prior
to the Effective Time that relates to such demand, and American
Resources shall have the opportunity and right to direct all
negotiations and proceedings with respect to such demands. Except
with the prior written consent of American Resources, the Company
shall not make any payment with respect to, or settle, or offer to
settle, any such demands.
2.04. Adjustments.
Without limiting the other provisions of this Agreement, if at any
time during the period between the date of this Agreement and the
Effective Time, any change in the outstanding shares of capital
stock of the Company or the American Resources Common Stock shall
occur (other than the issuance of additional shares of capital
stock of the Company or American Resources as permitted by this
Agreement), including by reason of any reclassification,
recapitalization, stock split (including a reverse stock split), or
combination, exchange, readjustment of shares, or similar
transaction, or any stock dividend or distribution paid in stock,
the Exchange Ratio and any other amounts payable pursuant to this
Agreement shall be appropriately adjusted to reflect such
change; provided,
however, that this sentence
shall not be construed to permit American Resources or the Company
to take any action with respect to its securities that is
prohibited by the terms of this Agreement.
2.05. Intentionally
omitted.
2.06. Lost
Certificates. If any
Certificate shall have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen, or destroyed and, if required by
American Resources, the posting by such Person of a bond, in such
reasonable amount as American Resources may direct, as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue, in exchange for such
lost, stolen, or destroyed Certificate, the Merger Consideration to
be paid in respect of the shares of Company Common Stock formerly
represented by such Certificate as contemplated under this Section
2.
2.07. Intentionally
omitted.
2.08. Tax
Treatment. The Merger is
intended to constitute a “reorganization” within the
meaning of Section 368(a) of the Code.
4
3. Representations
and Warranties of the Company. Except as
set forth in the correspondingly numbered Section of the Disclosure
Schedule that relates to such Section or in another Section of the
Company Disclosure Schedule to the extent that it is reasonably
apparent on the face of such disclosure that such disclosure is
applicable to such Section, the Company hereby represents and
warrants to American Resources as follows:
3.01. Organization;
Standing and Power.
The Company is a corporation, duly
organized and validly existing, under the Laws of its jurisdiction
of organization, and has the requisite corporate power and
authority to own, lease, and operate its assets and to carry on its
business as now conducted. The Company is duly qualified or
licensed to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the assets and
properties owned, leased, or operated by it or the nature of its
business makes such qualification or license necessary, except
where the failure to be so qualified or licensed or to be in good
standing, would not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse
Effect.
3.02. Capital
Structure.
(a). Capital
Stock. The authorized capital
stock of the Company consists of: (i) one thousand (1,000) shares
of Company Common Stock; and (ii) zero (0) shares of preferred
stock of the Company (the “Company Preferred Stock”).
As of the date of this Agreement: (A) 1,000 shares of Company
Common Stock were issued and outstanding (not including shares held
in treasury); (B) no shares of Company Common Stock were issued and
held by the Company in its treasury; and (C) no shares of Company
Preferred Stock were issued and outstanding or held by the Company
in its treasury. All of the outstanding shares of capital stock of
the Company are, and all shares of capital stock of the Company
which may be issued as contemplated or permitted by this Agreement
will be, when issued, duly authorized, validly issued, fully paid,
and non-assessable, and not subject to any pre-emptive rights. No
Subsidiary of the Company owns any shares of Company Common
Stock.
(b). Stock
Awards.
(i). As
of the date of this Agreement, no shares of Company Common Stock
were reserved for issuance pursuant to Company Equity Awards not
yet granted under the Company Stock Plans.
(ii). There
are no Contracts to which the Company is a party obligating the
Company to accelerate the vesting of any Company Equity Award as a
result of the transactions contemplated by this Agreement (whether
alone or upon the occurrence of any additional or subsequent
events). As of the date hereof, there are no outstanding: (A)
securities of the Company or any of its Subsidiaries convertible
into or exchangeable for Voting Debt or shares of capital stock of
the Company; (B) options, warrants, or other agreements or
commitments to acquire from the Company or any of its Subsidiaries,
or obligations of the Company or any of its Subsidiaries to issue,
any Voting Debt or shares of capital stock of (or securities
convertible into or exchangeable for shares of capital stock of)
the Company; or (C) restricted shares, restricted stock units,
stock appreciation rights, performance shares, profit participation
rights, contingent value rights, “phantom” stock, or
similar securities or rights that are derivative of, or provide
economic benefits based, directly or indirectly, on the value or
price of, any shares of capital stock of the Company, in each case
that have been issued by the Company or its Subsidiaries (the items
in clauses (A), (B), and (C), together with the capital stock of
the Company, being referred to collectively as “Company
Securities”). All outstanding shares of Company Common Stock,
all outstanding Company Equity Awards, and all outstanding shares
of capital stock, voting securities, or other ownership interests
in any Subsidiary of the Company, have been issued or granted, as
applicable, in compliance in all material respects with all
applicable securities Laws.
(iii). There
are no outstanding Contracts requiring the Company or any of its
Subsidiaries to repurchase, redeem, or otherwise acquire any
Company Securities or Company Subsidiary Securities. Neither the
Company nor any of its Subsidiaries is a party to any voting
agreement with respect to any Company Securities or Company
Subsidiary Securities.
(c). Voting
Debt. No bonds, debentures,
notes, or other indebtedness issued by the Company or any of its
Subsidiaries: (i) having the right to vote on any matters on which
stockholders or equity holders of the Company or any of its
Subsidiaries may vote (or which is convertible into, or
exchangeable for, securities having such right); or (ii) the value
of which is directly based upon or derived from the capital stock,
voting securities, or other ownership interests of the Company or
any of its Subsidiaries, are issued or outstanding (collectively,
“Voting Debt”).
(d). Company
Subsidiary Securities. As of
the date hereof, there are no outstanding: (i) securities of the
Company or any of its Subsidiaries convertible into or exchangeable
for Voting Debt, capital stock, voting securities, or other
ownership interests in any Subsidiary of the Company; (ii) options,
warrants, or other agreements or commitments to acquire from the
Company or any of its Subsidiaries, or obligations of the Company
or any of its Subsidiaries to issue, any Voting Debt, capital
stock, voting securities, or other ownership interests in (or
securities convertible into or exchangeable for capital stock,
voting securities, or other ownership interests in) any Subsidiary
of the Company; or (iii) restricted shares, restricted stock units,
stock appreciation rights, performance shares, profit participation
rights, contingent value rights, “phantom” stock, or
similar securities or rights that are derivative of, or provide
economic benefits based, directly or indirectly, on the value or
price of, any capital stock or voting securities of, or other
ownership interests in, any Subsidiary of the Company, in each case
that have been issued by a Subsidiary of the Company (the items in
clauses (i), (ii), and (iii), together with the capital stock,
voting securities, or other ownership interests of such
Subsidiaries, being referred to collectively as “Company
Subsidiary Securities”).
3.03. Authority;
Non-Contravention; Governmental Consents; Board
Approval.
(a). Authority.
The Company has all requisite corporate power and authority to
enter into and to perform its obligations under this Agreement and,
subject to, in the case of the consummation of the Merger, adoption
of this Agreement by the affirmative vote or consent of the holders
of a majority of the outstanding shares of Company Common Stock
(the “Requisite Company Vote”), to consummate the
transactions contemplated by this Agreement. The execution and
delivery of this Agreement by the Company and the consummation by
the Company of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of the
Company and no other corporate proceedings on the part of the
Company are necessary to authorize the execution and delivery of
this Agreement or to consummate the Merger and the other
transactions contemplated hereby, subject only, in the case of
consummation of the Merger, to the receipt of the Requisite Company
Vote. The Requisite Company Vote is the only vote or consent of the
holders of any class or series of the Company’s capital stock
necessary to approve and adopt this Agreement, approve the Merger,
and consummate the Merger and the other transactions contemplated
hereby. This Agreement has been duly executed and delivered by the
Company and, assuming due execution and delivery by American
Resources, constitutes the legal, valid, and binding obligation of
the Company, enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, moratorium, and other similar Laws affecting
creditors’ rights generally and by general principles of
equity.
5
(b). Non-Contravention.
The execution, delivery, and performance of this Agreement by the
Company, and the consummation by the Company of the transactions
contemplated by this Agreement, including the Merger, do not and
will not: (i) subject to obtaining the Requisite Company Vote,
contravene or conflict with, or result in any violation or breach
of, the Charter Documents of the Company or any of its
Subsidiaries; (ii) assuming that all Consents contemplated
by Section 3.03(c) have been obtained
or made and, in the case of the consummation of the Merger,
obtaining the Requisite Company Vote, conflict with or violate any
Law applicable to the Company, any of its Subsidiaries, or any of
their respective properties or assets; (iii) result in any breach
of or constitute a default (or an event that with notice or lapse
of time or both would become a default) under, result in the
Company’s or any of its Subsidiaries’ loss of any
benefit or the imposition of any additional payment or other
liability under, or alter the rights or obligations of any third
party under, or give to any third party any rights of termination,
amendment, acceleration, or cancellation, or require any Consent
under, any Contract to which the Company or any of its Subsidiaries
is a party or otherwise bound as of the date hereof; or (iv) result
in the creation of a Lien (other than Permitted Liens) on any of
the properties or assets of the Company or any of its Subsidiaries,
except, in the case of each of clauses (ii), (iii), and (iv), for
any conflicts, violations, breaches, defaults, loss of benefits,
additional payments or other liabilities, alterations,
terminations, amendments, accelerations, cancellations, or Liens
that, or where the failure to obtain any Consents, in each case,
would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
(c). Governmental
Consents. Except as set forth
on Section 3.03(c) of the Disclosure Schedule, no consent,
approval, order, or authorization of, or registration, declaration,
or filing with, or notice to (any of the foregoing being a
“Consent”), any supranational, national, state,
municipal, local, or foreign government, any instrumentality,
subdivision, court, administrative agency or commission, or other
governmental authority, or any quasi-governmental or private body
exercising any regulatory or other governmental or
quasi-governmental authority (a “Governmental Entity”)
is required to be obtained or made by the Company in connection
with the execution, delivery, and performance by the Company of
this Agreement or the consummation by the Company of the Merger and
other transactions contemplated hereby.
(d). Board
Approval. The Company Board, by
unanimous written consent not subsequently rescinded or modified in
any way, has: (i) determined that this Agreement and the
transactions contemplated hereby, including the Merger, upon the
terms and subject to the conditions set forth herein, are fair to,
and in the best interests of, the Company and the Company’s
stockholders; (ii) approved and declared advisable this Agreement,
including the execution, delivery, and performance thereof, and the
consummation of the transactions contemplated by this Agreement,
including the Merger, upon the terms and subject to the conditions
set forth herein; (iii) directed that this Agreement be submitted
to a vote of the Company’s stockholders for adoption at the
Company Stockholders Meeting; and (iv) resolved to recommend that
Company stockholders vote in favor of adoption of this Agreement in
accordance with the FBCA and the KBCA (collectively, the
“Company Board Recommendation”).
3.04. Intentionally
omitted.
3.05. Absence
of Certain Changes or Events.
Since the date of the Company Balance Sheet, except in connection
with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, the business
of the Company and each of its Subsidiaries has been conducted in
the ordinary course of business consistent with past practice and
there has not been or occurred:
(a). any
Company Material Adverse Effect or any event, condition, change, or
effect that could reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect;
or
(b). any
event, condition, action, or effect that, if taken during the
period from the date of this Agreement through the Effective Time,
would constitute a breach of Section 5.01.
3.06. Taxes.
(a). Tax
Returns and Payment of Taxes.
The Company and each of its Subsidiaries have duly and timely filed
or caused to be filed (taking into account any valid extensions)
all material Tax Returns required to be filed by them. Such Tax
Returns are true, complete, and correct in all material respects.
Neither Company nor any of its Subsidiaries is currently the
beneficiary of any extension of time within which to file any Tax
Return other than extensions of time to file Tax Returns obtained
in the ordinary course of business consistent with past practice.
All material Taxes due and owing by the Company or any of its
Subsidiaries (whether or not shown on any Tax Return) have been
timely paid or, where payment is not yet due, the Company has made
an adequate provision for such Taxes in the Company’s
financial statements. The Company’s most recent financial
statements reflect an adequate reserve for all material Taxes
payable by the Company and its Subsidiaries through the date of
such financial statements. Neither the Company nor any of its
Subsidiaries has incurred any material Liability for Taxes since
the date of the Company’s most recent financial statements
outside of the ordinary course of business or otherwise
inconsistent with past practice.
(b). Withholding.
The Company and each of its Subsidiaries have withheld and timely
paid each material Tax required to have been withheld and paid in
connection with amounts paid or owing to any Company Employee,
creditor, customer, stockholder, or other party (including, without
limitation, withholding of Taxes pursuant to Sections 1441 and 1442
of the Code or similar provisions under any state, local, and
foreign Laws), and materially complied with all information
reporting and backup withholding provisions of applicable
Law.
(c). Liens.
There are no Liens for material Taxes upon the assets of the
Company or any of its Subsidiaries other than for current Taxes not
yet due and payable or for Taxes that are being contested in good
faith by appropriate proceedings and for which adequate reserves
has been made in the Company’s most recent financial
statements.
(d). Tax
Deficiencies and Audits. No
deficiency for any material amount of Taxes which has been
proposed, asserted, or assessed in writing by any taxing authority
against the Company or any of its Subsidiaries remains unpaid.
There are no waivers or extensions of any statute of limitations
currently in effect with respect to Taxes of the Company or any of
its Subsidiaries. There are no audits, suits, proceedings,
investigations, claims, examinations, or other administrative or
judicial proceedings ongoing or pending with respect to any
material Taxes of the Company or any of its
Subsidiaries.
6
(e). Tax
Jurisdictions. No claim has
ever been made in writing by any taxing authority in a jurisdiction
where the Company and its Subsidiaries do not file Tax Returns that
the Company or any of its Subsidiaries is or may be subject to Tax
in that jurisdiction.
