hnrg20220930

hnrg20220930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2022
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:001-34743

“COAL KEEPS YOUR LIGHTS ON”

HALLADOR ENERGY COMPANY

(www.halladorenergy.com)

Colorado

(State of incorporation)

84-1014610

(IRS Employer Identification No.)

1183 East Canvasback Drive, Terre Haute, Indiana

(Address of principal executive offices)

47802

(Zip Code)

Registrant’s telephone number, including area code: 812.299.2800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Shares, $.01 par value	HNRG	Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☑		Smaller reporting company ☑
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 11, 2022, we had 32,982,605 shares of common stock outstanding.

Table of Contents

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	3

ITEM 1. FINANCIAL STATEMENTS (Unaudited)	3

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Operations	4

Condensed Consolidated Statements of Cash Flows	5

Condensed Consolidated Statements of Stockholders’ Equity	6

Notes to Condensed Consolidated Financial Statements	7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22

ITEM 4. CONTROLS AND PROCEDURES	22

PART II - OTHER INFORMATION	22

ITEM 4. MINE SAFETY DISCLOSURES	22

ITEM 5. OTHER INFORMATION	22

ITEM 6. EXHIBITS	23

SIGNATURES	24

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Hallador Energy Company

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(unaudited)

	*September 30,*			*December 31,*
	*2022*			*2021*
ASSETS
Current assets:
Cash and cash equivalents	$	7,000		$	2,546
Restricted cash		3,483			3,283
Accounts receivable		16,744			13,584
Inventory		13,734			7,699
Parts and supplies		14,990			10,015
Prepaid expenses		2,220			2,112
Total current assets		58,171			39,239
Property, plant and equipment:
Land and mineral rights		115,704			115,837
Buildings and equipment		363,903			342,782
Mine development		131,820			112,575
Total property, plant and equipment		611,427			571,194
Less - accumulated depreciation, depletion and amortization		(298,116	)		(268,370	)
Total property, plant and equipment, net		313,311			302,824
Investment in Sunrise Energy		4,051			3,545
Other assets		7,828			8,372
Total Assets	$	383,361		$	353,980
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities, long-term bank debt, net	$	110,158		$	23,098
Accounts payable and accrued liabilities		52,428			41,528
Total current liabilities		162,586			64,626
Long-term liabilities:
Long-term bank debt, excluding current maturities, net		—			84,667
Convertible note payable		10,000			—
Convertible notes payable - related party		9,000			—
Deferred income taxes		3,690			2,850
Asset retirement obligations		12,393			14,025
Other		1,720			1,577
Total long-term liabilities		36,803			103,119
Total liabilities		199,389			167,745
Commitments and contingencies
Redeemable noncontrolling interests		—			4,000
Stockholders' equity:
Preferred stock, $.10 par value, 10,000 shares authorized; none issued and outstanding		—			—
Common stock, $.01 par value, 100,000 shares authorized; 32,983 and 30,785 issued and outstanding, at September 30, 2022 and December 31, 2021, respectively		330			308
Additional paid-in capital		117,749			104,126
Retained earnings		65,893			77,801
Total stockholders’ equity		183,972			182,235
Total liabilities, redeemable noncontrolling interests, and stockholders’ equity	$	383,361		$	353,980

See accompanying notes.

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Hallador Energy Company

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2022*			*2021*			*2022*			*2021*
SALES AND OPERATING REVENUES:
Coal sales	$	83,562		$	79,036		$	204,733		$	179,515
Other revenues		1,522			786			5,187			2,640
Total revenue		85,084			79,822			209,920			182,155
EXPENSES:
Operating expenses		64,557			67,792			170,552			144,257
Depreciation, depletion and amortization		11,187			9,842			31,882			29,864
Asset retirement obligations accretion		255			380			751			1,116
Exploration costs		121			96			393			313
General and administrative		3,569			3,067			10,440			9,271
Total operating expenses		79,689			81,177			214,018			184,821

INCOME (LOSS) FROM OPERATIONS		5,395			(1,355	)		(4,098	)		(2,666	)

Interest expense (1)		(3,355	)		(2,108	)		(7,476	)		(6,188	)
Gain on extinguishment of debt		—			10,000			—			10,000
Equity method investment income		168			90			506			153
NET INCOME (LOSS) BEFORE INCOME TAXES		2,208			6,627			(11,068	)		1,299

INCOME TAX EXPENSE (BENEFIT):
Current		—			—			—			—
Deferred		596			(1,359	)		840			(2,691	)
Total income tax expense (benefit)		596			(1,359	)		840			(2,691	)

NET INCOME (LOSS)	$	1,612		$	7,986		$	(11,908	)	$	3,990

NET INCOME (LOSS) PER SHARE:
Basic and diluted	$	0.05		$	0.26		$	(0.38	)	$	0.13

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		32,983			30,613			31,727			30,612
Diluted		33,268			30,613			31,727			30,612

(1) Interest Expense:
Interest on bank debt	$	2,133		$	2,167		$	5,555		$	6,610
Other interest		227			—			285			—
Amortization and swap-related interest:
Payments on interest rate swap, net of changes in value		—			(716	)		(867	)		(2,330	)
Amortization of debt issuance costs		995			657			2,503			1,908
Total amortization and swap related interest		995			(59	)		1,636			(422	)
Total interest expense	$	3,355		$	2,108		$	7,476		$	6,188

See accompanying notes.

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Hallador Energy Company

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	*Nine Months Ended September 30,*
	*2022*			*2021*
OPERATING ACTIVITIES:
Net income (loss)	$	(11,908	)	$	3,990
Deferred income taxes		840			(2,691	)
Equity income – Sunrise Energy		(506	)		(153	)
Depreciation, depletion, and amortization		31,882			29,864
Gain on sale of assets		(367	)		—
Gain on extinguishment of debt		—			(10,000	)
Change in fair value of interest rate swaps		(867	)		(2,330	)
Change in fair value of fuel hedge		—			(379	)
Amortization of debt issuance costs		2,503			1,908
Asset retirement obligations accretion		751			1,116
Cash paid on asset retirement obligation reclamation		(2,483	)		—
Stock-based compensation		230			834
Provision for loss on customer contracts		159			—
Change in operating assets and liabilities:
Accounts receivable		(3,160	)		(2,041	)
Inventory		(6,035	)		13,341
Parts and supplies		(4,975	)		(918	)
Prepaid expenses		(2,390	)		(4,631	)
Accounts payable and accrued liabilities		9,318			8,960
Other		943			161
Cash provided by operating activities		13,935			37,031
INVESTING ACTIVITIES:
Capital expenditures		(38,344	)		(18,075	)
Proceeds from sale of equipment		758			—
Cash used in investing activities		(37,586	)		(18,075	)
FINANCING ACTIVITIES:
Payments on bank debt		(35,713	)		(37,062	)
Borrowings of bank debt		37,700			14,250
Issuance of convertible note payable		11,000			—
Issuance of related party convertible notes payable		18,000			—
Debt issuance costs		(2,097	)		(418	)
Distributions to redeemable noncontrolling interests		(585	)		—
Taxes paid on vesting of RSUs		—			(2	)
Cash provided by (used in) financing activities		28,305			(23,232	)
Increase (decrease) in cash, cash equivalents, and restricted cash		4,654			(4,276	)
Cash, cash equivalents, and restricted cash, beginning of period		5,829			12,071
Cash, cash equivalents, and restricted cash, end of period	$	10,483		$	7,795
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH CONSIST OF THE FOLLOWING:
Cash and cash equivalents	$	7,000		$	4,546
Restricted cash		3,483			3,249
	$	10,483		$	7,795

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	4,791		$	6,728
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Change in capital expenditures included in accounts payable and prepaid expense	$	2,396		$	5,782
Convertible notes payable and related party convertible notes payable converted to common stock	$	10,000		$	—

See accompanying notes.