(f). Tax
Rulings. Neither the Company
nor any of its Subsidiaries has requested or is the subject of or
bound by any private letter ruling, technical advice memorandum, or
similar ruling or memorandum with any taxing authority with respect
to any material Taxes, nor is any such request
outstanding.
3.07. Intellectual
Property.
(a). Company-Owned
IP. The Company has no
Company-Owned IP that is the subject of any issuance, registration,
certificate, application, or other filing by, to or with any
Governmental Authority or authorized private registrar, including
patents, patent applications, trademark registrations and pending
applications for registration, copyright registrations and pending
applications for registration, and internet domain name
registrations.
(b). Right
to Use; Title. The Company or
one of its Subsidiaries is the sole and exclusive owner of all
right, title, and interest in and to the Company-Owned IP, and has
the valid and enforceable right to use all other Intellectual
Property used in or necessary for the conduct of the business of
the Company and its Subsidiaries as currently conducted and as
proposed to be conducted (“Company IP”), in each case,
free and clear of all Liens other than Permitted Liens, except as
would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
(c). Validity
and Enforceability. The Company
and its Subsidiaries’ rights in the Company-Owned IP are
valid, subsisting, and enforceable, except as would not reasonably
be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. The Company and each of its Subsidiaries
have taken reasonable steps to maintain the Company IP and to
protect and preserve the confidentiality of all trade secrets
included in the Company IP, except where the failure to take such
actions would not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse
Effect.
(d). Non-Infringement.
Except as would not be reasonably expected to have, individually or
in the aggregate, a Company Material Adverse Effect: (i) the
conduct of the businesses of the Company and any of its
Subsidiaries has not infringed, misappropriated, or otherwise
violated, and is not infringing, misappropriating, or otherwise
violating, any Intellectual Property of any other Person; and (ii)
to the Knowledge of the Company, no third party is infringing upon,
violating, or misappropriating any Company IP.
(e). IP
Legal Actions and Orders. There
are no Legal Actions pending or, to the Knowledge of the Company,
threatened: (i) alleging any infringement, misappropriation, or
violation by the Company or any of its Subsidiaries of the
Intellectual Property of any Person; or (ii) challenging the
validity, enforceability, or ownership of any Company-Owned IP or
the Company or any of its Subsidiaries’ rights with respect
to any Company IP, in each case except for such Legal Actions that
would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. The Company and its
Subsidiaries are not subject to any outstanding Order that
restricts or impairs the use of any Company-Owned IP, except where
compliance with such Order would not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse
Effect.
3.08. Compliance;
Permits.
(a). Compliance.
The Company and each of its Subsidiaries is in material compliance
with all Laws or Orders applicable to the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries or
any of their respective businesses or properties is bound. Since
December 31, 2018, no Governmental Entity has issued any notice or
notification stating that the Company or any of its Subsidiaries is
not in compliance with any Law in any material
respect.
(b). Permits.
The Company and its Subsidiaries hold, to the extent necessary to
operate their respective businesses as such businesses are being
operated as of the date hereof, all permits, licenses,
registrations, variances, clearances, consents, commissions,
franchises, exemptions, orders, authorizations, and approvals from
Governmental Entities (collectively, “Permits”), except
for any Permits for which the failure to obtain or hold would not
reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect. No suspension, cancellation,
non-renewal, or adverse modifications of any Permits of the Company
or any of its Subsidiaries is pending or, to the Knowledge of the
Company, threatened, except for any such suspension or cancellation
which would not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse
Effect.
3.09. Litigation.
There is no Legal Action pending, or to the Knowledge of the
Company, threatened against the Company or any of its Subsidiaries
or any of their respective properties or assets or, to the
Knowledge of the Company, any officer or director of the Company or
any of its Subsidiaries in their capacities as such. None of the
Company or any of its Subsidiaries or any of their respective
properties or assets is subject to any order, writ, assessment,
decision, injunction, decree, ruling, or judgment
(“Order”) of a Governmental Entity or arbitrator,
whether temporary, preliminary, or permanent, which would
reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
3.10. Brokers’
and Finders’ Fees.
Neither the Company nor any of its Subsidiaries has incurred, nor
will it incur, directly or indirectly, any liability for investment
banker, brokerage, or finders’ fees or agents’
commissions, or any similar charges in connection with this
Agreement or any transaction contemplated by this
Agreement.
3.11. Related
Person Transactions. There are
no Contracts, transactions, arrangements, or understandings between
the Company or any of its Subsidiaries, on the one hand, and any
Affiliate (including any director, officer, or employee) thereof or
any holder of 5% or more of the shares of Company Common Stock, but
not including any wholly-owned Subsidiary of the Company, on the
other hand.
7
3.12. Employee
Matters. The Company has no employees and no employee
benefit plans.
3.13. Real
Property and Personal Property Matters.
(a). Owned
Real Estate. The Company has
good and marketable title to the Owned Real Estate free and clear
of any Liens other than the Permitted Liens. Section 3.13(a) of the
Company Disclosure Schedule contains a true and complete list of
the Owned Real Estate as of the date hereof.
(b). Leased
Real Estate. Section 3.13(b) of
the Company Disclosure Schedule contains a true and complete list
of all Leases (including all amendments, extensions, renewals,
guaranties, and other agreements with respect thereto) as of the
date hereof for each such Leased Real Estate (including the date
and name of the parties to such Lease document). The Company has
made available to American Resources a true and complete copy of
each such Lease. Except as would not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse
Effect or as set forth on Section 3.13(b) of the Company Disclosure
Schedule, with respect to each of the Leases: (i) such Lease is
legal, valid, binding, enforceable, and in full force and effect;
(ii) neither the Company nor any of its Subsidiaries nor, to the
Knowledge of the Company, any other party to the Lease, is in
breach or default under such Lease, and no event has occurred or
circumstance exists which, with or without notice, lapse of time,
or both, would constitute a breach or default under such Lease;
(iii) the Company’s or its Subsidiary’s possession and
quiet enjoyment of the Leased Real Estate under such Lease has not
been disturbed, and to the Knowledge of the Company, there are no
disputes with respect to such Lease; and (iv) there are no Liens on
the estate created by such Lease other than Permitted
Liens.
(c). Real
Estate Used in the Business.
The Owned Real Estate identified in Section 3.13(a) of the Company
Disclosure Schedule and the Leased Real Estate identified in
Section 3.13(b) of the Company Disclosure Schedule comprise all of
the real property of the Company or any of its
Subsidiaries.
(d). Personal
Property. Except as would not
reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect, the Company and each of its
Subsidiaries are in possession of and have good and marketable
title to, or valid leasehold interests in or valid rights under
contract to use, the machinery, equipment, furniture, fixtures, and
other tangible personal property and assets owned, leased, or used
by the Company or any of its Subsidiaries, free and clear of all
Liens other than Permitted Liens.
3.14. Intentionally
omitted.
3.15. Material
Contracts.
(a). Material
Contracts. For purposes of this
Agreement, “Company Material Contract” shall mean the
following to which the Company or any of its Subsidiaries is a
party or any of the respective assets are bound (excluding any
Leases):
(i). any
Contract providing for indemnification or any guaranty by the
Company or any Subsidiary thereof, in each case that is material to
the Company and its Subsidiaries, taken as a whole, other than (A)
any guaranty by the Company or a Subsidiary thereof of any of the
obligations of (1) the Company or another wholly-owned Subsidiary
thereof or (2) any Subsidiary (other than a wholly-owned
Subsidiary) of the Company that was entered into in the ordinary
course of business pursuant to or in connection with a customer
Contract, or (B) any Contract providing for indemnification of
customers or other Persons pursuant to Contracts entered into in
the ordinary course of business;
(ii). any
Contract that purports to limit in any material respect the right
of the Company or any of its Subsidiaries (or, at any time after
the consummation of the Merger, American Resources or any of its
Subsidiaries) (A) to engage in any line of business, (B) compete
with any Person or solicit any client or customer, or (C) operate
in any geographical location;
(iii). any
Contract relating to the disposition or acquisition, directly or
indirectly (by merger, sale of stock, sale of assets, or
otherwise), by the Company or any of its Subsidiaries after the
date of this Agreement of assets or capital stock or other equity
interests of any Person;
(iv). any
Contract that grants any right of first refusal, right of first
offer, or similar right with respect to any material assets,
rights, or properties of the Company or any of its
Subsidiaries;
(v). any
Contract that contains any provision that requires the purchase of
all or a material portion of the Company’s or any of its
Subsidiaries’ requirements for a given product or service
from a given third party, which product or service is material to
the Company and its Subsidiaries, taken as a whole;
(vi). any
Contract that obligates the Company or any of its Subsidiaries to
conduct business on an exclusive or preferential basis or that
contains a “most favored nation” or similar covenant
with any third party or upon consummation of the Merger or Second
Merger will obligate American Resources or any of its Subsidiaries
to conduct business on an exclusive or preferential basis or that
contains a “most favored nation” or similar covenant
with any third party;
(vii). any
partnership, joint venture, limited liability company agreement, or
similar Contract relating to the formation, creation, operation,
management, or control of any material joint venture, partnership,
or limited liability company, other than any such Contact solely
between the Company and its wholly-owned Subsidiaries or among the
Company’s wholly-owned Subsidiaries;
8
(viii). any
mortgages, indentures, guarantees, loans, or credit agreements,
security agreements, or other Contracts, in each case relating to
indebtedness for borrowed money, whether as borrower or lender, in
each case in excess of $50,000.00, other than (A) accounts
receivables and payables, and (B) loans to direct or indirect
wholly-owned Subsidiaries of the Company;
(ix). any
employee collective bargaining agreement or other Contract with any
labor union;
(x). any
Company IP Agreement, other than licenses for shrinkwrap,
clickwrap, or other similar commercially available off-the-shelf
software that has not been modified or customized by a third party
for the Company or any of its Subsidiaries; or
(xi). any
other Contract under which the Company or any of its Subsidiaries
is obligated to make payment or incur costs in excess of $50.000.00
in any year and which is not otherwise described
above.
(b). Schedule
of Material Contracts; Documents. Section 3.15(b) of the Company Disclosure
Schedule sets forth a true and complete list as of the date hereof
of all Company Material Contracts. The Company has made available
to American Resources correct and complete copies of all Company
Material Contracts, including any amendments
thereto.
(c). No
Breach. (i) All the Company
Material Contracts are legal, valid, and binding on the Company or
its applicable Subsidiary, enforceable against it in accordance
with its terms, and is in full force and effect; (ii) neither the
Company nor any of its Subsidiaries nor, to the Knowledge of the
Company, any third party has violated any provision of, or failed
to perform any obligation required under the provisions of, any
Company Material Contract; and (iii) neither the Company nor any of
its Subsidiaries nor, to the Knowledge of the Company, any third
party is in breach, or has received written notice of breach, of
any Company Material Contract.
3.16. Insurance.
Except as would not, individually or in the aggregate, reasonably
be expected to have a Company Material Adverse Effect, all
insurance policies of the Company and its Subsidiaries are in full
force and effect and provide insurance in such amounts and against
such risks as the Company reasonably has determined to be prudent,
taking into account the industries in which the Company and its
Subsidiaries operate, and as is sufficient to comply with
applicable Law. Except as would not, individually or in the
aggregate, reasonably be expected to have a Company Material
Adverse Effect, neither the Company nor any of its Subsidiaries is
in breach or default, and neither the Company nor any of its
Subsidiaries has taken any action or failed to take any action
which, with notice or the lapse of time, would constitute such a
breach or default, or permit termination or modification of, any of
such insurance policies. Except as would not, individually or in
the aggregate, reasonably be expected to have a Company Material
Adverse Effect and to the Knowledge of the Company: (i) no insurer
of any such policy has been declared insolvent or placed in
receivership, conservatorship, or liquidation; and (ii) no notice
of cancellation or termination, other than pursuant to the
expiration of a term in accordance with the terms thereof, has been
received with respect to any such policy.
4. Representations
and Warranties of American Resources. Except: (a)
as disclosed in the American Resources SEC Documents and that is
reasonably apparent on the face of such disclosure to be applicable
to the representation and warranty set forth herein (other than any
disclosures contained or referenced therein under the captions
“Risk Factors,” “Forward-Looking
Statements,” “Quantitative and Qualitative Disclosures
About Market Risk,” and any other disclosures contained or
referenced therein of information, factors, or risks that are
predictive, cautionary, or forward-looking in nature); or (b) as
set forth in the correspondingly numbered Section of the American
Resources Disclosure Schedule that relates to such Section or in
another section of the American Resources Disclosure Schedule to
the extent that it is reasonably apparent on the face of such
disclosure that such disclosure is applicable to such Section;
American Resources represents and warrants to the Company as
follows:
4.01. Organization;
Standing and Power; Charter Documents;
Subsidiaries.
(a). Organization;
Standing and Power. Each of
American Resources and its Subsidiaries is a corporation, limited
liability company, or other legal entity duly organized, validly
existing, and in good standing (to the extent that the concept of
“good standing” is applicable in the case of any
jurisdiction outside the United States) under the Laws of its
jurisdiction of organization, and has the requisite corporate,
limited liability company, or other organizational, as applicable,
power and authority to own, lease, and operate its assets and to
carry on its business as now conducted. Each of American Resources
and its Subsidiaries is duly qualified or licensed to do business
as a foreign corporation, limited liability company, or other legal
entity and is in good standing (to the extent that the concept of
“good standing” is applicable in the case of any
jurisdiction outside the United States) in each jurisdiction where
the character of the assets and properties owned, leased, or
operated by it or the nature of its business makes such
qualification or license necessary, except where the failure to be
so qualified or licensed or to be in good standing, would not
reasonably be expected to have, individually or in the aggregate,
an American Resources Material Adverse Effect.
(b). Charter
Documents. The copies of the
Certificate of Incorporation and By-Laws of American Resources as
most recently filed with the American Resources SEC Documents are
true, correct, and complete copies of such documents as in effect
as of the date of this Agreement. American Resources is not in
violation of any of the provisions of its Charter
Documents.