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Hallador Energy Company

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

					*Additional*					*Total*
	*Common Stock Issued*				*Paid-in*		*Retained*			*Stockholders'*
	*Shares*		*Amount*		*Capital*		*Earnings*			*Equity*
Balance, June 30, 2022		32,983	$	330	$	114,212	$	64,281		$	178,823
Stock-based compensation		—		—		122		—			122
Cancellation of redeemable noncontrolling interests		—		—		3,415		—			3,415
Net income		—		—		—		1,612			1,612
Balance, September 30, 2022		32,983	$	330	$	117,749	$	65,893		$	183,972

Balance, December 31, 2021		30,785	$	308	$	104,126	$	77,801		$	182,235
Stock-based compensation		—		—		230		—			230
Cancellation of redeemable noncontrolling interests		—		—		3,415		—			3,415
Stock issued on redemption of convertible note		232		2		998		—			1,000
Stock issued on redemption of related party convertible notes		1,966		20		8,980		—			9,000
Net loss		—		—		—		(11,908	)		(11,908	)
Balance, September 30, 2022		32,983	$	330	$	117,749	$	65,893		$	183,972

						*Additional*					*Total*
	*Common Stock Issued*					*Paid-in*			*Retained*		*Stockholders'*
	*Shares*			*Amount*		*Capital*			*Earnings*		*Equity*
Balance, June 30, 2021		30,613		$	306	$	103,964		$	77,559	$	181,829
Stock-based compensation		—			—		267			—		267
Net income		—			—		—			7,986		7,986
Balance, September 30, 2021		30,613		$	306	$	104,231		$	85,545	$	190,082

Balance, December 31, 2020		30,610		$	306	$	103,399		$	81,555	$	185,260
Stock-based compensation		—			—		834			—		834
Stock issued on vesting of RSUs		4			—		—			—		—
Taxes paid on vesting of RSUs		(1	)		—		(2	)		—		(2	)
Net income		—			—		—			3,990		3,990
Balance, September 30, 2021		30,613		$	306	$	104,231		$	85,545	$	190,082

See accompanying notes.

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Hallador Energy Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1)

GENERAL BUSINESS

The interim financial data is unaudited; however, in our opinion, it includes all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements included herein have been prepared pursuant to the Securities and Exchange Commission's (the "SEC") rules and regulations; accordingly, certain information and footnote disclosures normally included in generally accepted accounting principles ("GAAP") financial statements have been condensed or omitted.

The results of operations and cash flows for the three and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2022.

Our organization and business, the accounting policies we follow, and other information are contained in the notes to our consolidated financial statements filed as part of our 2021 Annual Report on Form 10-K. This quarterly report should be read in conjunction with such Annual Report on Form 10-K.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. This was early adopted on January 1, 2022 and did not have a significant impact on our consolidated financial statements.

The condensed consolidated financial statements include the accounts of Hallador Energy Company (hereinafter known as “we, us, or our”) and its wholly owned subsidiaries Sunrise Coal, LLC (Sunrise) and Hourglass Sands, LLC (Hourglass), and Sunrise’s wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Sunrise is engaged in the production of steam coal from mines located in western Indiana.

Hourglass operations ceased in August 2020. We have remaining reclamation obligations estimated at $0.1 million, thus determined for the three months ended September 30, 2022 to distribute excess cash totaling $0.6 million to the redeemable noncontrolling interest and cancelling the remaining $3.4 million of redeemable noncontrolling interest during the same period.

As announced in our Form 8-K filed on February 18, 2022, on February 14, 2022, Hallador Energy Company, through its subsidiary Hallador Power Company, LLC, entered into an Asset Purchase Agreement (the "Purchase Agreement") to acquire Hoosier Energy’s 1-Gigawatt Merom Generating Station (Merom) located in Sullivan County, Indiana, in return for assuming certain decommissioning costs and environmental responsibilities. The transaction, which includes a 3.5-year power purchase agreement (PPA), closed in October 2022, as announced in our Form 8-K filed on October 21, 2022.

(2)

LONG-LIVED ASSET IMPAIRMENTS

Long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable. For the three and nine month periods ended September 30, 2022 and for the three and nine-month periods ended September 30, 2021, there were no impairment charges recorded for long-lived assets.

(3)

INVENTORY

Inventory is valued at lower of average cost or net realizable value (NRV). As of September 30, 2022, and December 31, 2021, coal inventory includes NRV adjustments of $5.8 million and $3.8 million, respectively.

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(4)

OTHER LONG-TERM ASSETS (in thousands)

	*September 30,*		*December 31,*
	*2022*		*2021*
Advanced coal royalties	$	6,181	$	6,678
Other		1,647		1,694
Total other assets	$	7,828	$	8,372

(5)

BANK DEBT

On March 25, 2022, we executed an amendment to our credit agreement with PNC, administrative agent for our lenders. The primary purpose of the amendment was to return the allowable leverage ratio and debt service coverage ratio to their December 31, 2021 levels through September 30, 2022, with the debt service coverage waived for March 31, 2022.