(c). Subsidiaries.
All of the outstanding shares of capital stock of, or other equity
or voting interests in, each Subsidiary of American Resources have
been validly issued and are owned by American Resources, directly
or indirectly, free of pre-emptive rights, are fully paid and
non-assessable, and are free and clear of all Liens, including any
restriction on the right to vote, sell, or otherwise dispose of
such capital stock or other equity or voting interests, except for
any Liens: (i) imposed by applicable securities Laws; or (ii)
arising pursuant to the Charter Documents of any non-wholly-owned
Subsidiary of American Resources. Except for the capital stock of,
or other equity or voting interests in, its Subsidiaries, American
Resources does not own, directly or indirectly, any capital stock
of, or other equity or voting interests in, any
Person.
9
4.02. Capital
Structure.
(a). Capital
Stock. The authorized capital
stock of American Resources consists of: (i) 230,000,000 shares of
American Resources Common Stock; (ii) 5,000,000 shares of Series A
Preferred stock, par value $0.0001 per share, of American Resources
(the “American Resources Series A Preferred Stock”);
and (iii) 20,000,000 shares of Series C Preferred stock, par value
$0.0001 per share, of American Resources (the “American
Resources Series C Preferred Stock”). As of the date of this
Agreement and immediately prior to the share offering contemplated
under American Resources Form S1/A: (A) 18,639,433 shares of
American Resources Common Stock were issued and outstanding (not
including shares held in treasury); (B) 452,729 shares of American
Resources Series A Preferred Stock were issued and outstanding; and
(D) 50,000 shares of American Resources Series C Preferred Stock
were issued and outstanding; and through the date hereof, no
additional shares of American Resources Common Stock or shares of
American Resources Preferred Stock have been issued other than the
issuance of shares of American Resources Common Stock upon the
exercise or settlement of American Resources Equity Awards. For all
classes of common stock and preferred stock of American Resources,
no shares are issued and held by American Resources in its treasury
All of the outstanding shares of capital stock of American
Resources are, and all shares of capital stock of American
Resources which may be issued as contemplated or permitted by this
Agreement, including the shares of American Resources Common Stock
constituting the Merger Consideration, will be, when issued, duly
authorized, validly issued, fully paid, and non-assessable, and not
subject to any pre-emptive rights. No Subsidiary of American
Resources owns any shares of American Resources Common
Stock.
(b). Stock
Awards.
(i). As
of the date of this Agreement, an aggregate of 3,363,170 shares of
American Resources Common Stock were reserved for issuance pursuant
to American Resources Equity Awards not yet granted under the
American Resources Stock Plans. As of the date of this Agreement,
636,830 shares of American Resources Common Stock were reserved for
issuance pursuant to outstanding American Resources Stock Options
and no shares of American Resources Restricted Shares were issued
and outstanding. Except as provided in this Agreement, since
September 12, 2018 and through the date hereof, no American
Resources Equity Awards have been granted and no additional shares
of American Resources Common Stock have become subject to issuance
under the American Resources Stock Plans. All shares of American
Resources Common Stock subject to issuance under the American
Resources Stock Plans upon issuance in accordance with the terms
and conditions specified in the instruments pursuant to which they
are issuable, will be duly authorized, validly issued, fully paid,
and non-assessable.
(ii). Other
than the American Resources Equity Awards, as of the date hereof,
there are no outstanding (A) securities of American Resources or
any of its Subsidiaries convertible into or exchangeable for
American Resources Voting Debt or shares of capital stock of
American Resources, (B) options, warrants, or other agreements or
commitments to acquire from American Resources or any of its
Subsidiaries, or obligations of American Resources or any of its
Subsidiaries to issue, any American Resources Voting Debt or shares
of capital stock of (or securities convertible into or exchangeable
for shares of capital stock of) American Resources, or (C)
restricted shares, restricted stock units, stock appreciation
rights, performance shares, profit participation rights, contingent
value rights, “phantom” stock, or similar securities or
rights that are derivative of, or provide economic benefits based,
directly or indirectly, on the value or price of, any shares of
capital stock of American Resources, in each case that have been
issued by American Resources or its Subsidiaries (the items in
clauses (A), (B), and (C), together with the capital stock of
American Resources, being referred to collectively as
“American Resources Securities”). All outstanding
shares of American Resources Common Stock, all outstanding American
Resources Equity Awards, and all outstanding shares of capital
stock, voting securities, or other ownership interests in any
Subsidiary of American Resources, have been issued or granted, as
applicable, in compliance in all material respects with all
applicable securities Laws.
(iii). As
of the date hereof, there are no outstanding Contracts requiring
American Resources or any of its Subsidiaries to repurchase,
redeem, or otherwise acquire any American Resources Securities or
American Resources Subsidiary Securities. Neither American
Resources nor any of its Subsidiaries is a party to any voting
agreement with respect to any American Resources Securities or
American Resources Subsidiary Securities.
(c). Voting
Debt. No bonds, debentures,
notes, or other indebtedness issued by American Resources or any of
its Subsidiaries: (i) having the right to vote on any matters on
which stockholders or equity holders of American Resources or any
of its Subsidiaries may vote (or which is convertible into, or
exchangeable for, securities having such right); or (ii) the value
of which is directly based upon or derived from the capital stock,
voting securities, or other ownership interests of American
Resources or any of its Subsidiaries, are issued or outstanding
(collectively, “American Resources Voting
Debt”).
(d). American
Resources Subsidiary Securities. As of the date hereof, there are no outstanding:
(i) securities of American Resources or any of its Subsidiaries
convertible into or exchangeable for American Resources Voting
Debt, capital stock, voting securities, or other ownership
interests in any Subsidiary of American Resources; (ii) options,
warrants, or other agreements or commitments to acquire from
American Resources or any of its Subsidiaries, or obligations of
American Resources or any of its Subsidiaries to issue, any
American Resources Voting Debt, capital stock, voting securities,
or other ownership interests in (or securities convertible into or
exchangeable for capital stock, voting securities, or other
ownership interests in) any Subsidiary of American Resources; or
(iii) restricted shares, restricted stock units, stock appreciation
rights, performance shares, profit participation rights, contingent
value rights, “phantom” stock, or similar securities or
rights that are derivative of, or provide economic benefits based,
directly or indirectly, on the value or price of, any capital stock
or voting securities of, or other ownership interests in, any
Subsidiary of American Resources, in each case that have been
issued by a Subsidiary of American Resources (the items in clauses
(i), (ii), and (iii), together with the capital stock, voting
securities, or other ownership interests of such Subsidiaries,
being referred to collectively as “American Resources
Subsidiary Securities”).
4.03. Authority;
Non-Contravention; Governmental Consents; Board
Approval.
(a). Authority.
American Resources has all requisite corporate power or limited
liability power, as applicable, and authority to enter into and to
perform its obligations under this Agreement and, subject to, in
the case of the consummation of the Merger, the need to obtain the
affirmative vote or consent of 9,506,111 of the outstanding shares
of the American Resources Common Stock to the American Resources
Stock Issuance (the “Requisite American Resources
Vote”), to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by American
Resources and the consummation by American Resources of the
transactions contemplated by this Agreement have been duly
authorized by all necessary corporate or limited liability action,
as applicable, on the part of American Resources and no other
corporate or limited liability proceedings, as applicable, on the
part of American Resources are necessary to authorize the execution
and delivery of this Agreement or to consummate the Merger, the
American Resources Stock Issuance, and the other transactions
contemplated by this Agreement, subject only, in the case of
consummation of the Merger, to the need to obtain the Requisite
American Resources Vote. This Agreement has been duly executed and
delivered by American Resources and, assuming due execution and
delivery by the Company, constitutes the legal, valid, and binding
obligation of American Resources, enforceable against American
Resources in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency,
moratorium, and other similar Laws affecting creditors’
rights generally and by general principles of
equity.
10
(b). Non-Contravention.
The execution, delivery, and performance of this Agreement by
American Resources and the consummation by American Resources of
the transactions contemplated by this Agreement, do not and will
not: (i) contravene or conflict with, or result in any violation or
breach of, American Resources’ Charter Documents; (ii)
assuming that all of the Consents contemplated by Section
4.03(c) have been obtained or made,
and in the case of the consummation of the Merger, obtaining the
Requisite American Resources Vote, conflict with or violate any Law
applicable to American Resources or any of its properties or
assets; (iii) result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become a
default) under, result in American Resources’ or any of its
Subsidiaries’ loss of any benefit or the imposition of any
additional payment or other liability under, or alter the rights or
obligations of any third party under, or give to any third party
any rights of termination, amendment, acceleration, or
cancellation, or require any Consent under, any Contract to which
American Resources or any of its Subsidiaries is a party or
otherwise bound as of the date hereof; or (iv) result in the
creation of a Lien (other than Permitted Liens) on any of the
properties or assets of American Resources or any of its
Subsidiaries, except, in the case of each of clauses (ii), (iii),
and (iv), for any conflicts, violations, breaches, defaults, loss
of benefits, additional payments or other liabilities, alterations,
terminations, amendments, accelerations, cancellations, or Liens
that, or where the failure to obtain any Consents, in each case,
would not reasonably be expected to have, individually or in the
aggregate, an American Resources Material Adverse
Effect.
(c). Governmental
Consents. Except as set forth
in Section 4.03(c) of the American Resources Disclosure Schedule,
no Consent of any Governmental Entity is required to be obtained or
made by American Resources in connection with the execution,
delivery, and performance by American Resources of this Agreement
or the consummation by American Resources of the Merger, the
American Resources Stock Issuance, and the other transactions
contemplated hereby.
(d). Board
Approval. The American Resources Board by resolutions duly
adopted by a unanimous vote at a meeting of all directors of
American Resources duly called and held and, not subsequently
rescinded or modified in any way, has (A) determined that this
Agreement and the transactions contemplated hereby, including the
Merger, and the American Resources Stock Issuance, upon the terms
and subject to the conditions set forth herein, are fair to, and in
the best interests of, American Resources and the American
Resources’ stockholders, (B) approved and declared advisable
this Agreement, including the execution, delivery, and performance
thereof, and the consummation of the transactions contemplated by
this Agreement, including the Merger and the American Resources
Stock Issuance, upon the terms and subject to the conditions set
forth herein, (C) directed that the American Resources Stock
Issuance be submitted to a vote of the American Resources’
stockholders for adoption at the American Resources Stockholders
Meeting, and (D) resolved to recommend that American
Resources’ stockholders vote in favor of approval of the
American Resources Stock Issuance (collectively, the
“American Resources Board
Recommendation”).
4.04. SEC
Filings; Financial Statements; Undisclosed
Liabilities.
(a). SEC
Filings. American Resources has
timely filed with or furnished to, as applicable, the SEC all
registration statements, prospectuses, reports, schedules, forms,
statements, and other documents (including exhibits and all other
information incorporated by reference) required to be filed or
furnished by it with the SEC since September 30, 2018 (the
“American Resources SEC Documents”). True, correct, and
complete copies of all the American Resources SEC Documents are
publicly available on EDGAR. As of their respective filing dates
or, if amended or superseded by a subsequent filing prior to the
date hereof, as of the date of the last such amendment or
superseding filing (and, in the case of registration statements and
proxy statements, on the dates of effectiveness and the dates of
the relevant meetings, respectively), each of the American
Resources SEC Documents complied as to form in all material
respects with the applicable requirements of the Securities Act,
the Exchange Act, and the Sarbanes-Oxley Act, and the rules and
regulations of the SEC thereunder applicable to such American
Resources SEC Documents. None of the American Resources SEC
Documents, including any financial statements, schedules, or
exhibits included or incorporated by reference therein at the time
they were filed (or, if amended or superseded by a subsequent
filing prior to the date hereof, as of the date of the last such
amendment or superseding filing), contained any untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made,
not misleading. To the Knowledge of American Resources, none of the
American Resources SEC Documents is the subject of ongoing SEC
review or outstanding SEC investigation and there are no
outstanding or unresolved comments received from the SEC with
respect to any of the American Resources SEC Documents. None of
American Resources’ Subsidiaries is required to file or
furnish any forms, reports, or other documents with the
SEC.
(b). Financial
Statements. Each of the
consolidated financial statements (including, in each case, any
notes and schedules thereto) contained in or incorporated by
reference into the American Resources SEC Documents: (i) complied
as to form in all material respects with the published rules and
regulations of the SEC with respect thereto as of their respective
dates; (ii) was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be
indicated in the notes thereto and, in the case of unaudited
interim financial statements, as may be permitted by the SEC for
Quarterly Reports on Form 10-Q); and (iii) fairly presented in all
material respects the consolidated financial position and the
results of operations, changes in stockholders’ equity, and
cash flows of American Resources and its consolidated Subsidiaries
as of the respective dates of and for the periods referred to in
such financial statements, subject, in the case of unaudited
interim financial statements, to normal and year-end audit
adjustments as permitted by GAAP and the applicable rules and
regulations of the SEC (but only if the effect of such adjustments
would not, individually or in the aggregate, be
material).
(c). Undisclosed
Liabilities. The audited
balance sheet of American Resources dated as of January 31, 2019,
contained in the American Resources SEC Documents filed prior to
the date hereof is hereinafter referred to as the “American
Resources Balance Sheet.” Neither American Resources nor any
of its Subsidiaries has any Liabilities other than Liabilities
that: (i) are reflected or reserved against in the American
Resources Balance Sheet (including in the notes thereto); (ii) were
incurred since the date of the American Resources Balance Sheet in
the ordinary course of business consistent with past practice;
(iii) are incurred in connection with the transactions contemplated
by this Agreement; or (iv) would not reasonably be expected to
have, individually or in the aggregate, an American Resources
Material Adverse Effect.
(d). NASDAQ
Compliance. American Resources
is in compliance with all of the applicable listing and corporate
governance rules of NASDAQ, except for any non-compliance that
would not reasonably be expected to have, individually or in the
aggregate, an American Resources Material Adverse
Effect.