On May 20, 2022, we executed an additional amendment to our credit agreement with PNC, administrative agent for our lenders. The primary purpose of this amendment was to modify the allowable leverage ratio and debt service coverage ratio through June 30, 2022, to provide relief for current and anticipated covenant violations.

On August 5, 2022, we executed an additional amendment to our credit agreement with PNC, administrative agent for our lenders. The primary purpose of this amendment was to modify the allowable leverage ratio and debt service coverage ratio through September 30, 2022, to provide relief for anticipated covenant violations.

Bank debt was reduced by $17 million during the three months ended September 30, 2022. Bank debt is comprised of term debt ($11.0 million as of September 30, 2022) and a $120 million revolver ($102.7 million borrowed as of September 30, 2022). The term debt amortization concludes with the final payment in March 2023. The revolver matures in September 2023. Our debt is recorded at amortized cost, which approximates fair value due to the variable interest rates in the agreement, and is collateralized primarily by our assets.

Liquidity

As of September 30, 2022, with the provisions of the amendments, we had additional borrowing capacity of $11.6 million and total liquidity of $18.6 million. Our additional borrowing capacity is net of $5.7 million in outstanding letters of credit as of September 30, 2022, that were required to maintain surety bonds. Liquidity consists of our additional borrowing capacity and cash and cash equivalents.

We entered into new contracts during the three months ended June 30, 2022, with significantly higher prices, that began shipping during the three months ended September 30, 2022. These contracts substantially increase our cash flow for the remainder of 2022 and 2023. While it is our intention to refinance our bank debt in early 2023 under similar terms, we believe we have the ability to pay off the remaining balance with operating cash flows when due in September 2023.

Fees

Unamortized bank fees and other costs incurred in connection with the initial facility and subsequent amendments totaled $4.0 million as of December 31, 2021. Additional costs incurred with the March 25, 2022, May 20, 2022, and August 5, 2022 amendments totaled $2.1 million. These costs were deferred and are being amortized over the term of the loan. Unamortized costs as of September 30, 2022, and December 31, 2021, were $3.6 million and $4.0 million, respectively.

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Bank debt, less debt issuance costs, is presented below (in thousands):

	*September 30,*			*December 31,*
	*2022*			*2021*
Current bank debt	$	113,725		$	25,725
Less unamortized debt issuance cost		(3,567	)		(2,627	)
Net current portion	$	110,158		$	23,098

Long-term bank debt	$	—		$	86,013
Less unamortized debt issuance cost		—			(1,346	)
Net long-term portion	$	—		$	84,667

Total bank debt	$	113,725		$	111,738
Less total unamortized debt issuance cost		(3,567	)		(3,973	)
Net bank debt	$	110,158		$	107,765

Covenants

The credit facility includes a Maximum Leverage Ratio (consolidated funded debt/trailing twelve months adjusted EBITDA), calculated as of the end of each fiscal quarter for the trailing twelve months, not to exceed the amounts below:

Fiscal Periods Ending		*Ratio*
September 30, 2022		4.50 to 1.00
December 31, 2022		2.50 to 1.00
March 31, 2023 and thereafter		2.25 to 1.00

As of September 30, 2022, our Leverage Ratio of 3.50 was in compliance with the 4.50 covenant defined in the current and prior amendments.

Beginning December 31, 2022, the credit facility requires a Minimum Debt Service Coverage Ratio (consolidated adjusted EBITDA/annual debt service) calculated as of the end of each fiscal quarter for the trailing twelve months of 1.25 to 1.00 through the maturity of the credit facility.

Interest Rate

The interest rate on the facility ranges from LIBOR plus 2.75% to LIBOR plus 4.00%, depending on our Leverage Ratio, with a LIBOR floor of 0.50%. We entered into swap agreements to fix the LIBOR component of the interest rate at 2.92% on the entire amount of the declining term loan balance and on $52.7 million of the revolver. The swap agreements matured in May 2022. At September 30, 2022, we are paying LIBOR plus 4.0% on the outstanding bank debt.

Paycheck Protection Program

As previously reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2020, we entered into a Paycheck Protection Program Promissory Note and Agreement on April 15, 2020, evidencing an unsecured $10 million loan (the “PPP Loan”) under the Paycheck Protection Program (or “PPP”) made through First Financial Bank, N.A., (the "Lender"). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”).

Under the terms of the CARES Act, PPP loan recipients can apply for forgiveness. The SBA can grant forgiveness of all, or a portion of loans made under the PPP if the recipients use the PPP loan proceeds for eligible purposes, including payroll costs, mortgage interest, rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the PPP Loan proceeds for qualifying expenses and applied for the forgiveness of the PPP Loan in accordance with the terms of the CARES Act.

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On July 23, 2021, we received a notification from the Lender that the SBA approved our PPP Loan forgiveness application for the entire PPP Loan balance of $10 million, together with interest accrued thereon. The Lender notified us that the forgiveness payment was received on July 26, 2021. The forgiveness of the PPP Loan was recognized as other income.

The SBA retains the right to review the Company's loan file for a period subsequent to the date the loan is forgiven, with the potential for the SBA to pursue legal remedies at its discretion.

(6)

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (in thousands)

	*September 30,*		*December 31,*
	*2022*		*2021*
Accounts payable	$	33,147	$	27,835
Accrued property taxes		2,303		2,529
Accrued payroll		4,625		2,413
Workers' compensation reserve		3,749		2,560
Group health insurance		2,400		1,800
Fair value of interest rate swaps		—		867
Other		6,204		3,524
Total accounts payable and accrued liabilities	$	52,428	$	41,528

(7)

REVENUE

Revenue from Contracts with Customers

We account for a contract with a customer when the parties have approved the contract and are committed to performing their respective obligations, the rights of each party are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. We recognize revenue when we satisfy a performance obligation by transferring control of a good or service to a customer.

Our revenue is derived from sales to customers of coal produced at our facilities. Our customers typically purchase coal directly from our mine sites or our Princeton Loop, where the sale occurs and where title, risk of loss, and control pass to the customer at that point. Our customers arrange for and bear the costs of transporting their coal from our mines to their plants or other specified discharge points. Our customers are typically domestic utility companies. Our coal sales agreements with our customers are fixed-priced, fixed-volume supply contracts, or include a pre-determined escalation in price for each year. Price re-opener and index provisions may allow either party to commence a renegotiation of the contract price at a pre-determined time. Price re-opener provisions may automatically set a new price based on the prevailing market price or, in some instances, require us to negotiate a new price, sometimes within specified ranges of prices. The terms of our coal sales agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary by customer.

Coal sales agreements will typically contain coal quality specifications. With coal quality specifications in place, the raw coal sold by us to the customer at the delivery point must be substantially free of magnetic material and other foreign material impurities and crushed to a maximum size as set forth in the respective coal sales agreement. Price adjustments are made and billed in the month the coal sale was recognized based on quality standards that are specified in the coal sales agreement, such as Btu factor, moisture, ash, and sulfur content, and can result in either increases or decreases in the value of the coal shipped.

Disaggregation of Revenue

Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. 70% and 79% of our coal revenue for the three and nine months ended September 30, 2022 was sold to customers in the State of Indiana with the remainder sold to customers in Florida, Georgia, and North Carolina. 67% and 72% of our coal revenue for the three and nine months ended September 30, 2021 respectively, was sold to customers in the State of Indiana with the remainder sold to customers in Florida, Georgia, and North Carolina.

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Performance Obligations

A performance obligation is a promise in a contract with a customer to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. In most of our contracts, the customer contracts with us to provide coal that meets certain quality criteria. We consider each ton of coal a separate performance obligation and allocate the transaction price based on the base price per the contract, increased or decreased for quality adjustments.

We recognize revenue at a point in time, as the customer does not have control over the asset at any point during the fulfillment of the contract. For substantially all of our customers, this is supported by the fact that title and risk of loss transfer to the customer upon loading of the truck or railcar at the mine. This is also the point at which physical possession of the coal transfers to the customer, as well as the right to receive substantially all benefits and the risk of loss in ownership of the coal.

We have remaining performance obligations relating to fixed-priced contracts of approximately $648 million, which represent the average fixed prices on our committed contracts as of September 30, 2022. We expect to recognize approximately 79% of this revenue in 2022 and 2023, with the remainder recognized thereafter.