4.05. Absence
of Certain Changes or Events.
Since the date of the American Resources Balance Sheet, except in
connection with the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby, the
business of American Resources and each of its Subsidiaries has
been conducted in the ordinary course of business consistent with
past practice and there has not been or occurred any American
Resources Material Adverse Effect or any event, condition, change,
or effect that could reasonably be expected to have, individually
or in the aggregate, an American Resources Material Adverse
Effect.
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4.06. Compliance;
Permits.
(a). Compliance.
American Resources and each of its Subsidiaries are and, since
December 31, 2016, have been in compliance with, all Laws or Orders
applicable to American Resources or any of its Subsidiaries or by
which American Resources or any of its Subsidiaries or any of their
respective businesses or properties is bound, except for such
non-compliance that would not reasonably be expected to have,
individually or in the aggregate, an American Resources Material
Adverse Effect. Since December 31, 2016, no Governmental Entity has
issued any notice or notification stating that American Resources
or any of its Subsidiaries is not in compliance with any Law,
except where such non-compliance would not reasonably be expected
to have, individually or in the aggregate, an American Resources
Material Adverse Effect.
(b). Permits.
American Resources and its Subsidiaries hold, to the extent
necessary to operate their respective businesses as such businesses
are being operated as of the date hereof, all Permits except for
any Permits for which the failure to obtain or hold would not
reasonably be expected to have, individually or in the aggregate,
an American Resources Material Adverse Effect. No suspension,
cancellation, non-renewal, or adverse modifications of any Permits
of American Resources or any of its Subsidiaries is pending or, to
the Knowledge of American Resources, threatened, except for any
such suspension or cancellation which would not reasonably be
expected to have, individually or in the aggregate, an American
Resources Material Adverse Effect. American Resources and each of
its Subsidiaries is and, since December 31, 2016, has been in
compliance with the terms of all Permits, except where the failure
to be in such compliance would not reasonably be expected to have,
individually or in the aggregate, an American Resources Material
Adverse Effect.
4.07. Litigation.
There is no Legal Action pending, or to the Knowledge of American
Resources, threatened against American Resources or any of its
Subsidiaries or any of their respective properties or assets or, to
the Knowledge of American Resources, any officer or director of
American Resources or any of its Subsidiaries in their capacities
as such other than any such Legal Action that: (a) does not involve
an amount that would reasonably be expected to have, individually
or in the aggregate, an American Resources Material Adverse Effect;
and (b) does not seek material injunctive or other material
non-monetary relief. None of American Resources or any of its
Subsidiaries or any of their respective properties or assets is
subject to any Order of a Governmental Entity or arbitrator,
whether temporary, preliminary, or permanent, which would
reasonably be expected to have, individually or in the aggregate,
an American Resources Material Adverse Effect. To the Knowledge of
American Resources, there are no SEC inquiries or investigations,
other governmental inquiries or investigations, or internal
investigations pending or, to the Knowledge of American Resources,
threatened, in each case regarding any accounting practices of
American Resources or any of its Subsidiaries or any malfeasance by
any officer or director of American Resources.
4.08. Brokers.
Except for fees payable to Maxim Group, LLC, the fees and expenses
of which will be paid by American Resources, neither American
Resources, nor any of its Affiliates has incurred, nor will it
incur, directly or indirectly, any liability for investment banker,
brokerage, or finders’ fees or agents’ commissions, or
any similar charges in connection with this Agreement or any
transaction contemplated hereby for which the Company would be
liable in connection with the Merger.
4.09. Information
Supplied. None of the
information supplied or to be supplied by or on behalf of American
Resources for inclusion or incorporation by reference in any form
filed with the SEC, and at any time it is amended or supplemented
or at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to
make the statements therein not misleading. None of the information
supplied or to be supplied by or on behalf of American Resources
for inclusion or incorporation by reference in any proxy statement
will, at the date it is first mailed to American Resources’
stockholders or at the time of the American Resources Stockholders
Meeting or at the time of any amendment or supplement thereof,
contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made,
not misleading. Any proxy statement will comply as to form in all
material respects with the requirements of the Exchange Act.
Notwithstanding the foregoing, no representation or warranty is
made by American Resources with respect to statements made or
incorporated by reference therein based on information that was not
supplied by or on behalf of American Resources.
4.10. Ownership
of Company Common Stock.
Neither American Resources nor any of its Affiliates or Associates
owns any shares of Company Common Stock.
4.11. Intended
Tax Treatment. Neither American
Resources nor any of its Subsidiaries has taken or agreed to take
any action, and to the Knowledge of American Resources there exists
no fact or circumstance, that is reasonably likely to prevent or
impede the Merger from qualifying as a “reorganization”
within the meaning of Section 368(a) of the
Code.
4.12. Financial
Capability. American Resources
has or will have prior to the Effective Time, sufficient funds to
pay the aggregate Cash Consideration contemplated by this Agreement
and to perform the other obligations of American Resources
contemplated by this Agreement.
5. Covenants.
5.01. Conduct
of Business of the Company.
During the period from the date of this Agreement until the
Effective Time, the Company shall, and shall cause each of its
Subsidiaries, except as expressly contemplated by this Agreement,
as required by applicable Law, or with the prior written consent of
American Resources (which consent shall not be unreasonably
withheld, conditioned, or delayed), to use its reasonable best
efforts to conduct its business in the ordinary course of business
consistent with past practice. To the extent consistent therewith,
the Company shall, and shall cause each of its Subsidiaries to, use
its reasonable best efforts to preserve substantially intact its
and its Subsidiaries’ business organization, to keep
available the services of its and its Subsidiaries’ current
officers and employees, to preserve its and its Subsidiaries’
present relationships with customers, suppliers, distributors,
licensors, licensees, and other Persons having business
relationships with it. Without limiting the generality of the
foregoing, between the date of this Agreement and the Effective
Time, except as otherwise expressly contemplated by this Agreement,
as set forth in Section 5.01 of
the Company Disclosure Schedule, or as required by applicable Law,
the Company shall not, nor shall it permit any of its Subsidiaries
to, without the prior written consent of American Resources (which
consent shall not be unreasonably withheld, conditioned, or
delayed):
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(a). amend
or propose to amend its Charter Documents;
(b). (i)
split, combine, or reclassify any Company Securities or Company
Subsidiary Securities, (ii) repurchase, redeem, or otherwise
acquire, or offer to repurchase, redeem, or otherwise acquire, any
Company Securities or Company Subsidiary Securities, or (iii)
declare, set aside, or pay any dividend or distribution (whether in
cash, stock, property, or otherwise) in respect of, or enter into
any Contract with respect to the voting of, any shares of its
capital stock (other than dividends from its direct or indirect
wholly-owned Subsidiaries);
(c). issue,
sell, pledge, dispose of, or encumber any Company Securities or
Company Subsidiary Securities, other than the issuance of shares of
Company Common Stock upon the exercise of any Company Equity Award
outstanding as of the date of this Agreement in accordance with its
terms;
(d). except
as required by applicable Law or by any Company Employee Plan or
Contract in effect as of the date of this Agreement (i) increase
the compensation payable or that could become payable by the
Company or any of its Subsidiaries to directors, officers, or
employees, other than increases in compensation made to non-officer
employees in the ordinary course of business consistent with past
practice, (ii) promote any officers or employees, except in
connection with the Company’s annual or quarterly
compensation review cycle or as the result of the termination or
resignation of any officer or employee, or (iii) establish, adopt,
enter into, amend, terminate, exercise any discretion under, or
take any action to accelerate rights under any Company Employee
Plans or any plan, agreement, program, policy, trust, fund, or
other arrangement that would be a Company Employee Plan if it were
in existence as of the date of this Agreement, or make any
contribution to any Company Employee Plan, other than contributions
required by Law, the terms of such Company Employee Plans as in
effect on the date hereof, or that are made in the ordinary course
of business consistent with past practice;
(e). acquire,
by merger, consolidation, acquisition of stock or assets, or
otherwise, any business or Person or division thereof or make any
loans, advances, or capital contributions to or investments in any
Person in excess of $100,000.00 in the aggregate;
(f). (i)
transfer, license, sell, lease, or otherwise dispose of (whether by
way of merger, consolidation, sale of stock or assets, or
otherwise) or pledge, encumber, or otherwise subject to any Lien
(other than a Permitted Lien), any assets, including the capital
stock or other equity interests in any Subsidiary of the
Company; provided, that
the foregoing shall not prohibit the
Company and its Subsidiaries from transferring, selling, leasing,
or disposing of obsolete equipment or assets being replaced, or
granting of non-exclusive licenses under the Company IP, in each
case in the ordinary course of business consistent with past
practice, or (ii) adopt or effect a plan of complete or partial
liquidation, dissolution, restructuring, recapitalization, or other
reorganization;
(g). repurchase,
prepay, or incur any indebtedness for borrowed money or guarantee
any such indebtedness of another Person, issue or sell any debt
securities or options, warrants, calls, or other rights to acquire
any debt securities of the Company or any of its Subsidiaries,
guarantee any debt securities of another Person, enter into any
“keep well” or other Contract to maintain any financial
statement condition of any other Person (other than any
wholly-owned Subsidiary of it) or enter into any arrangement having
the economic effect of any of the foregoing, other than in
connection with the financing of ordinary course trade payables
consistent with past practice;
(h). enter
into or amend or modify in any material respect, or consent to the
termination of (other than at its stated expiry date), any Company
Material Contract or any Lease with respect to material Real Estate
or any other Contract or Lease that, if in effect as of the date
hereof would constitute a Company Material Contract or Lease with
respect to material Real Estate hereunder;
(i). institute,
settle, or compromise any Legal Action involving the payment of
monetary damages by the Company or any of its Subsidiaries of any
amount exceeding $50,000.00 in the aggregate, other than (i) any
Legal Action brought against American Resources arising out of a
breach or alleged breach of this Agreement by American Resources,
and (ii) the settlement of claims, liabilities, or obligations
reserved against on the Company Balance Sheet; provided, that
neither the Company nor any of its
Subsidiaries shall settle or agree to settle any Legal Action which
settlement involves a conduct remedy or injunctive or similar
relief or has a restrictive impact on the Company’s
business;
(j). make
any material change in any method of financial accounting
principles or practices;
(k). (i)
settle or compromise any material Tax claim, audit, or assessment
for an amount materially in excess of the amount reserved or
accrued on the Company Balance Sheet, (ii) make or change any
material Tax election, change any annual Tax accounting period, or
adopt or change any method of Tax accounting, (iii) amend any
material Tax Returns or file claims for material Tax refunds, or
(iv) enter into any material closing agreement, surrender in
writing any right to claim a material Tax refund, offset or other
reduction in Tax liability or consent to any extension or waiver of
the limitation period applicable to any material Tax claim or
assessment relating to the Company or its
Subsidiaries;
(l). enter
into any material agreement, agreement in principle, letter of
intent, memorandum of understanding, or similar Contract with
respect to any joint venture, strategic partnership, or
alliance;
(m). except
in connection with actions permitted by Section 5.04
hereof, take any action to exempt any
Person from, or make any acquisition of securities of the Company
by any Person not subject to, any state takeover statute or similar
statute or regulation that applies to Company with respect to a
Takeover Proposal or otherwise, except for American Resources or
the transactions contemplated by this
Agreement;
13
(n). abandon,
allow to lapse, sell, assign, transfer, grant any security interest
in otherwise encumber or dispose of any material Company IP, or
grant any right or license to any material Company IP other than
pursuant to non-exclusive licenses entered into in the ordinary
course of business consistent with past practice;
(o). terminate
or modify in any material respect, or fail to exercise renewal
rights with respect to, any material insurance policy;
(p). except
to the extent expressly permitted by Section 5.04
or Section 7, take any action that is
intended or that would reasonably be expected to, individually or
in the aggregate, prevent, materially delay, or materially impede
the consummation of the Merger, or the other transactions
contemplated by this Agreement; or
(q). agree
or commit to do any of the foregoing.
5.02. Conduct
of the Business of American Resources. During the period from the date of this
Agreement until the Effective Time, American Resources shall, and
shall cause each of its Subsidiaries, except as expressly
contemplated by this Agreement, as required by applicable Law, or
with the prior written consent of the Company (which consent shall
not be unreasonably withheld, conditioned, or delayed), to use its
reasonable best efforts to conduct its business in the ordinary
course of business consistent with past practice. Without limiting
the generality of the foregoing, between the date of this Agreement
and the Effective Time, except as otherwise expressly contemplated
by this Agreement, as set forth in Section 5.02 of
the American Resources Disclosure
Schedule, or as required by applicable Law, American Resources
shall not, nor shall it permit any of its Subsidiaries to, without
the prior written consent of the Company (which consent shall not
be unreasonably withheld, conditioned, or
delayed):
(a). amend
its Charter Documents in a manner that would adversely affect the
Company or the holders of Company Common Stock relative to the
other holders of American Resources Common Stock;
(b). (i)
split, combine, or reclassify any American Resources Securities or
American Resources Subsidiary Securities in a manner that would
adversely affect the Company or the holders of Company Common Stock
relative to the other holders of American Resources Common Stock,
(ii) repurchase, redeem, or otherwise acquire, or offer to
repurchase, redeem, or otherwise acquire, any American Resources
Securities or American Resources Subsidiary Securities, or (iii)
declare, set aside, or pay any dividend or distribution (whether in
cash, stock, property, or otherwise) in respect of, or enter into
any Contract with respect to the voting of, any shares of its
capital stock (other than dividends from its direct or indirect
wholly-owned Subsidiaries and ordinary quarterly dividends,
consistent with past practice with respect to timing of declaration
and payment);
(c). issue,
sell, pledge, dispose of, or encumber any American Resources
Securities or American Resources Subsidiary Securities, other than
(i) the issuance of shares of American Resources Common Stock upon
the exercise of any American Resources Equity Awards outstanding as
of the date of this Agreement in accordance with its terms, (ii)
the issuance of shares of American Resources Common Stock in
connection with or upon the exercise of any American Resources
Equity Awards granted after the date hereof in the ordinary course
of business consistent with past practice, and (iii) sales or
issuances of shares of American Resources Common Stock or
convertible securities in an amount not exceeding 5% of the issued
and outstanding shares of American Resources Common Stock (in the
case of convertible securities, on an as-converted basis) as of the
date of this Agreement;
(d). acquire,
by merger, consolidation, acquisition of stock or assets, or
otherwise, any business or Person or division thereof or make any
loans, advances, or capital contributions to or investments in any
Person, in each case that would reasonably be expected to prevent,
impede, or materially delay the consummation of the Merger or other
transactions contemplated by this Agreement;
(e). adopt
or effect a plan of complete or partial liquidation, dissolution,
restructuring, recapitalization, or other
reorganization;
(f). except
to the extent expressly permitted by Section 5.04
or Section 7, take any action that is
intended or that would reasonably be expected to, individually or
in the aggregate, prevent, impede, or materially delay the
consummation of the Merger, or the other transactions contemplated
by this Agreement; or
(g). agree
or commit to do any of the foregoing.
5.03. Access
to Information; Confidentiality.
(a). Access
to Information. From the date
of this Agreement until the earlier to occur of the Effective Time
or the termination of this Agreement in accordance with the terms
set forth in Section 7, the Company shall, and shall cause its
Subsidiaries to, afford to American Resources and American
Resources’ Representatives reasonable access, at reasonable
times and in a manner as shall not unreasonably interfere with the
business or operations of the Company or any Subsidiary thereof, to
the officers, employees, accountants, agents, properties, offices,
and other facilities and to all books, records, contracts, and
other assets of the Company and its Subsidiaries, and the Company
shall, and shall cause its Subsidiaries to, furnish promptly to
American Resources such other information concerning the business
and properties of the Company and its Subsidiaries as American
Resources may reasonably request from time to time. Neither the
Company nor any of its Subsidiaries shall be required to provide
access to or disclose information where such access or disclosure
would jeopardize the protection of attorney-client privilege or
contravene any Law (it being agreed that the parties shall use
their reasonable best efforts to cause such information to be
provided in a manner that would not result in such jeopardy or
contravention). No investigation shall affect the Company’s
representations, warranties, covenants, or agreements contained
herein, or limit or otherwise affect the remedies available to
American Resources pursuant to this Agreement.
14
(b). Confidentiality.
[reserved].
5.04. Company
Stockholders Meeting. The
Company shall take all action necessary to duly call, give notice
of, convene, and hold the Company Stockholders Meeting as soon as
reasonably practicable.
5.05. American
Resources Stockholders Meeting. American
Resources shall take all action necessary to duly call, give notice
of, convene, and hold the American Resources Stockholders Meeting
as soon as reasonably practicable.
5.06. McCoy
Elkhorn Coal LLC. Immediately
subsequent to the Merger, American Resources shall take all steps
necessary to cause the assets of the Company to ultimately be owned
by McCoy Elkhorn Coal LLC, the single-member limited liability
company owned by Quest Energy, Inc., American Resources’
wholly-owned subsidiary.
5.07. Company
Bond. American Resources and
its Subsidiaries shall cause the Company surety bonds in place
prior to Closing to be released within thirty (30) days after
Closing and the cash collateral for such bonds shall be delivered
to the holders of shares of Company Common Stock. This Section and
the covenants set forth herein shall expressly survive
Closing.
5.08. Public
Announcements. The initial
press release with respect to this Agreement and the transactions
contemplated hereby shall be a release mutually agreed to by the
Company and American Resources. Thereafter, no public release or
announcement concerning the transactions contemplated hereby shall
be issued by any party without the prior written consent of the
Company and American Resources (which consent shall not be
unreasonably withheld, conditioned, or delayed), except as may be
required by applicable Law or the rules or regulations of any
applicable United States securities exchange or other Governmental
Entity to which the relevant party is subject or submits, in which
case the party required to make the release or announcement shall
use its reasonable best efforts to allow the other party reasonable
time to comment on such release or announcement in advance of such
issuance.
5.09. Section
16 Matters. Prior to the
Effective Time, the Company and American Resources shall each take
all such steps as may be required to cause to be exempt under Rule
16b-3 promulgated under the Exchange Act:
(a). any
dispositions of shares of Company Common Stock (including
derivative securities with respect to such shares) that are treated
as dispositions under such rule and result from the transactions
contemplated by this Agreement by each director or officer of the
Company who is subject to the reporting requirements of Section
16(a) of the Exchange Act with respect to the Company immediately
prior to the Effective Time; and
(b). any
acquisitions of American Resources Common Stock (including
derivative securities with respect to such shares) that are treated
as acquisitions under such rule and result from the transactions
contemplated by this Agreement by each individual who may become or
is reasonably expected to become subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to
American Resources immediately after the Effective
Time.
5.10. Stock
Exchange Matters.
American Resources shall use its
reasonable best efforts to cause the shares of American Resources
Common Stock to be issued in connection with the Merger to be
listed on NASDAQ (or such other stock exchange as may be mutually
agreed upon by the Company and American Resources), subject to
official notice of issuance, prior to the Effective
Time.
6. Conditions.
6.01. Conditions
to Each Party’s Obligation to Effect the
Merger. The respective
obligations of each party to this Agreement to effect the Merger is
subject to the satisfaction or waiver (where permissible pursuant
to applicable Law) on or prior to the Closing Date of each of the
following conditions:
(a). Company
Stockholder Approval. This
Agreement will have been duly adopted by the Requisite Company
Vote.
(b). American
Resources Stockholder Approval.
The American Resources Stock Issuance will have been approved by
the Requisite American Resources Vote.
(c). Listing.
The shares of American Resources Common Stock issuable as Merger
Consideration pursuant to this Agreement shall have been approved
for listing on NASDAQ, subject to official notice of
issuance.
(d). Form
S-4. The Form S-4 shall have
become effective under the Securities Act and shall not be the
subject of any stop order.
(e). Regulatory
Approvals. All waiting periods
applicable to the consummation of the Merger under the HSR Act (or
any extension thereof) shall have expired or been terminated and
all required filings shall have been made and all required
approvals obtained (or waiting periods expired or terminated) under
applicable Antitrust Laws.
15
(f). No
Injunctions, Restraints, or Illegality. No Governmental Entity having jurisdiction over
any party hereto shall have enacted, issued, promulgated, enforced,
or entered any Laws or Orders, whether temporary, preliminary, or
permanent, that make illegal, enjoin, or otherwise prohibit
consummation of the Merger, the American Resources Stock Issuance,
or the other transactions contemplated by this
Agreement.
6.02. Conditions
to Obligations of American Resources. The obligations of American Resources to effect
the Merger are also subject to the satisfaction or waiver (where
permissible pursuant to applicable Law) by American Resources on or
prior to the Effective Time of the following
conditions:
(a). Representations
and Warranties. The
representations and warranties of the Company this Agreement shall
be true and correct in all respects when made and on and as of the
Closing Date, as if made on and as of such date (except those
representations and warranties that address matters only as of a
particular date, which shall be true and correct in all respects as
of that date), except where the failure of such representations and
warranties to be so true and correct would not reasonably be
expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
(b). Performance
of Covenants. The Company shall
have performed in all material respects all obligations, and
complied in all material respects with the agreements and
covenants, in this Agreement required to be performed by or
complied with by it at or prior to the Closing
Date.
(c). Company
Material Adverse Effect. Since
the date of this Agreement, there shall not have been any Company
Material Adverse Effect or any event, change, or effect that would,
individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect.
6.03. Conditions
to Obligation of the Company.
The obligation of the Company to effect the Merger is also subject
to the satisfaction or waiver by the Company on or prior to the
Effective Time of the following conditions:
(a). Representations
and Warranties. The
representations and warranties of American Resources set forth in
this Agreement shall be true and correct in all respects when made
and on and as of the Closing Date, as if made on and as of such
date (except those representations and warranties that address
matters only as of a particular date, which shall be true and
correct in all respects as of that date), except where the failure
of such representations and warranties to be so true and correct
would not reasonably be expected to have, individually or in the
aggregate, an American Resources Material Adverse
Effect.
(b). Performance
of Covenants. American
Resources shall have performed in all material respects all
obligations, and complied in all material respects with the
agreements and covenants, of this Agreement required to be
performed by or complied with by them at or prior to the Closing
Date.
(c). American
Resources Material Adverse Effect. Since the date of this Agreement, there shall
not have been any American Resources Material Adverse Effect or any
event, change, or effect that would, individually or in the
aggregate, reasonably be expected to have an American Resources
Material Adverse Effect.
(d). Consents.
(i). The
Company will have received written consent regarding the effect of
the Merger and any change of control or assignment provision in any
Company Material Contract, including without limitation, that
certain Amended and Restated Agreement of Lease dated January 1,
1992, by and between the Company and Kentucky Berwind Land
Company.
(ii). The
Company will have received written consent from Community Trust
Bank regarding the effect of the Merger and any change of control,
assignment provision or other applicable provision within the
Company’s loan documents with Community Trust
Bank.
(e). Assignment
Prior to Closing. The Company
shall have transferred, assigned or distributed the Company’s
rights, title and interest in and to that certain Forbearance
Agreement dated April 29, 2016, by and among Empire Coal Holdings,
LLC, the Company, Revelation Energy, LLC and Empire Coal
Processing, LLC.
(f). Empire
Coal Holdings, LLC Merger. The
closing of the merger transaction by and between Empire Coal
Holdings, LLC and McCoy Elkhorn Coal LLC, the consideration for
which shall be $2,500,000.00 (payable $500,000.00 upon the
execution of the definitive agreement between Empire Coal Holdings,
LLC and McCoy Elkhorn Coal LLC and a promissory note in the
original principal amount of $2,000,000.00 delivered at closing)
shall occur immediately prior to the Closing.
7. Termination,
Amendment, and Waiver.
7.01. Termination
by Mutual Consent. This
Agreement may be terminated at any time prior to the Effective Time
(whether before or after the receipt of the Requisite Company Vote
or the Requisite American Resources Vote) by the mutual written
consent of American Resources and the Company.
7.02. Termination
by Either American Resources or the Company. This Agreement may be terminated by either
American Resources or the Company at any time prior to the
Effective Time (whether before or after the receipt of the
Requisite Company Vote or the Requisite American Resources
Vote):
(a). if
the Merger shall not have been consummated on or prior to 5:00
p.m., Eastern Time, on March 15, 2019 (the “End
Date”); provided,
however, that the right to
terminate this Agreement pursuant to this Section 7.02(a)
shall not be available to any party
whose breach of any representation, warranty, covenant, or
agreement set forth in this Agreement has been the cause of, or
resulted in, the failure of the Merger to be consummated on or
before the End Date;
16
(b). if
any Governmental Entity of competent jurisdiction shall have
enacted, issued, promulgated, enforced, or entered any Law or Order
making illegal, permanently enjoining, or otherwise permanently
prohibiting the consummation of the Merger, the American Resources
Stock Issuance, or the other transactions contemplated by this
Agreement, and such Law or Order shall have become final and
nonappealable; provided,
however, that the right to
terminate this Agreement pursuant to this Section 7.02(b)
shall not be available to any party
whose breach of any representation, warranty, covenant, or
agreement set forth in this Agreement has been the cause of, or
resulted in, the issuance, promulgation, enforcement, or entry of
any such Law or Order;
(c). if
this Agreement has been submitted to the stockholders of the
Company for adoption at a duly convened Company Stockholders
Meeting and the Requisite Company Vote shall not have been obtained
at such meeting (unless such Company Stockholders Meeting has been
adjourned or postponed, in which case at the final adjournment or
postponement thereof); or
(d). if
the American Resources Stock Issuance has been submitted to the
stockholders of American Resources for approval at a duly convened
American Resources Stockholders Meeting and the Requisite American
Resources Vote shall not have been obtained at such meeting (unless
such American Resources Stockholders Meeting has been adjourned or
postponed, in which case at the final adjournment or postponement
thereof).
7.03. Termination
by American Resources. This
Agreement may be terminated by American Resources at any time prior
to the Effective Time:
(a). if
prior to the receipt of the Requisite American Resources Vote at
the American Resources Stockholders Meeting, the American Resources
Board authorizes American Resources, in full compliance with the
terms of this Agreement, to enter into an Acquisition Agreement
(other than an Acceptable Confidentiality Agreement) in respect of
a Superior Proposal; provided, that
American Resources shall have paid any
amounts due pursuant to Section 7.06(b)(ii) hereof
in accordance with the terms, and at
the times, specified therein; and provided
further, that in the event of
such termination, American Resources substantially concurrently
enters into such Acquisition Agreement;
(b). if:
(i) a Company Adverse Recommendation Change shall have occurred; or
(ii) the Company shall have breached or failed to perform in any
material respect any of its covenants and agreements set forth in
this Agreement; or
(c). if
there shall have been a breach of any representation, warranty,
covenant, or agreement on the part of the Company set forth in this
Agreement such that the conditions to the Closing of the Merger set
forth in Section 6.02 would not be satisfied; provided, that
American Resources shall not have the
right to terminate this Agreement pursuant to this Section
7.03(c) if American Resources is then
in material breach of any representation, warranty, covenant, or
obligation hereunder, which breach has not been
cured.
7.04. Termination
by the Company. This Agreement
may be terminated by the Company at any time prior to the Effective
Time:
(a). if
prior to the receipt of the Requisite Company Vote at the Company
Stockholders Meeting, the Company Board authorizes the Company, in
full compliance with the terms of this Agreement to enter into an
Acquisition Agreement (other than an Acceptable Confidentiality
Agreement) in respect of a Superior Proposal; provided, that
the Company shall have paid any
amounts due pursuant to Section 7.06(b)(i) hereof
in accordance with the terms, and at
the times, specified therein; and provided
further, that in the event of
such termination, the Company substantially concurrently enters
into such Acquisition Agreement; or
(b). if:
(i) a American Resources Adverse Recommendation Change shall have
occurred; or (ii) American Resources shall have breached or failed
to perform in any material respect any of its covenants and
agreements set forth in this Agreement; or
(c). if
there shall have been a breach of any representation, warranty,
covenant, or agreement on the part of American Resources set forth
in this Agreement such that the conditions to the Closing of the
Merger set forth in Section 6.03 would not be satisfied;
provided,
that the Company shall not have
the right to terminate this Agreement pursuant to this
Section 7.04(c) if the Company is then
in material breach of any representation, warranty, covenant, or
obligation hereunder, which breach has not been
cured.