We have remaining performance obligations relating to contracts with price re-openers of approximately $166 million, which represents our estimate of the expected re-opener price on committed contracts as of September 30, 2022. We expect to recognize all of this revenue beginning in 2024.

The tons used to determine the remaining performance obligations are subject to adjustment in instances of force majeure and exercise of customer options to either take additional tons or reduce tonnage if such an option exists in the customer contract.

Contract Balances

Under ASC 606, the timing of when a performance obligation is satisfied can affect the presentation of accounts receivable, contract assets, and contract liabilities. The main distinction between accounts receivable and contract assets is whether consideration is conditional on something other than the passage of time. A receivable is an entity’s right to consideration that is unconditional. Under the typical payment terms of our contracts with customers, the customer pays us a base price for the coal, increased or decreased for any quality adjustments. Amounts billed and due are recorded as trade accounts receivable and included in accounts receivable in our condensed consolidated balance sheets. As of January 1, 2021, accounts receivable for coal sales billed to customers was $14.4 million. We do not currently have any contracts in place where we would transfer coal in advance of knowing the final price of the coal sold, and thus do not have any contract assets recorded. Contract liabilities arise when consideration is received in advance of performance.

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INCOME TAXES

For the nine months ended September 30, 2022, we recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. For the nine months ended September 30, 2021, with the exception of removing the forgiveness of the PPP note as a discrete item, the Company recorded income taxes using an estimated annual effective tax rate based upon projected annual income, forecasted permanent tax differences, discrete items and statutory rates in states in which we operate. The effective tax rate for the nine months ended September 30, 2022 and 2021 was ~ (8%) and ~ 31%, respectively. Historically, our actual effective tax rates have differed from the statutory effective rate primarily due to the benefit received from statutory percentage depletion in excess of tax basis. The deduction for statutory percentage depletion does not necessarily change proportionately to changes in income (loss) before income taxes.

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STOCK COMPENSATION PLANS

Non-vested grants at December 31, 2021	183,000
Awarded - weighted average share price on award date was $6.11	357,826
Vested	—
Forfeited	(7,500	)
Non-vested grants at September 30, 2022	533,326

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For the three and nine months ended September 30, 2022 our stock compensation was $0.1 million and $0.2 million, respectively. For the three and nine months ended September 30, 2021, our stock compensation was $0.3 million and $0.8 million, respectively.

Non-vested RSU grants will vest as follows:

Vesting Year	*RSUs Vesting*
2023		301,442
2024		115,942
2025		115,942
		533,326

The outstanding RSUs have a value of $3.0 million based on the September 30, 2022 closing stock price of $5.62.

As of September 30, 2022, unrecognized stock compensation expense is $2.3 million, and we had 1,050,845 RSUs available for future issuance. RSUs are not allocated earnings and losses as they are considered non-participating securities.

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LEASES

We have operating leases for office space with remaining lease terms ranging from 11 months to 22 months. As most of the leases do not provide an implicit rate, we calculated the right-of-use assets and lease liabilities using our secured incremental borrowing rate at the lease commencement date. We currently do not have any finance leases outstanding.

Information related to leases was as follows (in thousands):

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2022*			*2021*			*2022*			*2021*
Operating lease information:
Operating cash outflows from operating leases	$	54		$	51		$	164		$	148
Weighted average remaining lease term in years		1.51			2.45			1.51			2.45
Weighted average discount rate		6.0	%		6.0	%		6.0	%		6.0	%

Future minimum lease payments under non-cancellable leases as of September 30, 2022, were as follows:

Year	*Amount*
	(In thousands)
2022	$	52
2023		174
2024		60
Total minimum lease payments	$	286
Less imputed interest		(6	)

Total operating lease liability	$	280

As reflected within the following balance sheet line items:
Accounts payable and accrued liabilities	$	200
Other long-term liabilities		80

Total operating lease liability	$	280

At September 30, 2022, and December 31, 2021, we had approximately $280,000 and $424,000, respectively, of right-of-use operating lease assets recorded within “buildings and equipment” on the condensed consolidated balance sheets.

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SELF-INSURANCE

We self-insure our underground mining equipment. Such equipment is allocated among seven mining units dispersed over ten miles. The historical cost of such equipment was approximately $276 million and $260 million as of September 30, 2022, and December 31, 2021, respectively.