7.05. Notice
of Termination; Effect of Termination. The party desiring to terminate this Agreement
pursuant to this Section 7 (other than pursuant to Section 7.01)
shall deliver written notice of such termination to each other
party hereto specifying with particularity the reason for such
termination, and any such termination in accordance with this
Section 7.05 shall be effective immediately upon delivery of such
written notice to the other party. If this Agreement is terminated
pursuant to this Section 7, it will become void and of no further
force and effect, with no liability on the part of any party to
this Agreement (or any stockholder, director, officer, employee,
agent, or Representative of such party) to any other party hereto,
except: (a) with respect to, this Section 7.05, Section
7.06, and Section 8 (and any related
definitions contained in any such Sections or Article), which shall
remain in full force and effect; and (b) with respect to any
liabilities or damages incurred or suffered by a party, to the
extent such liabilities or damages were the result of fraud or the
breach by another party of any of its representations, warranties,
covenants, or other agreements set forth in this
Agreement.
7.06. Fees
and Expenses Following Termination.
(a). If
this Agreement is terminated by American Resources pursuant
to Section 7.03(a), or by the Company pursuant to Section 7.04(b)
or Section 7.04(c), then American
Resources shall pay to the Company (by wire transfer of immediately
available funds), at or prior to such termination, $500,000.00 (the
“American Resources Termination Fee”) plus the
Company’s Expenses actually incurred by the Company on or
prior to the termination of this Agreement.
17
(b). The
parties acknowledge and hereby agree that the provisions of
this Section 7.06 are an integral part
of the transactions contemplated by this Agreement (including the
Merger), and that, without such provisions, the parties would not
have entered into this Agreement. If American Resources shall fail
to pay in a timely manner the amounts due pursuant to this
Section 7.06, and, in order to obtain
such payment, the other party makes a claim against the non-paying
party that results in a judgment, the non-paying party shall pay to
the other party the reasonable costs and expenses (including its
reasonable attorneys’ fees and expenses) incurred or accrued
in connection with such suit, together with interest on the amounts
set forth in this Section 7.06 at the prime lending rate prevailing during such
period as published in The Wall Street
Journal. Any interest payable
hereunder shall be calculated on a daily basis from the date such
amounts were required to be paid until (but excluding) the date of
actual payment, and on the basis of a 360-day year. The parties
acknowledge and agree that in no event shall American Resources be
required to pay the American Resources Termination Fee on more than
one occasion.
(c). Except
as expressly set forth in this Section 7.06, all Expenses incurred in connection with this
Agreement and the transactions contemplated hereby will be paid by
the party incurring such Expenses.
7.07. Amendment.
At any time prior to the Effective Time, this Agreement may be
amended or supplemented in any and all respects, whether before or
after receipt of the Requisite Company Vote or the Requisite
American Resources Vote, by written agreement signed by each of the
parties hereto; provided,
however, that: (a) following
the receipt of the Requisite Company Vote, there shall be no
amendment or supplement to the provisions of this Agreement which
by Law or in accordance with the rules of any relevant
self-regulatory organization would require further approval by the
holders of Company Common Stock without such approval; and (b)
following the receipt of the Requisite American Resources Vote,
there shall be no amendment or supplement to the provisions of this
Agreement which by Law or in accordance with the rules of any
relevant self-regulatory organization would require further
approval by the holders of American Resources Common Stock without
such approval.
7.08. Extension;
Waiver. At any time prior to
the Effective Time, American Resources or the Company may: (a)
extend the time for the performance of any of the obligations of
the other party(ies); (b) waive any inaccuracies in the
representations and warranties of the other party(ies) contained in
this Agreement or in any document delivered under this Agreement;
or (c) unless prohibited by applicable Law, waive compliance with
any of the covenants, agreements, or conditions contained in this
Agreement. Any agreement on the part of a party to any extension or
waiver will be valid only if set forth in an instrument in writing
signed by such party. The failure of any party to assert any of its
rights under this Agreement or otherwise will not constitute a
waiver of such rights.
8. Miscellaneous.
8.01. Definitions.
For purposes of this Agreement, defined terms will have the
meanings set forth in Appendix A, attached hereto and incorporated
herein by reference, when used herein with initial capital
letters.
8.02. Interpretation;
Construction.
(a). The
table of contents and headings herein are for convenience of
reference only, do not constitute part of this Agreement and shall
not be deemed to limit or otherwise affect any of the provisions
hereof. Where a reference in this Agreement is made to a Section,
Exhibit, or Schedule, such reference shall be to a Section of,
Exhibit to, or Schedule of this Agreement unless otherwise
indicated. Unless the context otherwise requires, references
herein: (i) to an agreement, instrument, or other document means
such agreement, instrument, or other document as amended,
supplemented, and modified from time to time to the extent
permitted by the provisions thereof; and (ii) to a statute means
such statute as amended from time to time and includes any
successor legislation thereto and any regulations promulgated
thereunder. Whenever the words “include,”
“includes,” or “including” are used in this
Agreement, they shall be deemed to be followed by the words
“without limitation,” and the word “or” is
not exclusive. The word “extent” in the phrase
“to the extent” means the degree to which a subject or
other thing extends, and does not simply mean “if.” A
reference in this Agreement to $ or dollars is to U.S. dollars. The
definitions of terms herein shall apply equally to the singular and
plural forms of the terms defined. The words “hereof,”
“herein,” “hereby,” “hereto,”
and “hereunder” and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not
to any particular provision of this Agreement. References to
“this Agreement” shall include the Company Disclosure
Schedule and American Resources Disclosure Schedule.
(b). The
parties have participated jointly in negotiating and drafting this
Agreement. In the event that an ambiguity or a question of intent
or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of
the authorship of any provision of this Agreement.
8.03. Survival.
None of the representations and warranties contained in this
Agreement or in any instrument delivered under this Agreement will
survive the Effective Time. This Section 8.03 does
not limit any covenant or agreement of
the parties contained in this Agreement which, by its terms,
contemplates performance after the Effective
Time.
8.04. Governing
Law. This Agreement and all
Legal Actions (whether based on contract, tort, or statute) arising
out of or relating to this Agreement or the actions of any of the
parties hereto in the negotiation, administration, performance, or
enforcement hereof, shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Kentucky without giving effect to
any choice or conflict of law provision or rule (whether of the
Commonwealth of Kentucky or any other jurisdiction) that would
cause the application of Laws of any jurisdiction other than those
of the Commonwealth of
Kentucky.
8.05. Submission
to Jurisdiction. Each of the
parties hereto irrevocably agrees that any Legal Action with
respect to this Agreement and the rights and obligations arising
hereunder, or for recognition and enforcement of any judgment in
respect of this Agreement and the rights and obligations arising
hereunder brought by any other party hereto or its successors or
assigns shall be brought and determined exclusively in the
Commonwealth of Kentucky, or in the event (but only in the event)
that such court does not have subject matter jurisdiction over such
Legal Action, in the Commonwealth of Kentucky. Each of the parties
hereto agrees that mailing of process or other papers in connection
with any such Legal Action in the manner provided in Section
8.07 or in such other manner as may be
permitted by applicable Laws, will be valid and sufficient service
thereof. Each of the parties hereto hereby irrevocably submits with
regard to any such Legal Action for itself and in respect of its
property, generally and unconditionally, to the personal
jurisdiction of the aforesaid courts and agrees that it will not
bring any Legal Action relating to this Agreement or any of the
transactions contemplated by this Agreement in any court or
tribunal other than the aforesaid courts. Each of the parties
hereto hereby irrevocably waives, and agrees not to assert, by way
of motion, as a defense, counterclaim, or otherwise, in any Legal
Action with respect to this Agreement and the rights and
obligations arising hereunder, or for recognition and enforcement
of any judgment in respect of this Agreement and the rights and
obligations arising hereunder: (a) any claim that it is not
personally subject to the jurisdiction of the above named courts
for any reason other than the failure to serve process in
accordance with this Section 8.05; (b) any claim that it or its property is exempt or
immune from jurisdiction of any such court or from any legal
process commenced in such courts (whether through service of
notice, attachment prior to judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise); and (c)
to the fullest extent permitted by the applicable Law, any claim
that (i) the suit, action, or proceeding in such court is brought
in an inconvenient forum, (ii) the venue of such suit, action, or
proceeding is improper, or (iii) this Agreement, or the subject
matter hereof, may not be enforced in or by such
courts.
18
8.06. Waiver
of Jury Trial. EACH PARTY
ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER
THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LEGAL ACTION ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH
PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT: (A) NO
REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO ENFORCE THE
FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION; (B) SUCH PARTY HAS
CONSIDERED THE IMPLICATIONS OF THIS WAIVER; (C) SUCH PARTY MAKES
THIS WAIVER VOLUNTARILY; AND (D) SUCH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION
8.06.
8.07. Notices.
All notices, requests, consents, claims, demands, waivers, and
other communications hereunder shall be in writing and shall be
deemed to have been given: (a) when delivered by hand (with written
confirmation of receipt); (b) when received by the addressee if
sent by a nationally recognized overnight courier (receipt
requested); (c) on the date sent by facsimile or email of a PDF
document (with confirmation of transmission) if sent during normal
business hours of the recipient, and on the next Business Day if
sent after normal business hours of the recipient; or (d) on the
third day after the date mailed, by certified or registered mail,
return receipt requested, postage prepaid. Such communications must
be sent to the respective parties at the following addresses (or at
such other address for a party as shall be specified in a notice
given in accordance with this Section 8.07) or to such other Persons, addresses or facsimile
numbers as may be designated in writing by the Person entitled to
receive such communication as provided above.
8.08. Entire
Agreement. This Agreement
(including the Exhibits to this Agreement), the Company Disclosure
Schedule, the American Resources Disclosure Schedule, and the
Confidentiality Agreement constitute the entire agreement among the
parties with respect to the subject matter of this Agreement and
supersede all other prior agreements and understandings, both
written and oral, among the parties to this Agreement with respect
to the subject matter of this Agreement. In the event of any
inconsistency between the statements in the body of this Agreement,
the Confidentiality Agreement, the American Resources Disclosure
Schedule, and the Company Disclosure Schedule (other than an
exception expressly set forth as such in the American Resources
Disclosure Schedule or Company Disclosure Schedule), the statements
in the body of this Agreement will control.
8.09. No
Third-Party Beneficiaries. This
Agreement is for the sole benefit of the parties hereto and their
permitted assigns and respective successors and nothing herein,
express or implied, is intended to or shall confer upon any other
Person or entity any legal or equitable right, benefit, or remedy
of any nature whatsoever under or by reason of this
Agreement.
8.10. Severability.
If any term or provision of this Agreement is invalid, illegal, or
unenforceable in any jurisdiction, such invalidity, illegality, or
unenforceability shall not affect any other term or provision of
this Agreement or invalidate or render unenforceable such term or
provision in any other jurisdiction. Upon such determination that
any term or other provision is invalid, illegal, or unenforceable,
the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that
the transactions contemplated hereby be consummated as originally
contemplated to the greatest extent possible.
8.11. Assignment.
This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and permitted
assigns. Neither American Resources nor the Company may assign its
rights or obligations hereunder without the prior written consent
of the other party, which consent shall not be unreasonably
withheld, conditioned, or delayed. No assignment shall relieve the
assigning party of any of its obligations
hereunder.
8.12. Remedies.
Except as otherwise provided in this Agreement, any and all
remedies expressly conferred upon a party to this Agreement will be
cumulative with, and not exclusive of, any other remedy contained
in this Agreement, at Law, or in equity. The exercise by a party to
this Agreement of any one remedy will not preclude the exercise by
it of any other remedy.
8.13. Counterparts;
Effectiveness. This Agreement
may be executed in any number of counterparts, all of which will be
one and the same agreement. This Agreement will become effective
when each party to this Agreement will have received counterparts
signed by all of the other parties.
[SPACE INTENTIONALLY BLANK; SIGNATURES ON FOLLOWING
PAGE]
19
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first written above by their respective
officers thereunto duly authorized.
EMPIRE KENTUCKY LAND, INC.
By:
/s/ Greg B. McDonald
Greg
B. McDonald, President
(the
“Company”)
AMERICAN RESOURCES CORPORATION
By:
/s/ Mark C. Jensen
Mark
C. Jensen, Chief Executive Officer
(“American
Resources”)
20
APPENDIX A
DEFINED TERMS
“Acquisition Agreement” has the meaning set forth in
Section 5.04(a).
“Affiliate” means, with respect to any Person, any
other Person that directly or indirectly controls, is controlled
by, or is under common control with, such first Person. For the
purposes of this definition, “control” (including, the
terms “controlling,” “controlled by,” and
“under common control with”), as applied to any Person,
means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of
that Person, whether through the ownership of voting securities, by
Contract, or otherwise.
“Affordable Care Act” means the Patient Protection and
Affordable Care Act (PPACA), as amended by the Health Care and
Education Reconciliation Act (HCERA).
“Agreement” has the meaning set forth in the
Preamble.
“Antitrust Laws” has the meaning set forth in Section
3.03(c).
“Book-Entry Share” has the meaning set forth in Section
2.01(c).
“Business Day” means any day, other than Saturday,
Sunday, or any day on which banking institutions located in
Commonwealth of Kentucky are authorized or required by Law or other
governmental action to close.
“Cancelled Shares” has the meaning set forth in Section
2.01(a).
“Certificate” has the meaning set forth in Section
2.01(c).
“Charter Documents” means: (a) with respect to a
corporation, the charter, articles or certificate of incorporation,
as applicable, and bylaws thereof; (b) with respect to a limited
liability company, the certificate of formation or organization, as
applicable, and the operating or limited liability company
agreement, as applicable, thereof; (c) with respect to a
partnership, the certificate of formation and the partnership
agreement; and (d) with respect to any other Person the
organizational, constituent and/or governing documents and/or
instruments of such Person.
“Closing” has the meaning set forth in Section
1.02.
“Closing Date” has the meaning set forth in Section
1.02.
“COBRA” means the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, and as codified in Section
4980B of the Code and Section 601 et. seq. of ERISA.
“Code” has the meaning set forth in the
Recitals.
“Company” has the meaning set forth in the
Preamble.
“Company Adverse Recommendation Change” shall mean the
Company Board: (a) failing to make, withdraw, amend, modify, or
materially qualify, in a manner adverse to American Resources, the
Company Board Recommendation; (b) failing to include the Company
Board Recommendation in the Joint Proxy Statement that is mailed to
the Company’s stockholders; (c) recommending a Takeover
Proposal; (d) failing to recommend against acceptance of any tender
offer or exchange offer for the shares of Company Common Stock
within ten Business Days after the commencement of such offer; (e)
failing to reaffirm (publicly, if so requested by American
Resources) the Company Board Recommendation within ten Business
Days after the date any Takeover Proposal (or material modification
thereto) is first publicly disclosed by the Company or the Person
making such Takeover Proposal; (f) making any public statement
inconsistent with the Company Board Recommendation; or (g)
resolving or agreeing to take any of the foregoing
actions.
21
“Company Balance Sheet” has the meaning set forth in
Section 3.04(e).
“Company Board” has the meaning set forth in the
Recitals.
“Company Board Recommendation” has the meaning set
forth in Section 3.03(d).
“Company Common Stock” has the meaning set forth in the
Recitals.
“Company Disclosure Schedule” means the disclosure
schedule, dated as of the date of this Agreement and delivered by
the Company to American Resources concurrently with the execution
of this Agreement.
“Company Equity Award” means a Company Stock Option or
a Company Restricted Share granted under one of the Company Stock
Plans, as the case may be.
“Company Financial Advisor” has the meaning set forth
in Section 3.10.
“Company IP” has the meaning set forth in Section
3.07(b).
“Company IP Agreements” means all licenses,
sublicenses, consent to use agreements, settlements, coexistence
agreements, covenants not to sue, waivers, releases, permissions,
and other Contracts, whether written or oral, relating to
Intellectual Property and to which the Company or any of its
Subsidiaries is a party, beneficiary, or otherwise
bound.
“Company IT Systems” means all software, computer
hardware, servers, networks, platforms, peripherals, data
communication lines, and other information technology equipment and
related systems that are owned or used by the Company or any of its
Subsidiaries.
“Company Material Adverse Effect” means any event,
occurrence, fact, condition, or change that is, or would reasonably
be expected to become, individually or in the aggregate, materially
adverse to: (a) the business, results of operations, condition
(financial or otherwise), or assets of the Company and its
Subsidiaries, taken as a whole; or (b) the ability of the Company
to consummate the transactions contemplated hereby on a timely
basis; provided, however, that a Company Material Adverse Effect
shall not be deemed to include events, occurrences, facts,
conditions or changes arising out of, relating to, or resulting
from: (i) changes generally affecting the economy, financial, or
securities markets; (ii) the announcement of the transactions
contemplated by this Agreement; (iii) any outbreak or escalation of
war or any act of terrorism; or (iv) general conditions in the
industry in which the Company and its Subsidiaries operate;
provided further, however, that any event, change, and effect
referred to in clauses (i), (iii), or (iv) immediately above shall
be taken into account in determining whether a Company Material
Adverse Effect has occurred or would reasonably be expected to
occur to the extent that such event, change, or effect has a
disproportionate effect on the Company and its Subsidiaries, taken
as a whole, compared to other participants in the industries in
which the Company and its Subsidiaries conduct their
businesses.
“Company Material Contract” has the meaning set forth
in Section 3.15(a).
“Company-Owned IP” means all Intellectual Property
owned by the Company or any of its Subsidiaries.
“Company Preferred Stock” has the meaning set forth in
Section 3.02(a).
“Company Restricted Share” has the meaning set forth in
Section 2.07(b).
“Company Securities” has the meaning set forth in
Section 3.02(b)(ii).
“Company Stock Option” has the meaning set forth in
Section 2.07(a).
“Company Stock Plans” means the following plans, in
each case as amended: [LIST OF PLANS].
“Company Stockholders Meeting” means the special
meeting of the stockholders of the Company to be held to consider
the adoption of this Agreement.
“Company Subsidiary Securities” has the meaning set
forth in Section 3.02(d).
“Confidentiality Agreement” has the meaning set forth
in Section 5.03(b).
“Consent” has the meaning set forth in Section
3.03(c).
“Contracts” means any contracts, agreements, licenses,
notes, bonds, mortgages, indentures, leases, or other binding
instruments or binding commitments, whether written or
oral.
22
“Dissenting Shares” has the meaning set forth in
Section 2.03.
“EDGAR” has the meaning set forth in Section
3.04(a).
“Effective Time” has the meaning set forth in Section
1.03(a).
“End Date” has the meaning set forth in Section
7.02(a).
“Environmental Laws” means any applicable Law, and any
Order or binding agreement with any Governmental Entity: (a)
relating to pollution (or the cleanup thereof) or the protection of
natural resources, endangered or threatened species, human health
or safety, or the environment (including ambient air, soil, surface
water or groundwater, or subsurface strata); or (b) concerning the
presence of, exposure to, or the management, manufacture, use,
containment, storage, recycling, reclamation, reuse, treatment,
generation, discharge, transportation, processing, production,
disposal or remediation of any Hazardous Materials. The term
“Environmental Law” includes, without limitation, the
following (including their implementing regulations and any state
analogs): the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et
seq.; the Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976, as amended by the Hazardous
and Solid Waste Amendments of 1984, 42 U.S.C. §§ 6901 et
seq.; the Federal Water Pollution Control Act of 1972, as amended
by the Clean Water Act of 1977, 33 U.S.C. §§ 1251 et
seq.; the Toxic Substances Control Act of 1976, as amended, 15
U.S.C. §§ 2601 et seq.; the Emergency Planning and
Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001
et seq.; the Clean Air Act of 1966, as amended by the Clean Air Act
Amendments of 1990, 42 U.S.C. §§ 7401 et seq.; and the
Occupational Safety and Health Act of 1970, as amended, 29 U.S.C.
§§ 651 et seq.
“ERISA” means the Employee Retirement Income Security
Act of 1974, as amended.
“Exchange Act” has the meaning set forth in Section
3.03(c).
“Exchange Agent” has the meaning set forth in Section
2.02(a).
“Exchange Fund” has the meaning set forth in Section
2.02(a).
“Exchange Ratio” has the meaning set forth in Section
2.01(b).
“Expenses” means, with respect to any Person, all
reasonable and documented out-of-pocket fees and expenses
(including all fees and expenses of counsel, accountants, financial
advisors, and investment bankers of such Person and its
Affiliates), incurred by such Person or on its behalf in connection
with or related to the authorization, preparation, negotiation,
execution, and performance of this Agreement and any transactions
related thereto.
“Certificate of Merger” has the meaning set forth in
Section 1.03(a).
“Merger” has the meaning set forth in the
Recitals.
“Foreign Antitrust Laws” has the meaning set forth in
Section 3.03(c).
“Form S-4” has the meaning set forth in Section
3.17.
“GAAP” has the meaning set forth in Section
3.04(b).
“Governmental Antitrust Authority” has the meaning set
forth in Section 5.11(b).
“Governmental Entity” has the meaning set forth in
Section 3.03(c).
“Hazardous Substance” shall mean: (a) any material,
substance, chemical, waste, product, derivative, compound, mixture,
solid, liquid, mineral, or gas, in each case, whether naturally
occurring or man-made, that is hazardous, acutely hazardous, toxic,
or words of similar import or regulatory effect under Environmental
Laws; and (b) any petroleum or petroleum-derived products, radon,
radioactive materials or wastes, asbestos in any form, lead or
lead-containing materials, urea formaldehyde foam insulation, and
polychlorinated biphenyls.
23
“HIPAA” means the Health Insurance Portability and
Accountability Act of 1996, as amended.
“HSR Act” has the meaning set forth in Section
3.03(c).
“Indemnified Party” has the meaning set forth in
Section 5.10(a).
“Intellectual Property” means any and all of the
following arising pursuant to the Laws of any jurisdiction
throughout the world: (a) trademarks, service marks, trade names,
and similar indicia of source or origin, all registrations and
applications for registration thereof, and the goodwill connected
with the use of and symbolized by the foregoing; (b) copyrights and
all registrations and applications for registration thereof; (c)
trade secrets and know-how; (d) patents and patent applications;
(e) internet domain name registrations; and (f) other intellectual
property and related proprietary rights.
“IRS” means the United States Internal Revenue
Service.
“Knowledge” means: (a) with respect to the Company and
its Subsidiaries, the actual knowledge of each of the individuals
listed in Section 8.01 of the Company’s Disclosure Schedule;
and (b) with respect to American Resources and its Subsidiaries,
the actual knowledge of each of the individuals listed in Section
8.01 of the American Resources’ Disclosure Schedule; in each
case, after due inquiry.
“Laws” means any federal, state, local, municipal,
foreign, multi-national or other laws, common law, statutes,
constitutions, ordinances, rules, regulations, codes, Orders, or
legally enforceable requirements enacted, issued, adopted,
promulgated, enforced, ordered, or applied by any Governmental
Entity.
“Lease” shall mean all leases, subleases, licenses,
concessions, and other agreements (written or oral) under which the
Company or any of its Subsidiaries holds any Leased Real Estate,
including the right to all security deposits and other amounts and
instruments deposited by or on behalf of the Company or any of its
Subsidiaries thereunder.
“Leased Real Estate” shall mean all leasehold or
subleasehold estates and other rights to use or occupy any land,
buildings, structures, improvements, fixtures, or other interest in
real property held by the Company or any of its
Subsidiaries.
“Legal Action” means any legal, administrative,
arbitral, or other proceedings, suits, actions, investigations,
examinations, claims, audits, hearings, charges, complaints,
indictments, litigations, or examinations.
“Liability” shall mean any liability, indebtedness, or
obligation of any kind (whether accrued, absolute, contingent,
matured, unmatured, determined, determinable, or otherwise, and
whether or not required to be recorded or reflected on a balance
sheet under GAAP).
“Liens” means, with respect to any property or asset,
all pledges, liens, mortgages, charges, encumbrances,
hypothecations, options, rights of first refusal, rights of first
offer, and security interests of any kind or nature
whatsoever.
“Maximum Premium” has the meaning set forth in Section
5.10(b).
“Merger” has the meaning set forth in the
Recitals.
“Merger Consideration” has the meaning set forth in
Section 2.01(b).
“Net Shares” has the meaning set forth in Section
2.07(a).
“Nasdaq” has the meaning set forth in Section
2.01(e).
“Order” has the meaning set forth in Section
3.09.
“Other Governmental Approvals” has the meaning set
forth in Section 3.03(c).
“Owned Real Estate” shall mean all land, including
without limitation, owned surface and owned mineral rights,
together with all buildings, structures, fixtures, and improvements
located thereon and all easements, rights of way, and appurtenances
relating thereto, owned by the Company or any of its
Subsidiaries.
“American Resources” has the meaning set forth in the
Preamble.
“American Resources Adverse Recommendation Change”
shall mean the American Resources Board: (a) failing to make,
withdraw, amend, modify, or materially qualify, in a manner adverse
to the Company, the American Resources Board Recommendation; (b)
failing to include the American Resources Board Recommendation in
the Joint Proxy Statement that is mailed to the American
Resources’ stockholders; (c) recommending a Takeover
Proposal; (d) failing to recommend against acceptance of any tender
offer or exchange offer for the shares of American Resources Common
Stock within ten Business Days after the commencement of such
offer; (e) failing to reaffirm (publicly, if so requested by the
Company) the American Resources Board Recommendation within ten
Business Days after the date any Takeover Proposal (or material
modification thereto) is first publicly disclosed by American
Resources or the Person making such Takeover Proposal; (f) making
any public statement inconsistent with the American Resources Board
Recommendation; or (g) resolving or agreeing to take any of the
foregoing actions.
“American Resources Balance Sheet” has the meaning set
forth in Section 4.04(c).
“American Resources Benefit Plans” has the meaning set
forth in Section 5.09(b).
“American Resources Board” has the meaning set forth in
the Recitals.
24
“American Resources Board Recommendation” has the
meaning set forth in Section 4.03(d)(i).
“American Resources Common Stock” has the meaning set
forth in the Recitals.
“American Resources Disclosure Schedule” means the
disclosure letter, dated as of the date of this Agreement and
delivered by American Resources to the Company concurrently with
the execution of this Agreement.
“American Resources Equity Award” means a American
Resources Stock Option or a American Resources Restricted Share, as
the case may be.