Restricted cash of $3.5 million and $3.3 million as of September 30, 2022, and December 31, 2021, respectively, represents cash held and controlled by a third party and is restricted for future workers’ compensation claim payments.

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FAIR VALUE MEASUREMENTS

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. We have no Level 1 instruments.

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. We have no Level 2 instruments.

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our Level 3 instruments are comprised of interest rate swaps and impairment measurements. The fair values of our swaps were estimated using discounted cash flow calculations based upon forward interest-rate yield curves. The notional values of our two interest rate swaps were $52.7 million and $22.1 million when they matured in May 2022. Although we utilize third-party broker quotes to assess the reasonableness of our prices and valuation, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2. Certain properties' asset retirement obligation liabilities use Level 3 non-recurring fair value measures.

The following table summarizes our financial assets and liabilities measured on a recurring basis at fair value at December 31, 2021, by the respective level of the fair value hierarchy (in thousands):

	*Level 1*		*Level 2*		*Level 3*		*Total*
December 31, 2021
Liabilities:
Interest rate swaps	$	—	$	—	$	867	$	867

The table below highlights the change in fair value of the interest rate swaps which are based on a discounted future cash flow model (in thousands):

Ending balance, December 31, 2021	$	867
Settlements		(1,058	)
Unrealized loss		191
Ending balance, September 30, 2022	$	—

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EQUITY METHOD INVESTMENTS

We own a 50% interest in Sunrise Energy, LLC, which owns gas reserves and gathering equipment and generates revenue from gas sales. Sunrise Energy plans to continue developing and exploring for oil, gas, and coal-bed methane gas reserves on or near our underground coal reserves. The carrying value of the investment included in our condensed consolidated balance sheets as of September 30, 2022, and December 31, 2021, was $4.1 million and $3.5 million, respectively.

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CONVERTIBLE NOTES

On May 2, 2022, and May 20, 2022, we issued senior unsecured convertible notes (the "Notes") to five parties, in the aggregate principal amount of $10 million, with $9 million going to related parties affiliated with independent members of our board of directors and the remainder to a non-affiliated party. The Notes were scheduled to mature on December 29, 2028, and accrue interest at 8% per annum, with interest payable on the date of maturity. Pursuant to the terms of the Notes, the holders of the Notes may convert the entire principal balance and all accrued and unpaid interest then outstanding during the period beginning June 1, 2022, and ending on May 31, 2027, into shares of the Company Common Stock (the "Conversion Shares") at a conversion price the greater of (i)$3.33 and (ii) the 30-day trailing volume-weighted average sales price for the Common Stock on the Nasdaq Capital Market ending on and including the date on which this Note is converted. At any time on or after June 1, 2025, the Company may, at its option and upon 30 days' written notice provided to the Holders, elect to redeem the Notes (in whole and not in part) and the Holders shall be obligated to surrender the Notes, at a redemption price equal to 100% of the outstanding Principal Balance, together with any accrued but unpaid interest thereon to the redemption date. After receipt of such redemption notice from the Company, the Holder may, at its option, elect to convert the Principal Balance and accrued interest into Conversion Shares by giving written notice of such election to the Company no later than 5 days prior to the date fixed for redemption.

In June 2022, the four holders of the $9 million related party convertible notes converted them into 1,965,841 shares of common stock of the Company and the one holder of the $1 million convertible note converted it into 231,697 shares of common stock pursuant to the terms of the notes and their related agreements.

On July 29, 2022, we issued $5 million of a senior unsecured convertible note to a related party affiliated with an independent member of our board of directors. The note carries an interest rate of 8% per annum with a maturity date of December 29, 2028. For the period August 18, 2022 through August 17, 2024, the holder has the option to convert the notes into shares of the Company's common stock at a conversion price of $6.254. Beginning August 18, 2025, the Company may elect to redeem the note and the holder shall be obligated to surrender the note at 100% of the outstanding principal balance together with any accrued unpaid interest. Upon receipt of the redemption notice from the Company, the holder may elect to convert the principal balance and accrued interest into conversion shares.

On August 8, 2022, we issued $4 million of senior unsecured convertible notes to related parties affiliated with independent members of our board of directors. The notes carry an interest rate of

SEC Form 10-Q filed by Hallador Energy Company