“American Resources Material Adverse Effect” means any
event, occurrence, fact, condition, or change that is, or would
reasonably be expected to become, individually or in the aggregate,
materially adverse to: (a) the business, results of operations,
condition (financial or otherwise), or assets of American Resources
and its Subsidiaries, taken as a whole; or (b) the ability of
American Resources to consummate the transactions contemplated
hereby on a timely basis; provided, however, that an American
Resources Material Adverse Effect shall not be deemed to include
events, occurrences, facts, conditions, or changes arising out of,
relating to, or resulting from: (i) changes generally affecting the
economy, financial, or securities markets; (ii) the announcement of
the transactions contemplated by this Agreement; (iii) any outbreak
or escalation of war or any act of terrorism; (iv) general
conditions in the industry in which American Resources and its
Subsidiaries operate; (v) any failure, in and of itself, by
American Resources to meet any internal or published projections,
forecasts, estimates, or predictions in respect of revenues,
earnings, or other financial or operating metrics for any period
(it being understood that the facts or occurrences giving rise to
or contributing to such failure may be deemed to constitute, or be
taken into account in determining whether there has been or would
reasonably be expected to become, an American Resources Material
Adverse Effect, to the extent permitted by this definition and not
otherwise excepted by a clause of this proviso); or (vi) any
change, in and of itself, in the market price or trading volume of
American Resources’ securities or in its credit ratings (it
being understood that the facts or occurrences giving rise to or
contributing to such change may be deemed to constitute, or be
taken into account in determining whether there has been or would
reasonably be expected to become, an American Resources Material
Adverse Effect, to the extent permitted by this definition and not
otherwise excepted by a clause of this proviso), provided further,
however, that any event, change, and effect referred to in clauses
(i), (iii), or (iv) immediately above shall be taken into account
in determining whether an American Resources Material Adverse
Effect has occurred or would reasonably be expected to occur to the
extent that such event, change, or effect has a disproportionate
effect on American Resources and its Subsidiaries, taken as a
whole, compared to other participants in the industries in which
American Resources and its Subsidiaries conduct their
businesses.
“American Resources Series A Preferred Stock” has the
meaning set forth in Section 4.02(a).
“American Resources Series C Preferred Stock” has the
meaning set forth in Section 4.02(a).
“American Resources Restricted Share” means any
American Resources Common Stock subject to vesting, repurchase, or
other lapse of restrictions granted under any American Resources
Stock Plan.
“American Resources SEC Documents” has the meaning set
forth in Section 4.04(a).
“American Resources Securities” has the meaning set
forth in Section 4.02(b)(ii).
“American Resources Stockholders Meeting” means the
special meeting of the stockholders of American Resources to be
held to consider the approval of the American Resources Stock
Issuance.
“American Resources Stock Issuance” has the meaning set
forth in the Recitals.
“American Resources Stock Option” means any option to
purchase American Resources Common Stock granted under any American
Resources Stock Plan.
“American Resources Stock Plans” means the following
plans, in each case as amended: the 2018 Stock Option Plan dated
July 1, 2018.
“American Resources Subsidiary Securities” has the
meaning set forth in Section 4.02(d).
“American Resources Termination Fee” means
$500,000.00.
“American Resources Trading Price” means the volume
weighted average price per share of American Resources Common Stock
as reported on the Nasdaq for the 10 consecutive trading days
ending on the trading day immediately preceding the Effective Time
(as adjusted as appropriate to reflect any stock splits, stock
dividends, combinations, reorganizations, reclassifications, or
similar events).
“American Resources Voting Debt” has the meaning set
forth in Section 4.02(c).
“PBGC” has the meaning set forth in Section
3.12(d).
“Permits” has the meaning set forth in Section
3.08(b).
25
“Permitted Liens” means: (a) statutory Liens for
current Taxes or other governmental charges not yet due and payable
or the amount or validity of which is being contested in good faith
(provided appropriate reserves required pursuant to GAAP have been
made in respect thereof); (b) mechanics’, carriers’,
workers’, repairers’, and similar statutory Liens
arising or incurred in the ordinary course of business for amounts
which are not delinquent or which are being contested by
appropriate proceedings (provided appropriate reserves required
pursuant to GAAP have been made in respect thereof); (c) zoning,
entitlement, building, and other land use regulations imposed by
Governmental Entities having jurisdiction over such Person’s
owned or leased real property, which are not violated by the
current use and operation of such real property; (d) covenants,
conditions, restrictions, easements, and other similar non-monetary
matters of record affecting title to such Person’s owned or
leased real property, which do not materially impair the occupancy
or use of such real property for the purposes for which it is
currently used in connection with such Person’s businesses;
(e) any right of way or easement related to public roads and
highways, which do not materially impair the occupancy or use of
such real property for the purposes for which it is currently used
in connection with such Person’s businesses; and (f) Liens
arising under workers’ compensation, unemployment insurance,
social security, retirement, and similar legislation.
“Per Share Cash Equivalent Consideration” has the
meaning set forth in Section 2.07(a).
“Person” means any individual, corporation, limited or
general partnership, limited liability company, limited liability
partnership, trust, association, joint venture, Governmental
Entity, or other entity or group (which term will include a
“group” as such term is defined in Section 13(d)(3) of
the Exchange Act).
“Real Estate” means the Owned Real Estate and the
Leased Real Estate.
“Representatives” has the meaning set forth in Section
5.04(a).
“Requisite Company Vote” has the meaning set forth in
Section 3.03(a).
“Requisite American Resources Vote” has the meaning set
forth in Section 4.03(a).
“Securities Act” has the meaning set forth in Section
3.03(c).
“Merger Consideration” has the meaning set forth in
Section 2.01(b).
“Subsidiary” of a Person means a corporation,
partnership, limited liability company, or other business entity of
which a majority of the shares of voting securities is at the time
beneficially owned, or the management of which is otherwise
controlled, directly or indirectly, through one or more
intermediaries, or both, by such Person.
“Superior Proposal” means a bona fide written Takeover
Proposal with respect to the applicable party or its Subsidiaries
(except that, for purposes of this definition, each reference in
the definition of “Takeover Proposal” to
“15%” shall be “50%”), that such
party’s board determines in good faith (after consultation
with outside legal counsel and such party’s financial
advisor) is more favorable from a financial point of view to the
holders of such party’s common stock than the transactions
contemplated by this Agreement, taking into account: (a) all
financial considerations; (b) the identity of the third party
making such Takeover Proposal; (c) the anticipated timing,
conditions (including any financing condition or the reliability of
any debt or equity funding commitments) and prospects for
completion of such Takeover Proposal; (d) the other terms and
conditions of such Takeover Proposal and the implications thereof
on such party, including relevant legal, regulatory, and other
aspects of such Takeover Proposal deemed relevant by such party;
and (e) any revisions to the terms of this Agreement and the
transaction contemplated by this Agreement proposed by the other
party during the Superior Proposal Notice Period set forth in
Section 5.04(d).
“Superior Proposal Notice Period” has the meaning set
forth in Section 5.04(d).
“Takeover Proposal” means with respect to the Company
or American Resources, as the case may be, an inquiry, proposal, or
offer from, or indication of interest in making a proposal or offer
by, any Person or group relating to any transaction or series of
related transactions (other than the transactions contemplated by
this Agreement), involving any: (a) direct or indirect acquisition
of assets of such party hereto or its Subsidiaries (including any
voting equity interests of Subsidiaries, but excluding sales of
assets in the ordinary course of business) equal to 15% or more of
the fair market value of such party’s consolidated assets or
to which 15% or more of such party’s net revenues or net
income on a consolidated basis are attributable; (b) direct or
indirect acquisition of 15% or more of the voting equity interests
of such party hereto or any of its Subsidiaries whose business
constitutes 15% or more of the consolidated net revenues, net
income, or assets of such party and its Subsidiaries, taken as a
whole; (c) tender offer or exchange offer that if consummated would
result in any Person or group (as defined in Section 13(d) of the
Exchange Act) beneficially owning (within the meaning of Section
13(d) of the Exchange Act) 15% or more of the voting power of such
party hereto; (d) merger, consolidation, other business
combination, or similar transaction involving such party hereto or
any of its Subsidiaries, pursuant to which such Person or group (as
defined in Section 13(d) of the Exchange Act) would own 15% or more
of the consolidated net revenues, net income, or assets of such
party and its Subsidiaries, taken as a whole; (e) liquidation,
dissolution (or the adoption of a plan of liquidation or
dissolution), or recapitalization or other significant corporate
reorganization of such party hereto or one or more of its
Subsidiaries which, individually or in the aggregate, generate or
constitute 15% or more of the consolidated net revenues, net
income, or assets of such party and its Subsidiaries, taken as a
whole; or (f) any combination of the foregoing.
“Taxes” means all federal, state, local, foreign and
other income, gross receipts, sales, use, production, ad valorem,
transfer, franchise, registration, profits, license, lease,
service, service use, withholding, payroll, employment,
unemployment, estimated, excise, severance, environmental, stamp,
occupation, premium, property (real or personal), real property
gains, windfall profits, customs, duties or other taxes, fees,
assessments, or charges of any kind whatsoever, together with any
interest, additions or penalties with respect thereto and any
interest in respect of such additions or penalties.
“Tax Returns” means any return, declaration, report,
claim for refund, information return or statement, or other
document relating to Taxes, including any schedule or attachment
thereto, and including any amendment thereof.
“Treasury Regulations” means the Treasury regulations
promulgated under the Code.
“Voting Debt” has the meaning set forth in Section
3.02(c).
26
Exhibit 10.19
SHARE EXCHANGE AGREEMENT TO
REPLACE THE PLAN OF MERGER
By and Among
AMERICAN RESOURCES CORPORATION,
and
EMPIRE KENTUCKY LAND, INC.
ORIGINALLY Dated as of February 12, 2019
SHARE EXCHANGE AGREEMENT TO
REPLACE THE PLAN OF MERGER
AMERICAN RESOURCES
CORPORATION, a Florida
corporation (“American Resources”), and
EMPIRE KENTUCKY
LAND, INC., a Kentucky
corporation (“Company”) entered into an Agreement and
Plan of Merger (this “Agreement”), dated the 12 day of
February, 2019. The intent of this agreement was a share transfer
agreement and not a merger between the two entities. The parties
will be entering into a formal share exchange agreement between
American Resources Corporation and the Company with substantially
the same protections, terms and conditions as the previously
entered into Merger Agreement except for the fact that it will not
be defined as a merger requiring stockholder approval and instead
will structured as a share exchange. Such Share Exchange Agreement
will be executed not later than Monday February 18, 2019 and will
be consummated not later than Wednesday February 20, 2019 business
days and will supersede the previously entered Plan of
Merger.
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first written above by their respective
officers thereunto duly authorized.
EMPIRE KENTUCKY LAND, INC.
By:
/s/ Greg B. McDonald
Greg
B. McDonald, President
(the
“Company”)
AMERICAN RESOURCES CORPORATION
By:
/s/ Mark C. Jensen
Mark
C. Jensen, Chief Executive Officer
(“American
Resources”)
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the inclusion in this Registration Statement on Form S-1
(Amendment #7) of our report dated April 20, 2018 with respect to
the audited consolidated financial statements of American Resources
Corporation for the years ended December 31, 2017 and 2016. Our
report contains an explanatory paragraph regarding the
Company’s ability to continue as a going
concern.
We also
consent to the references to us under the heading
“Experts” in such Registration Statement.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
February 14,
2019
Exhibit 23.2
Law Office of Clifford J. Hunt, P.A.
8200
Seminole Boulevard
Seminole,
Florida 33772
(727)
471-0444 Telephone
(727)
471-0447 Facsimile
www.huntlawgrp.com
Reply to:
February
14, 2019
Mark C.
Jensen, CEO
American
Resources Corporation
9002
Technology Lane
Fishers,
IN 46038
Re:
Registration
Statement on Form S-1/A for American Resources
Corporation
Dear
Mr. Jensen:
You
have requested our opinion, as counsel for American Resources
Corporation, a Florida corporation (the “Company”), in
connection with a Registration Statement on Form S-1/A (Amendment
No. 7) (the “Registration Statement”) to be filed by
the Company with the United States Securities and Exchange
Commission (the “Commission”) under the Securities Act
of 1933 (the “Act”), as amended, regarding the legality
of the 40,000,000 shares (the “Shares”) of Series
“A” Common Stock, par value $0.0001 per share, of the
Company which are being registered in the Registration
Statement.
We have
made such legal examination and inquiries as we have deemed
advisable or necessary for the purpose of rendering this opinion
and have examined originals or copies of the following documents
and corporate records:
1.
Articles of
Incorporation and amendments thereto;
2.
Bylaws;
3.
Resolutions of the
Board of Directors authorizing the issuance of the Shares;
and
4.
Such other
documents and records as we have deemed relevant in connection with
this opinion.
In
rendering this opinion, we have relied upon, with the consent of
the Company and its Board of Directors: (i) the representations of
the Company, its officers and directors as set forth in the
aforementioned documents as to factual matters; and (ii) assurances
from the officers and directors of the Company regarding factual
representations as we have deemed necessary for purposes of
expressing the opinions set forth herein. We have not undertaken
any independent investigation to determine or verify any
information and representations made by the Company, its officers
and directors in the aforementioned documents and have relied upon
such information and representations as being accurate and complete
in expressing our opinion.
We have
assumed in rendering the opinions set forth herein that no person
or entity has taken any action inconsistent with the terms of the
aforementioned documents or prohibited by law. This opinion letter
is limited to the matters set forth herein and no opinions may be
implied or inferred beyond the matters expressly stated herein. We
undertake no, and hereby disclaim any, obligation to make any
inquiry after the date hereof or to advise you of any changes in
any matter set forth herein, whether based on a change in the law,
a change in any fact relating to the Company or any other person or
any other circumstance.
It is
our opinion that the 40,000,000 shares
of Series “A” Common Stock of the Company being
registered pursuant to the Registration Statement by the Company,
were duly authorized by all necessary corporate action on the part
of the Company and when issued in exchange for the agreed
consideration, will be validly issued, fully paid and
non-assessable and, when sold as contemplated in the Registration
Statement, will continue to be validly issued, fully paid and
non-assessable. This opinion letter opines upon applicable
provisions of the Securities Act of 1933, Florida law including the
statutory provisions, all applicable provisions of the Florida
Constitution and reported judicial decisions interpreting those
laws.
We
hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our law firm under
the caption “Interest of Named Experts and Counsel” in
the Registration Statement. In giving this consent, we do not
thereby admit that we are within the category of persons whose
consent is required under Section 7 of the Act and the rules and
regulations of the Securities and Exchange Commission promulgated
thereunder.
Sincerely,
LAW
OFFICE OF CLIFFORD J. HUNT, P.A.
/s/: Clifford J. Hunt, Esquire
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